<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31, 1995.
---------------
Commission file number 0-11476
HEALTHWATCH, INC.,
------------------
Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
--------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2445 Cades Way, Vista California 92083
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(Address of Principal Executive Offices)
(619) 598-4333
- --------------
(Issuer's Telephone Number, Including Area Code)
________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Number of registrant's common shares outstanding at
March 31, 1995; 2,849,123
---------
Traditional Small Business Issuer (check one)
Yes X No
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<PAGE>
PART 1. FINANCIAL INFORMATION
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 204,182 $ 49,934
Accounts receivable, net (Note 5) 488,966 753,065
Inventory (Note 3) 1,080,281 1,206,309
Prepaid expense (Note 4 & 5) 227,209 66,959
Current portion of note receivable 0 114,189
Subscriptions receivable 0 225,000
Other current assets 43,823 119,353
----------- -----------
Total current assets 2,044,461 2,534,809
Note receivable (Note 6) 0 9,935
Property and equipment, net 160,809 234,623
Intangible assets, net 1,468,810 1,673,270
Other assets 79,059 93,784
----------- -----------
Total assets $ 3,753,139 $ 4,546,421
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 593,444 $ 699,060
Accrued compensation and payroll taxes 212,454 255,395
Other accrued expenses - related parties 69,981 76,974
Other accrued expenses - unrelated parties (Note 5) 402,656 391,100
Note payable - unrelated party 100,000 0
Note payable - related party 0 10,000
Deferred revenue 189,734 173,309
Current portion of long-term debt 4,215 7,399
----------- -----------
Total current liabilities 1,572,484 1,613,237
Long-term debt 742 4,404
Debentures payable - related parties 75,000 85,000
Debentures payable - unrelated parties (Note 5) 505,000 510,000
----------- -----------
Total liabilities $ 2,153,226 $ 2,212,641
----------- -----------
Contingencies and commitments -- --
Shareholders' equity:
Cumulative preferred stock, $.01 par value;
10,000,000 shares authorized, no shares issued
and outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 2,849,123 and 1,214,026 issued and
outstanding, respectively (Note 4 & 5) 11,047,148 10,726,912
Accumulated deficit (9,413,364) (8,128,572)
Equity adjustment from foreign currency translation (33,871) (39,560)
Stock subscriptions receivable 0 (225,000)
----------- -----------
Total shareholders' equity 1,599,913 2,333,780
----------- -----------
Total liabilities and shareholders' equity $ 3,753,139 $ 4,546,421
=========== ===========
</TABLE>
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Nine months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------ -------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 989,613 $ 920,122 $ 2,953,238 $ 2,993,800
---------- ---------- ----------- -----------
Cost of Revenues:
Cost of Sales 671,598 736,982 2,109,387 2,259,116
---------- ---------- ----------- -----------
Gross Margin 318,015 183,140 843,851 734,684
---------- ---------- ----------- -----------
Operating Costs and Expenses:
Selling, general and administrative 306,138 440,924 1,362,257 1,662,470
Research and development 166,490 54,635 424,388 173,184
Depreciation and amortization 93,642 101,035 280,923 311,982
---------- ---------- ----------- -----------
Total operating costs and expenses 566,270 596,594 2,067,568 2,147,636
Income (loss) from operations (248,255) (413,454) (1,223,717) (1,412,952)
Other Income (expense):
Interest income 463 3,342 4,515 11,216
Metamed Product Development Costs 0 0 0 (775,580)
Other income (expense) 0 (6,338) 0 4,313
Interest expense (18,725) (19,215) (51,954) (66,213)
---------- ---------- ----------- -----------
Total other income (expense) (18,262) (22,211) (47,439) (826,264)
---------- ---------- ----------- -----------
Net Income (loss) before extraordinary item $ (266,517) $ (435,665) $(1,271,156) $(2,239,216)
Extraordinary Item:
Gain from reduction in debt obligation 0 0 0 24,328
Loss from reduction in note receivable (Note 5) (13,639) 0 (13,639) 0
---------- ---------- ----------- -----------
Net income (loss) $ (280,156) $ (435,665) $(1,284,795) $(2,214,888)
========== ========== =========== ===========
Net income (loss) per share $(0.10) $(0.22) $(0.47) $(1.36)
========== ========== =========== ===========
Weighted average number of shares outstanding 2,823,073 1,987,042 2,711,754 1,632,694
========== ========== =========== ===========
</TABLE>
