As filed with the Securities and Exchange Commission on September 27, 1995.
Registration No. 33-62403
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
HEALTHWATCH, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 3845 84-0916792
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name,address, including zip code, and telephone number
including, area code, of Registrant's principal
executive offices)
John D. Greenbaum
HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name, address, including zip code, and telephone
number, including, area code, of agent for service
of process)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / X /
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8, may
determine.
HEALTHWATCH, INC.
This Prospectus relates to the offer and sale from time to time by
certain Selling Shareholders of shares of the Common Stock, $.01 par value (the
"Common Stock") of HealthWatch, Inc. ("HealthWatch" or the "Company"). The
shares offered hereby include: (i) 2,600,000 shares of Common Stock subject to
outstanding stock purchase warrants (the "Warrants"); (ii) up to 2,400,000
shares of Common Stock issuable upon conversion of outstanding shares of Series
A Preferred Stock (the "Preferred Stock"); and (iii) up to 480,000 shares of
Common Stock which may be issued by the Company in lieu of cash payments of the
dividends payable on the Preferred Stock. The Preferred Stock is currently
convertible into 400,000 shares of Common Stock. However, the number of shares
of Common Stock into which the Preferred Stock may be converted in the future
could increase by up to 2,000,000 additional shares depending upon future market
prices for the Common Stock. See "Principal and Selling Shareholders" and
"Description of Securities-Preferred Stock."
The Selling Shareholders may sell the shares of Common Stock in one or
more transactions in the Nasdaq Small Cap Market, or otherwise, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices. It is anticipated that the brokers and dealers,
if any, participating in the sales of such securities will receive the usual and
customary selling commissions. See "Plan of Distribution" and "Principal and
Selling Shareholders." The Warrants grant to the holders thereof the right to
acquire shares of Common Stock from the Company at exercise prices ranging from
$.25 to $.50 per share. The exercise of the Warrants is at the discretion of the
holders and there is, therefore, no assurance that any of the Warrants will be
exercised.
The Company's Common Stock is traded in the over-the-counter market
under the Nasdaq symbol HEAL. On September 25, 1995, the last reported sale
price of the Common Stock, as reported on the Nasdaq Small Cap Market was
$.546875 per share. See "Price Range of Common Stock."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Since the Common Stock offered pursuant to this Prospectus is being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Act"), the Company cannot include
herein information about the price to the public of the Common Stock or the
proceeds to the Selling Shareholders. The Company will receive no proceeds from
any sales of Common Stock by the Selling Shareholders, and the Company is
obligated to pay the expenses of this offering, which are estimated at $20,000.
The Selling Shareholders will pay their own expenses in connection with sales of
the Common Stock. The Selling Shareholders and any brokers or dealers executing
selling orders on their behalf may be deemed "underwriters" within the meaning
of the Act, in which event the usual and customary selling commissions which may
be paid to the brokers or dealers may be deemed to be underwriting commissions
under the Act. There can be no assurance that any or all of the Shares
registered hereunder will be sold. See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 27, 1995.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission. Reports, proxy statements and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549, and inspected at the Commission's regional
offices at Room 7 World Trade Center, New York, New York 10048 and Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450 Fifth
Street N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, with
respect to the securities offered hereby. This Prospectus omits certain
information included in such Registration Statement. For further information
about the Company and its securities, reference is made to such Registration
Statement and to the exhibits filed as part thereof or otherwise incorporated
therein. Each summary in this Prospectus of information included in the
Registration Statement or any exhibit thereto is qualified in its entirety by
this reference to such information or exhibit.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus has
been adjusted to reflect a one-for-four reverse split of the Common Stock
effective as of January 12, 1994.
THE COMPANY
HealthWatch develops, manufactures and markets cardiovascular
noninvasive diagnostic instruments, accessories and services. The Company's
diagnostic instruments include non-invasive doppler and ultrasound imaging
systems designed to diagnose peripheral vascular (blood vessel) disease and
electrocardiograph and stress-testing equipment and interpretive software. In
1993, HealthWatch acquired Metamed, Inc. ("Metamed"), a development-stage
company which was engaged in the development of products for the infusion
therapy ("IV") industry. Infusion therapy generally involves the delivery of one
or more fluids, primarily pharmaceuticals or nutritionals, to a patient by means
of an infusion line inserted into the circulatory system. The Pacer, the
Company's first IV product, which was approved for marketing by the U.S. Food
and Drug Administration ("FDA") in April 1994, is in the final development
stage. Sales of the Pacer are expected to begin within the next four months.
Markets for the Company's diagnostic products have been adversely
affected by efforts to contain health-care costs as well as by the efforts of
many hospitals and other health-care institutions to reduce their costs by
consolidating operations with the operations of other institutions. This
consolidation has resulted in fewer customers for HealthWatch's diagnostic
products and for delays in obtaining purchase orders from institutions which are
evaluating possible consolidations with other institutions. In contrast, the
Company believes that its IV products will benefit from the health-care
industry's focus on reducing costs, as these products are expected to be
substantially less expensive and easier to use than most competing products. For
this reason, the Company's primary focus during the past year has been on the
development of the Pacer.