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three and Nine months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- -------------------------
1995 1994 1995 1994
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(262,456) $(435,665) $(1,267,095) $(2,214,888)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 93,642 101,035 280,923 311,982
Metamed product development costs 0 0 0 775,580
Stock issued as payment of expenses 73,350 2,188 220,050 2,188
Loss on sale of property and equipment 0 10,227 0 67,657
Loss from reduction in note receivable 13,639 0 13,639 0
Gain from reduction in extraordinary items 0 0 0 (24,328)
Decrease (increase) in assets:
Accounts receivable (182,274) (266,857) 244,099 125,190
Inventory 221,479 137,567 126,028 326,973
Prepaid expenses (Note 4) (49,511) 0 (86,900) 0
Other current assets 20,542 (392) 75,530 75,558
Other assets 4,072 3,999 14,728 17,230
Increase (decrease) in liabilities:
Accounts payable (31,756) 229,287 (105,616) 210,756
Accrued expenses (30,346) 12,538 (56,078) 66,242
Deferred revenue 39,448 (10,916) 16,425 (85,667)
--------- --------- ----------- -----------
Net cash used in operating activities $ (90,171) $(216,989) $(524,267) $(345,527)
--------- --------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (2,649) (39,720) (2,649) (62,844)
Increase in intangible assets 0 0 0 (44,298)
Payment received on note receivable 54,537 26,659 110,485 62,825
--------- --------- ----------- -----------
Net cash provided by investing activities 51,888 (13,061) 107,836 (44,317)
--------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds (repayment) of note payable 100,000 0 90,000 0
Repayment of long-term debt (1,007) (2,708) (6,846) (9,097)
Proceeds from exercise of options 0 45,932 0 45,932
Net costs of issuance of common stock 0 0 (13,164) (15,900)
Payments received on stock subscriptions 0 30,000 495,000 430,423
--------- --------- ----------- -----------
Net cash provided by (used in) financing
activities 98,993 73,224 564,990 451,358
--------- --------- ----------- -----------
Effect of exchange rate changes on cash 44,696 49,867 5,689 17,049
--------- --------- ----------- -----------
Increase (decrease) in cash and cash equivalents 105,406 (106,959) 154,248 78,563
Cash and cash equivalents-beginning of period 98,776 230,995 49,934 45,473
--------- --------- ----------- -----------
Cash and cash equivalents-end of period $ 204,182 $ 124,036 $ 204,182 $ 124,036
========= ========= =========== ===========
</TABLE>
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine months ended March 31, 1995 and 1994
(Unaudited)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all
adjustments which in the opinion of management are necessary for
a fair presentation of the Company's financial position as of
March 31, 1995, the results of operations and its cash flows for the
three and nine months ended March 31, 1995 and 1994. This report should
be read in conjunction with the Company's Financial Statements and Notes
thereto contained in the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1994.
Note 2: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1995 and 1994 periods were
computed based on the weighted average number of shares outstanding
during the periods without taking into effect outstanding options as
their effect would be either anti-dilutive or dilutive by less than 3%.
On January 12, 1994, HealthWatch's Articles of Incorporation were
amended to effect a one-for-four stock split of the Company's
outstanding shares of Common Stock. All references in the accompanying
financial statements to the number of common shares and per share
amounts have been retroactively adjusted to reflect the stock split.
Note 3: Inventory
Inventory consisted of the following at March 31, 1995 and June 30,
1994:
<TABLE>
<CAPTION>
3/31/95 6/30/94
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<S> <C> <C>
Raw materials $ 896,633 $ 929,634
Work in process 108,030 204,296
Finished goods 75,618 72,379
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$1,082,281 $1,206,309
========== ==========
</TABLE>
Note 4: Prepaid expense:
In June 1994, the Company entered into an agreement with consultants
whereby the consultants provide financial and public relations services
to the Company for a period of one year in exchange for 200,000 shares
of the Company's common stock. The $1.47 per share price used to value
the agreement represented the approximate trading price for the
Company's common stock at the date the shares were issued, discounted
to factor in the reduction in value stemming from the size of the block
issued.