The Company's licensed patented IV technology utilizes proprietary
optics and computer technology to measure the size (volume) of drops as they
fall in a drip chamber. By combining this information with the rate of flow of
the drops, the system is able to determine and regulate the amount of the fluid
delivered to the patient. In effect, the Company's IV system utilizes the power
of a microprocessor chip and electronics to replace more cumbersome and
expensive mechanical-based systems. The cost of using the Company's IV systems
is expected to be significantly less than the cost for most competing systems,
both because the purchase prices for the Company's IV systems are expected to be
less than those for competing systems and because the Company's IV systems can
be used with generic IV sets which usually are significantly less expensive than
proprietary IV sets required to be used with most competing systems.
HealthWatch believes that there are more than 900,000 IV instruments
currently being used in the U.S. and that approximately 120,000 IV instruments
are sold annually in the U.S., and that the international market is equal in
size to the U.S. market. The Company intends to market the Pacer based on its
ease of use and the potentially significant cost savings which users of the
Pacer may recognize, both due to the lower cost of the Pacer and the ability to
use lower-priced IV sets.
HealthWatch's executive offices are located at 2445 Cades Way, Vista,
California 92083, telephone number (619) 598-4333.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by Selling Shareholders 2,600,000 shares of Common Stock minimum - 5,480,000 shares of Common
Stock maximum (1)
Securities Outstanding:
Common Stock......................... 7,672,779 shares(2)
Preferred Stock...................... 400,000 shares(3)
Use of Proceeds........................... The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Shareholders. The Company may, however, receive
proceeds from the exercise of Warrants by certain of the Selling
Shareholders prior to the sale pursuant to this offering of the Common
Stock subject to the Warrants. Such proceeds, if any, will be used for
working capital purposes, including the purchase of raw materials
required to build initial product inventory for the first IV product,
marketing and sales expenses related to the introduction of this product
and product development.
Risk Factors.............................. Prospective investors should review carefully and consider the factors
described under "RISK FACTORS," including the Company's recent operating
losses, need for additional financing and introduction of new products.
Nasdaq Symbol for Common Stock............ HEAL
</TABLE>
_________________________
(1) The maximum number of shares assumes that the Company does not exercise
its right to redeem the Preferred Stock prior to its conversion and
that the Preferred Stock is converted into the maximum number of shares
of Common Stock into which the Preferred Stock currently could be
converted and that the Company exercises its option to pay the
dividends on the Preferred Stock in shares of Common Stock.
See "Description of Securities-Preferred Stock."
(2) Shares outstanding at September 26, 1995. Does not include 6,183,788
shares of Common Stock reserved for issuance upon the exercise of stock
purchase warrants (including the Warrants) and options or the
conversion of the Company's 10% Convertible Senior Debentures (the
"Debentures") and Preferred Stock.
(3) The Preferred Stock is convertible into 400,000 shares of Common Stock
at a conversion price of $1.50 per share. If HealthWatch does not
redeem the Preferred Stock, one-half of the Preferred Stock becomes
convertible at a reduced conversion price on March 12, 1996, and the
balance becomes convertible at a reduced conversion price on August 12,
1996. In both cases, the reduced conversion price is the lesser of
$1.00 per share or 50% of the then market value for the Common Stock,
provided that the conversion price shall not be less than $.25 per
share or, if less, the lowest price at which HealthWatch has sold its
Common Stock prior to such conversion.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
STATEMENT OF INCOME DATA:
YEAR ENDED JUNE 30,
1995 1994 1993
<S> <C> <C> <C>
Product sales ............................... $ 3,516,252 $ 4,070,146 $ 6,094,862
Gross margin ................................ 1,116,709 1,118,656 2,774,040
Loss from continuing operations ............. (1,843,239) (2,000,959) (1,571,138)
Total other income (expense) ................ 12,785 (839,654) (54,764)
Loss from continuing operations
before discontinued operations
and extraordinary item ..................... (1,830,454) (2,840,613) (1,625,902)
Discontinued operations:
Income from discontinued
operations of medical services
segment .................................. -- -- 186,797
Gain on sale of medical services
segment .................................. -- -- 288,697
Loss before extraordinary item .............. (1,830,454) (2,840,613) (1,150,408)
Gain from reduction in debt
obligation ............................... 61,603 24,328 102,433
Net loss .................................... $(1,768,851) $(2,816,285) $(1,047,975)
Income (loss) per share of Common Stock:
Continuing operations .................... $ (.65) $ (1.48) $ (1.33)
Discontinued operations .................. -- -- .39
Extraordinary item ....................... .02 .01 .08
Net income (loss) per share ................. $ (.63) $ (1.47) $ (.86)
Weighted average number of shares outstanding 2,816,173 1,912,915 1,211,591
</TABLE>
BALANCE SHEET DATA:
June 30, 1995(1)
Current Assets $2,060,725
Total Assets 3,754,119
Current Liabilities 1,661,084
Long-Term Debt 580,000
Accumulated Deficit (9,942,423)
Shareholders' Equity 1,513,035
Working Capital 399,641
(1) On August 4, 1995, the Company completed a distribution of 1,040,987
Units of its securities. These Units consisted of four shares of the
Company's Common Stock and two Redeemable Common Stock Purchase
Warrants. Each of the Warrants entitles the holder to purchase one
share of Common Stock at a price of $.75. Gross receipts to the Company
from the offering of the Units was $1,040,987.
RISK FACTORS
In addition to considering the other information set forth in this
Prospectus, prospective purchasers should carefully consider the following
factors in evaluating an investment in the Company.
DECLINE IN REVENUES; RECENT OPERATING LOSSES
The Company's product sales have declined in each of the past three
fiscal years, compared to the prior fiscal years, primarily due, the Company
believes, to the uncertainty in the medical community regarding the effects of
various proposals for health-care reforms, consolidations and mergers of
health-care institutions, continued increased price competition and the
Company's lack of sufficient working capital to adequately fund marketing and
product enhancement efforts. In view of the Company's belief that there is
substantially more potential for its IV products than for its current diagnostic
products, HealthWatch intends to concentrate its efforts and limited working
capital on the completion and initial marketing of the Pacer, its first IV
product. While sales of the Pacer are expected to begin within two months, the
Company does not expect to be able to produce and ship significant quantities of
the Pacer for several months after it commences production of this product. The
Company's sales may, therefore, continue to decrease for the next six or more
months.
The Company has incurred losses from operations in each of its last
three fiscal years. The Company expects to continue to incur losses from
operations until it is able to generate significant sales of the Pacer. The
Pacer is still in the development stage and there can be no assurance that the
Company will be able to successfully complete this product or, assuming such
development is successful, realize significant revenues from the sale of the
Pacer. In addition, if the Company is not able to generate sufficient sales of
its existing products to support the value of certain inventory items or of the
intangible assets relating to certain of these products, it could be required to
recognize significant additional losses in connection with the write-down of
these assets for book purposes. At June 30, 1995, the Company had an accumulated
deficit of ($9,942,423). There can be no assurance that the Company will be able
to operate at a profit in the future. The Company is not able to finance current
working capital requirements from operations.
NEED FOR ADDITIONAL FINANCING
The Company estimates that it needs approximately $400,000 of
additional debt or equity capital to sustain its operations during the next
twelve months. In addition to the $400,000 required to sustain operations, the
Company estimates that it will need to obtain from $400,000 to $800,000 of
additional working capital to implement its marketing plan for the Pacer and to
provide adequate working capital to fund a rapid increase in product sales. In
the event that the Company is unable to raise additional capital, it will be
required to defer producing IV or other products, to sell certain assets or
enter into joint ventures with or grant licenses to other companies with respect
to one or more of its products and/or further reduce its operations in order to
sustain 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.
METAMED ACQUISITION; NEW BUSINESS VENTURE; UNPROVEN PRODUCTS
In September 1993, the Company completed the acquisition of Metamed,
Inc., a development-stage company. The Metamed acquisition represented a
significant new business venture for HealthWatch, and the Company's ability to
successfully develop this business is subject to all of the risks inherent in
the establishment of a new business. HealthWatch had not previously been engaged
in the infusion therapy business and Metamed had only a limited history of
operations and had not generated any revenues.
HealthWatch believes that the Metamed acquisition is of strategic
importance because it offers the Company the opportunity to expand its product
offerings to include medical products which it believes will be less sensitive
than its existing diagnostic products to current market pressures and
uncertainties, as the Metamed products are expected to be not only easier to use
but also less costly than existing competing products. While the first Metamed
product, the Pacer, an IV controller, has recently been introduced, there can be
no assurance that it will achieve wide acceptance in the marketplace. Efforts to
obtain required governmental approvals for additional products based on the
Metamed patented technology may be costly and require significant time and
additional effort on behalf of the Company which could further deplete the
Company's limited resources and delay the introduction of additional Metamed
products. There can be no assurance that the Company will be able to obtain
necessary governmental approvals for additional Metamed products or that any
products based on the Metamed technology can be successfully introduced to the
marketplace.
DEPENDENCE ON SUPPLIERS; WORKING CAPITAL REQUIREMENTS
Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers,
require that orders be placed 60 days or more in advance of the desired delivery
date and may be available to the Company only if it places significant orders
which represent several months or more of the Company's projected needs for such
materials. The need to purchase significant quantities of these materials in
advance of their use substantially increases the Company's working capital
requirements.
There can be no assurance that the Company's current suppliers for
these products will continue to supply them to the Company. While alternative
sources for such items are currently available, the Company could be required to
redesign its products in order to be able to use the alternative materials
provided by these additional suppliers. Any such redesign of the Company's
products could be expensive and time consuming and could require six or more
months to complete. The Company is currently redesigning its first IV product so
that it can use a different microprocessor chip that is more readily available
to the Company than the microprocessor chip originally intended to be used in
this product. This redesign effort has delayed the first shipments of the Pacer,
with the first shipments now expected to occur in October or November 1995. The
Company believes that it either has or has commitments to supply adequate
quantities of the more difficult to obtain components for its initial IV
product.
DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES
In general, the medical products industry is subject to rapid and
significant technological changes and frequent introduction of new competitive
products. To respond to these expected changes and to improve or sustain the
marketability of its products, the Company will be required to commit
substantial investments in product improvement and development in order to
periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the
marketplace.
COMPETITION
There are many companies that produce equipment which competes with the
Company's products, particularly its cardiology and current and proposed
infusion therapy products. Most of the Company's competitors have substantially
greater financial and marketing resources than the Company. Three companies
account for a substantial portion of the market for ECG products similar to
those sold by HealthWatch, and five companies account for over 80% of the U.S.
market for infusion therapy systems. All of such companies are substantially
larger than HealthWatch. The Company expects to encounter intense competition in
the market for its IV products. This could require that the Company commit
significantly greater resources to the introduction of its IV products than
would otherwise be required.
GOVERNMENT REGULATION
The FDA regulates the testing, manufacturing, packaging, distribution
and marketing of medical devices in the U.S., including the products
manufactured by HealthWatch. The Company's infusion therapy products are Class
II devices for which permission to market can be obtained under Section 510(k)
of the Medical Device Amendments Act to the Food, Drug and Cosmetic Act.
Products requiring permission to market under 510(k) may be approved after
adequate demonstration of safety, effectiveness and documentation that the
product is substantially equivalent to a similar device in interstate commerce
prior to 1976. The Company submitted a 510(k) application with respect to its
first Metamed infusion therapy system in September 1993. On April 4, 1994, the
Company received notification from the FDA that this product could be marketed
in the U.S. Compliance with the provisions of the Food, Drug and Cosmetic Act
and the FDA's regulations is time consuming and expensive.
PRODUCT LIABILITY INSURANCE
Producers of medical instruments may face substantial liability from
the use of their products. HealthWatch has obtained product liability insurance
in the amount of $1,000,000 per occurrence and $2,000,000 in the aggregate. As
the installed base of IV products increases, the Company plans to raise the
amount of such insurance. There can be no assurance that any such liability of
the Company will be covered by its insurance or that damages will not exceed the
limits of the coverage.
CHANGES IN HEALTH-CARE INDUSTRY
The health-care industry is experiencing significant pressure to reduce
costs. The Clinton administration has identified the containment of health-care
costs as a major priority. While the Company cannot predict what effect any
proposals to contain health-care costs may have on its business, such proposals,
if enacted, could have a material adverse effect on portions of its business,
particularly its diagnostic instruments business. In order to reduce costs and
to improve utilization of facilities, many health-care organizations have
consolidated or merged or are considering consolidating or merging their
operations or portions of their operations with the operations of other
health-care organizations. The consolidation and merging of health-care
organizations has reduced and can be expected to continue to reduce the number
of potential purchasers for the Company's products, particularly its diagnostic
instruments.
RECENT SENIOR MANAGEMENT CHANGE
John D. Greenbaum, President of the Company has resigned effective
October 1, 1995. Mr. Greenbaum has agreed to provide consulting services to the
Company through November 1995.
BROKER-DEALER SALES OF COMPANY COMMON STOCK
Securities and Exchange Commission Rule 15g-9 imposes additional sales
practice requirements on brokers-dealers who sell certain low-priced securities
to persons other than established customers. So long as the Company's Common
Stock continues to be quoted on the Nasdaq Small Cap Market, sales of its stock
are exempt from the application of this rule. In order for securities to
continue to be quoted on the Nasdaq Small Cap Market, they must meet certain
maintenance requirements, including a minimum bid price of at least $1.00 per
share or a market value of the public float for its common stock of at least
$1,000,000 and $2,000,000 in capital and surplus. The bid price for the
Company's Common Stock is below $1.00 per share. While the Company's capital and
surplus is currently slightly in excess of $2,000,000, further losses from
operations could result in such capital and surplus being less than $2,000,000.
It is possible that shareholders will be requested to consider a reverse split
of the Company's Common Stock in the future, if this would better assure the
Company's ability to satisfy the requirements for its Common Stock to continue
to be listed on the Nasdaq Small Cap Market. In the event that the Company's
Common Stock should cease to be traded on the Nasdaq Small Cap Market, or it
should otherwise cease to be exempt from the application of Rule 15g of the
Securities Exchange Act of 1934, it would become subject to Rule 15g-9. In this
event, prior to effecting transactions in the Company's Common Stock,
brokers-dealers would be required to make a special suitability determination
for the purchaser and receive the purchaser's written agreement to the
transaction prior to the sale. These requirements could adversely affect the
ability of brokers-dealers to sell the Company's securities. In addition, in the
event that the Company's securities ceased to be traded on the Nasdaq Small Cap
Market, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURES AND PREFERRED STOCK
As of September 26, 1995, there were up to 6,183,788 shares of Common
Stock reserved for issuance upon the exercise of stock purchase warrants or
options or the conversion of Debentures and Preferred Stock, at exercise or
conversion prices ranging from $.25 to $9.76 per share. To the extent the
trading price of the Company's Common Stock at the time of exercise or
conversion of any such warrants, options, Debentures or Preferred Stock exceeds
the exercise or conversion prices, any such exercise or conversion will have a
dilutive effect on the Company's shareholders.
The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 100,000,000 shares of Common Stock, of which 7,672,779 shares
were outstanding on September 26, 1995. The Company's Board of Directors has the
authority to issue additional shares of Common Stock and to issue options and
warrants to purchase shares of the Company's Common Stock without shareholder
approval.
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
HealthWatch is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of Preferred Stock. The issuance of any
shares of Preferred Stock having rights superior to those of HealthWatch's
Common Stock may result in a decrease in the value or market price of the Common
Stock and could further be used by the Board as a device to prevent a change in
control of HealthWatch. Holders of Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights. There are
400,000 authorized shares of Series A Preferred Stock. The Company does not have
any present intention to issue any other shares of Preferred Stock.
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
The number of record holders of the Company's Common Stock on September
26, 1995 was 703. The high and low sale prices as reported on the Nasdaq Small
Cap Market (National Market through May 12, 1994) are shown in the table below.
These quotations represent prices between dealers, and do not include retail
markups, markdowns or commissions.
QUARTER ENDED HIGH LOW
1993
March 31 2 3/4 2 3/4
June 30 3 2 5/8
September 30 2 5/8 2 3/8
December 31 4 2 1/4
1994
March 31 3 1/4 2 3/16
June 30 3 3/8 1 1/4
September 30 2 1 1/8
December 31 1 1/2 1
1995
March 31 13/32 3/8
June 30 15/32 9/32
July 1 through
September 25 11/16 5/16
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition.
USE OF PROCEEDS
The Company will not receive any of the proceeds of the sale of the
Common Stock by the Selling Shareholders. The Company may, however, receive
proceeds upon the exercise of Warrants held by certain of the Selling
Shareholders representing the rights to acquire up to 2,600,000 shares of Common
Stock, which Warrants must be exercised prior to the sale pursuant to this
offering by the Selling Shareholders of the underlying shares of Common Stock.
The net proceeds, if any, from the exercise of the Warrants will be used by the
Company primarily for working capital purposes, including the purchase of raw
materials required to build product inventory for the first IV product,
marketing and sales expenses related to the introduction of this product and
product development. The Company estimates that it needs approximately $400,000
of additional debt or equity capital to sustain its operations during the next
12 months. In addition to the $400,000 required to sustain operations, the
Company estimates that it will need to obtain from $400,000 to $800,000 of
additional working capital to implement its marketing plan for the Pacer and to
provide adequate working capital to fund a rapid increase in product sales. In
the event that the Company is unable to raise additional capital, it will be
required to defer producing IV or other products, to sell certain assets or
enter into joint ventures with or grant licenses to other companies with respect
to one or more of its products and/or further reduce its operations in order to
sustain 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.
The Company's estimate regarding the need for additional capital to
fund its operations for the next twelve months is based upon various assumptions
regarding the working capital that will be required to introduce the Pacer,
overall working capital requirements and revenues from product sales, including
sales of the Company's existing products as well as the Pacer product. There can
be no assurance that these assumptions will prove to be correct. In the event
that they are not correct, the Company may be required to obtain additional
capital, delay certain product development and sales and marketing activities,
sell certain assets or enter into one or more joint ventures with other
companies and/or reduce its level of operations.
PROFORMA FINANCIAL STATEMENTS
On September 13, 1993, HealthWatch purchased 100% of the common stock
of Metamed, Inc. The total purchase price was $755,724 and consisted of 625,000
shares of HealthWatch Common Stock valued at $700,000 in exchange for $9,819 of
property and equipment, $3,406 of intangible assets, net of $33,081 of accounts
payable assumed and $55,724 of professional fees incurred.
HealthWatch accounted for the acquisition under the purchase method
whereby the assets and liabilities of Metamed are recorded at their net book
value, which approximated fair market value as of the date of acquisition as
estimated by management. The $775,580 excess purchase price over the fair market
value of tangible assets and liabilities acquired has been identified as
Technology/Product Development acquired and was expensed at the date of
acquisition.
Summarized below are the unaudited condensed and proforma statements of
operations as if the Metamed acquisition had taken place at the beginning of the
year ended June 30, 1994. All adjustments, which in the opinion of management,
are necessary for a fair proforma presentation have been made in the following
proforma consolidated financial statements. These financial statements are
intended to present consolidated results of operations for the period presented.
Had the acquisition actually taken place at the beginning of the period,
operating results may have differed from the proforma results posted below and
accordingly, the proforma results are not intended to be indicative of future
results.
YEAR ENDED JUNE 30, 1994
ACTUAL PROFORMA
Sales ........................... $ 4,070,146 $ 4,070,146
Cost of sales ................... 2,951,490 2,951,490
Operating expenses .............. 3,119,615 3,120,407
Loss from continuing operation .. (2,000,959) (2,001,751)
Other income (expense) .......... (839,654)(1) (839,654)(1)
Loss before extraordinary item .. (2,840,613) (2,841,405)
Extraordinary item - gain from
extinguishment of debt ........ 24,328 24,328
Net loss ........................ $(2,816,285) $(2,817,077)
Net loss per share .............. $ (1.47) $ (1.40)
Weighted average number of shares 1,912,915 2,018,258
(1) Includes an expense of $775,580 relating to the intangible assets
acquired in connection with the Metamed acquisition which were expensed
at the time of the acquisition as the development of the Metamed products
had not been completed at the time of the acquisition.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
In recent years, the markets in which the Company participates have
experienced significant changes and a period of uncertainty due to proposed
changes in health-care administration in the United States and efforts by
health-care organizations to reduce their operating costs and the cost of health
care in general. As a result, the Company has focused its products in the
hospital marketplace in anticipation of lower sales directly to physicians. The
Company believes that the major changes which have been introduced to the
health-care industry will place greater emphasis on lower-cost products. While
medical standards for safety and effectiveness are expected to remain strong,
costs are expected to be a deciding factor on health-care purchases.
HealthWatch has incurred losses from operations in each of its last
three fiscal years. Based on current margins for the Company's diagnostic
products, the Company believes that it needs to increase monthly revenues from
the sale of these products by from $250,000 to $300,000, depending on the mix of
products sold, in order to operate at a break-even level. Based on anticipated
margins for its new IV product, HealthWatch believes that if revenues from its
existing diagnostic products continue at current levels, that the Company would
be able to operate at a break-even level if it is able to achieve monthly
revenues of approximately $230,000 (approximately 175 units) from the sale of
the Pacer. Due to the significantly better margins anticipated for its IV
products than for its diagnostic products, the Company's primary focus is on the
development of its IV business. In January 1995, the Company sold its Telemed
ECG software-based analysis program. The Company retained a license to use this
program in its Cambridge products.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994. The following table compares the results of
operations for fiscal 1995 and fiscal 1994 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
1995 vs 1994
1995 1994 Increase (Decrease)
<S> <C> <C> <C> <C>
Product sales ................... $ 3,516,252 $ 4,070,146 ($ 553,894) (13.6%)
Product cost of sales ........... 2,399,543 2,951,490 (551,947) (18.7)
Gross profit .................. 1,116,709 1,118,656 (1,947) (0.2)
Selling, general & administrative 2,105,148 2,513,458 (408,310) (16.2)
Research & development .......... 499,099 201,713 297,386 147.4
Depreciation & amortization ..... 355,701 404,444 (48,743) (12.1)
Total operating costs &
expenses .................... 2,959,948 3,119,615 (159,667) (5.1)
Loss from continuing
operations .................. (1,843,239) (2,000,959) (157,720) (7.9)
Other income (expenses):
Interest income ............... 4,546 14,084 (9,538) (67.7)
Interest expense .............. (76,943) (88,976) (12,033) (13.5)
Metamed Product Development ... -- (775,580) (775,580) N/M
Gain on sales of assets ...... -- 14,298 (14,298) N/M
Miscellaneous ................. 85,182 (3,480) 88,662 N/M
Total other income
(expenses) ............... 12,785 (839,654) (852,439) N/M
Loss before
extraordinary item ............ (1,830,454) (2,840,613) (1,010,159) (35.6)
Extraordinary item:
Gain from reduction
in debt obligation ........... 61,603 24,328 37,275 153.2
Net loss ...................... ($1,768,851) ($2,816,285) ($1,047,434) (37.2%)
</TABLE>
Revenues declined 13.6% during 1995 compared to 1994, primarily due to
a decline in product sales. 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 adequate
working capital has adversely affected its level of sales as the Company has not
been able to adequately support selling efforts and enhancements to its existing
products. While bookings of product orders increased during the first quarter of
fiscal 1995, compared to the first quarter of fiscal 1994, bookings of new
product orders declined in the second, third and fourth quarters of fiscal 1995,
compared to the second, third and fourth quarters of fiscal 1994. At June 30,
1994, the backlog of booked but not shipped orders was $238,000 compared to
$50,750 at June 30, 1995. During the second quarter of fiscal 1995, the Company
implemented actions to improve its material procurement practices which resulted
in the reduction in 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 for 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 the second quarter of fiscal year 1996.
Costs of products sold during fiscal 1995 were 18.7% lower than in
fiscal 1994, due primarily to the lower levels of sales. Gross margins were
31.8% and 27.5% for fiscal 1995 and fiscal 1994, respectively. The higher gross
margin for the 1995 period was primarily due to the lower cost of sales due to
the sale of the Telemed ECG software and the Company's efforts to reduce its
operating costs.
Selling, general and administrative expenses as a percent of sales were
59.9% in fiscal 1995 compared to 61.8% in the prior year. This decrease was due
primarily to costs incurred in fiscal 1994 in connection with the relocation of
the Company's corporate offices to Vista, California. While the Company has made
substantial reductions in the number of personnel in response to the lower sales
level, it does not expect significantly lower selling, general and
administrative expenses in fiscal 1996 due to planned expenditures associated
with the introduction of the new IV product.
Research and development expenses increased 147.4% in fiscal 1995
compared to fiscal 1994 as development efforts on the Company's IV controller
increased.
The decrease in the Company's other expense in fiscal 1995 compared to
fiscal 1994 was a result primarily 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.