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the nine months ended March 31, 1995:
The Company acquired $293,400 of prepaid consulting services for
200,000 shares of common stock. Relating to these services, $73,350
and $220,050 was charged to expense as professional services for the
three and nine months ended March 31, 1995, respectively.
As a result of debenture conversion, 7,500 shares of common stock,
valued at $15,000, were issued.
The Company has written off $20,000 in receivables that were assessed
during fiscal 1994 in connection with warrant exercise programs.
The Company approved stock grants totaling 80,000 shares valued at
$17,700 in exchange for professional services. The per share price used
to value the grants represented HealthWatch's approximate trading price
at the date of the transactions, discounted to factor in the reduction
in value stemming from the restricted nature of the shares.
Note 6:
The Company accepted a $13,169 discount for the early payoff on a note
receivable that was scheduled to mature in July 1995. The $45,000
proceeds obtained from the note were used as working capital.
<PAGE>
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue increased 8% during the three-month and declined 1% during the
nine-month period ended March 31, 1995, respectively, compared to the
similar fiscal 1994 periods. The increase for the three-month period was
primarily due to improved shipment of backlogged orders. The Company
believes that product sales continue to be depressed as a result of
uncertainty in the medical community regarding the reimbursement effects
of health-care reforms; consolidations of hospital and other health-care
institutions resulting in fewer customers for the Company's diagnostic
products and delays in making purchase commitments by institutions
engaged in merger or consolidation discussions; and competitive pressure
on product prices. In addition, the Company believes that its lack of
working capital has adversely affected its level of sales as the Company
has not been able to support selling efforts and enhancements to its
existing products. Shipments increased during the three-month 1995
period compared to the 1994 period due to an increase in sales and the
ability to ship products from finished goods inventory. At March 31,
1994, the backlog of booked, but not shipped, orders was approximately
$238,000, as compared to $108,000 at March 31, 1995, excluding an order
valued at $1,000,000 for the Company's IV controller which is under
development. During the second quarter of fiscal 1995, the Company
implemented actions to improve its materials procurement practices and
reduced the backlog of booked, but not shipped orders. Completion of the
Company's first IV product has been delayed, most recently by the
Company's decision to redesign the layout for this product in order to be
able to use a different microprocessor chip that is more readily
available to the Company. The decision to incorporate a different
microprocessor chip was necessitated by the Company's inability to obtain
the original microprocessor chip in accordance with previous commitments
from the distributor of this chip and because the distributor was
unwilling to provide adequate assurance regarding future deliveries of
the chip. The Company expects to begin limited shipments of its new IV
controller product in September or October 1995.
Costs of products sold as a percent of sales were 12% and 4% lower in the
three and nine-month periods ended March 31, 1995, respectively, compared to
the similar fiscal 1994 periods. Gross margins were 32% and 29% in the three
and nine-month periods ended March 31, 1995, respectively, compared to 20%
and 25% for the similar fiscal 1994 periods. The higher gross margins in
the three and nine-month fiscal 1995 periods were primarily due to the
increased sales revenues.
Selling, general and administrative expenses as a percent of sales were 29%
and 48% in the three and nine-month periods ended March 31, 1995, respectively,
compared to 48% and 56%, respectively, in the similar fiscal 1994 periods.
These decreases were due not only to the improved sales revenues, but were also
due to the absence of costs incurred during fiscal 1994 in connection with
the relocation of the Company's principal offices to Vista, California . The
Company relocated its operating facilities due to the concentration of
infusion therapy businesses in Southern California. While the Company
has made substantial reduction in the number of personnel in response to
the lower sales level, it does not expect significantly lower selling,
general and administrative expenses in the remainder of fiscal 1995 due
to planned expenditures associated with the introduction of the infusion
therapy products and a charge of $73,350 per quarter for financial and
public relations services being provided throughout the fiscal year.
Research and development expenses increased in the fiscal 1995 periods
compared to the similar fiscal 1994 periods as development efforts were
increased to support the introduction of the Company's IV controller. The
Company does not expect significant declines in these expenses in the
balance of fiscal 1995.