1994 COMPARED TO 1993. The following table compares the results of
operations for fiscal 1994 and fiscal 1993 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
1994 vs 1993
1994 1993 Increase (Decrease)
<S> <C> <C> <C> <C>
Product sales ................ $ 4,070,146 $ 6,094,862 ($2,024,716) (33.2%)
Product cost of sales ........ 2,951,490 3,320,822 (369,332) (11.1)
Gross profit .............. 1,118,656 2,774,040 (1,655,384) (59.7)
Selling, general &
administrative ............ 2,513,458 3,573,115 (1,059,657) (29.7)
Depreciation & amortization .. 404,444 490,145 (85,701) (17.5)
Research & development ....... 201,713 281,918 (80,205) (28.4)
Total operating costs &
expenses ................. 3,119,615 4,345,178 (1,225,563) (28.2)
Loss from continuing
operations ................ (2,000,959) (1,571,138) 429,821 27.4
Other income (expense):
Metamed Product
Development costs ......... (775,580) 0 (775,580) N/M
Gain on sale of Investment. 84,799 0 84,799 N/M
Interest income ........... 14,084 12,302 1,782 14.5
Interest expense .......... (88,976) (80,533) 8,443 10.5
Miscellaneous ............. (3,480) 13,467 (16,947) (125.8)
Loss on disposal of fixed
assets .................... (70,501) 0 (70,501) N/M
Total other income
(expense) ............... (839,654) (54,764) (784,890) (1433.2)
Loss from continuing
operations before
discontinued operations
and extraordinary item..
(2,840,613) (1,625,902) 1,214,711 74.7
Discontinued operations:
Income from discontinued
operations of medical
services segment
0 186,797 (186,797) (100.0)
Gain on sale of medical
services segment
0 288,697 (288,697) (100.0)
Loss before
extra-ordinary Item ..... (2,840,613) (1,150,408) 1,690,205 146.9
Extraordinary item-gain
from extinguishment of debt 24,328 102,433 (78,105) (76.2)
Net loss ..................... ($2,816,285) ($1,047,975) $ 1,768,310 168.7%
</TABLE>
The decrease of $2,024,716 or 33.2% in product sales in 1994 compared
to 1993 is primarily due, the Company believes, to the continued uncertainty in
the medical community regarding the effects of the health care reform proposed
by the Administration, particularly with respect to the Company's business,
uncertainty with how the proposals may affect reimbursement for diagnostic
procedures, as well as to generally lower sales due to personnel changes,
reductions in list prices for many of the Company's products throughout fiscal
1994 and discontinuation of sales of licensed products produced by other
companies. In December 1993, the Company hired a new Vice President of Sales and
Marketing in an effort to improve sales of the Company's products and to better
position the Company for the introduction of its first Metamed infusion therapy
products. The Company believes that its sales for fiscal 1994 were adversely
affected by uncertainties that existed within its sales and marketing group
during the period from the time it determined to seek new leadership for this
group until the new Vice President of sales and marketing was hired and began
working for the Company. Bookings of new product orders increased by
approximately 34 % during the six months ended June 30, 1994, compared to the
first six months of the fiscal year. However, due to difficulties in raw
materials procurement related to the Company's relocation during the first six
months of the fiscal year, a significant number of booked orders were not
shipped by the end of the fiscal period. As of June 30, 1994, the backlog of
orders not shipped was $ 431,509 compared to $ 87,872 as of June 30, 1993.
Cost of product sales, which resulted in a gross margin of 27.5% in
fiscal 1994 (compared with 45.5% in 1993) declined $369,332 or 11.1% due to the
reduction of manufacturing expenses to support the lower level of sales. The
lower gross margins in the fiscal 1994 period were primarily due to the
significantly lower sales revenues which were not sufficient to support certain
relatively fixed costs, costs associated with amending various of the Company's
manufacturing processes and documentation to better assure compliance with the
"good manufacturing practices" of the U.S. Food and Drug Administration, and
increased price competition which caused the Company to reduce the list prices
for several of its products during fiscal 1994.
Selling, general and administrative expenses decreased $1,059,657 or
29.7%, in fiscal 1994 compared to 1993, due primarily to lower head counts and
reduction of certain administrative and selling expenses as a result of the
lower level of sales and decreases in commission expenses also as a result of
the lower level of sales.
Depreciation and amortization decreased in fiscal 1994 by $85,701 or
17.5%, compared to 1993, primarily due to the retirement of property and
equipment in connection with the sale in the third quarter of fiscal 1993 of the
medical services segment of the Company's business and the completion in fiscal
1993 of amortization of certain intangibles relating to the Life Sciences
acquisition.
Research and development expenses decreased $80,205 or 28.4% in fiscal
1994 compared to 1993, as product developments were limited to design
improvements to one product line and development of the IV controller.
Other income (expense) includes expenses of $775,580 relating to the
value of the intangible assets acquired in connection with the Metamed
acquisition in the first quarter of fiscal 1994 which were expensed at the time
of the acquisition, as the development of the products had not been completed at
the time of the acquisition, a loss of $57,430 recognized in connection with the
sale of a building which originally had been used in connection with the medical
services business sold in 1989, a loss of $10,227 on sale of leasehold
improvements in the Company's former Broomfield, Colorado facilities and income
of $84,799 relating to the sale of common stock of Discovery Technologies, Inc.
Interest income increased in fiscal 1994, compared to 1993, due to interest paid
on the notes received as part of the purchase price for the medical services
business sold during the third quarter of fiscal 1993. Interest expense
increased in fiscal 1994, compared to 1993, due to interest paid on the
Company's 10% Convertible Senior Debentures issued in the second quarter of
fiscal 1993.
The Company's net loss increased by $1,768,310 in fiscal 1994 compared
to 1993 due primarily to the lower level of sales, lower gross margins and the
$775,580 expense relating to the intangible assets acquired in connection with
the Metamed acquisition as described above and direct (approximately $110,000)
and indirect costs incurred in connection with the move of the Company's
corporate offices from Broomfield, Colorado to Vista, California.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had $1,028,937 of cash and accounts
receivable. Due to the Company's operating losses during the past five years, 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. In August 1995, the Company completed the sale of 1,040,987
Units of its securities, at a purchase price of $1.00 per Unit. Each Unit
consisted of four shares of Common Stock and two redeemable Common Stock
Purchase Warrants. The sale of 548,847 of the Units had been completed at June
30, 1995 and is reflected in the financial statements for fiscal 1995. During
August and September 1995, the Company also issued an aggregate of 684,711
shares of its Common Stock in payment of trade accounts payable of $321,814.
The Company believes it needs to raise approximately $400,000 of
additional working capital in addition to the proceeds raised in connection with
the unit offering completed in August 1995, to sustain operations during the
next twelve months. While not required to sustain operations, the Company
believes it should raise an additional $400,000-$800,000 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. In the event that the
Company is unable to raise additional capital, it will be required to defer
shipment of the initial IV products and/or to 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. 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 and product development activities.
BUSINESS
INTRODUCTION
HealthWatch develops, manufactures and markets cardiovascular
noninvasive diagnostic instruments, accessories and services. The Company's
diagnostic instruments include non-invasive doppler and ultrasound imaging
systems designed to diagnose peripheral vascular (blood vessel) disease and
electrocardiograph and stress-testing equipment and interpretive software. In
1993, HealthWatch acquired Metamed, Inc. ("Metamed"), a development-stage
company which was engaged in the development of products for the infusion
therapy ("IV") industry. Infusion therapy generally involves the delivery of one
or more fluids, primarily pharmaceuticals or nutritionals, to a patient by means
of an infusion line inserted into the circulatory system. The Pacer, the
Company's first IV product, which was approved for marketing by the U.S. Food
and Drug Administration ("FDA") in April 1994, is in the final development
stage. Sales of the Pacer are expected to begin within the next two months.
Markets for the Company's diagnostic products have been adversely
affected by efforts to contain health-care costs as well as by the efforts of
many hospitals and other health-care institutions to reduce their costs by
consolidating operations with the operations of other institutions. This
consolidation has resulted in fewer customers for HealthWatch's diagnostic
products and for delays in obtaining purchase orders from institutions which are
evaluating possible consolidations with other institutions. In contrast, the
Company believes that its IV products will benefit from the health-care
industry's focus on reducing costs, as these products are expected to be
substantially less expensive and easier to use than most competing products. For
this reason, the Company's primary focus during the past year has been on the
development of the Pacer.
The Company's licensed patented IV technology utilizes proprietary
optics and computer technology to measure the size (volume) of drops as they
fall in a drip chamber. By combining this information with the rate of flow of
the drops, the system is able to determine and regulate the amount of the fluid
delivered to the patient. In effect, the Company's IV system utilizes the power
of a microprocessor chip and electronics to replace more cumbersome and
expensive mechanical-based systems. The cost of using the Company's IV systems
is expected to be significantly less than the cost for most competing systems,
both because the purchase prices for the Company's IV systems are expected to be
less than those for competing systems and because the Company's IV systems can
be used with generic IV sets which usually are significantly less expensive than
proprietary IV sets required to be used with most competing systems.
HealthWatch's strategy from 1989 to 1994 was to build its business
primarily through the acquisition or licensing of products utilizing new or
related technologies which could be sold through a common distribution network.
HealthWatch believes that there are substantial opportunities to grow its
existing business through sales of its initial IV product, development of
additional IV products utilizing its licensed patented technology and the
development and distribution of related IV products and supplies. The Company
intends, therefore, to concentrate its business development efforts during at
least the next 18 months on the development and expansion of its IV business.
During this period, the Company also intends to complete certain enhancements to
its Life Sciences product line.
References herein to "HealthWatch" or the "Company" include HealthWatch
and its consolidated subsidiaries and their predecessors unless the context
indicates otherwise. HealthWatch was incorporated in the state of Minnesota in
1983.
BUSINESS SEGMENTS
HealthWatch's business prior to the sale of its medical services
businesses in February and March 1993, generally could be divided into two
business segments: medical products and medical services. Revenues and operating
profits (losses) before allocation of certain corporate and other expenses for
both of these segments for the past three fiscal years are as follows:
Year Ended June 30,
1995 1994 1993
Revenues:
Medical Products
Cardiology ........... $