The decrease in the Company's other expense in the fiscal 1995 nine-month
period compared to the similar fiscal 1994 period was a result of the Company's
acquisition on September 13, 1993, of Metamed, Inc. The $775,580 of excess
purchase price over the fair market value of tangible assets and liabilities
was charged to expense in the first quarter of fiscal 1994, as the development
of Metamed products had not been completed at the time of the acquisition.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had $693,148 of cash and accounts receivable.
Due to the Company's operating losses during the past four years and nine
months, it has been required to raise additional debt and equity capital to
fund its operations. Capital expenditures during this period have been limited
to routine capital purchases. During the balance of fiscal 1995, assuming
availability of funds, approximately $75,000 is expected to be devoted to the
development of the Metamed IV instrumentation products. Due to the uncertainty
in the availability of a key component in the Company's new IV product and the
manufacturers' insistence that the Company place orders for six months or more
of its anticipated need for this component, the Company has decided to redesign
the product so that it will be able to use a competing part that is more
available to the Company. While working capital requirements will remain high,
the decision to use the competing part will substantially reduce the Company's
previously announced significant increases in working capital requirements
through the second quarter of fiscal 1996.
The Company believes it needs to raise approximately $1,000,000 of
additional working capital to sustain operations during the next twelve months.
While not required to sustain operations, the Company believes it should raise
an additional $500,000 - $700,000 of such capital to better fund the sales and
marketing expenses for the roll-out of the new IV product, to continue the
development of additional IV products and for general working capital purposes
during the next twelve months.
The Company has filed a registration statement with the Securities and Exchange
Commission for the offer and sale of up to 1,400,000 Units of its securities,
each Unit consisting of four shares of common stock, and two Redeemable Common
Stock Purchase Warrants. The Unit price is $1.00. If all Units are purchased,
the maximum net proceeds to the Company are estimated at $1,260,000. A minimum
of 750,000 Units must be sold for the offering to be effective.
There can be no assurance that any of the Units being offered by the Company
will be sold. While the net proceeds for the sale of the minimum number of
Units which must be sold for the offering to become effective is expected to
be enough to enable the Company to complete the development of its first IV
product, the Company expects that if only the minimum number of Units are sold,
it will need to obtain additional working capital before October or November
1995 in order to sustain its operations. If the Company is not able to obtain
sufficient additional capital through the Unit offering, it will be required
to defer the shipment of the initial IV products and/or sell certain assets or
enter into joint ventures with or grant licenses to other companies with
respect to one or more of its products in order to sustain operations. In this
connection, the Board of Directors has instructed management of the Company to
attempt to find a buyer for the Company's Cambridge operations. There can be no
assurance that the Company could, if it were required to do so to sustain
operations, sell any such assets or enter into any such joint venture or grant
any such license, if at all, on terms acceptable to the Company. If the Company
is unable to obtain additional working capital, it will be necessary for the
Company to attempt to further reduce operating expenses and/or curtail certain
of its operations or product development activities.
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27 - Financial Data Schedule
The Company was not required to file a report on Form 8-K during the quarter
ended March 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
Date: May 11, 1995
------------
_________________________
John D. Greenbaum
(Chief Executive and
Chief Financial Officers)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HealthWatch
Inc. Form 10Q-SB for the Quarterly period ended March 31, 1995 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 204,182
<SECURITIES> 0
<RECEIVABLES> 488,966
<ALLOWANCES> 0
<INVENTORY> 1,080,281
<CURRENT-ASSETS> 2,044,461
<PP&E> 160,809
<DEPRECIATION> 93,642
<TOTAL-ASSETS> 3,753,139
<CURRENT-LIABILITIES> 1,572,484
<BONDS> 0
<COMMON> 2,809,348
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,753,139
<SALES> 989,613
<TOTAL-REVENUES> 989,613
<CGS> 671,598
<TOTAL-COSTS> 1,237,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> (18,725)
<INCOME-PRETAX> (280,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> (248,255)
<DISCONTINUED> 0
<EXTRAORDINARY> (13,639)
<CHANGES> 0
<NET-INCOME> (280,156)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
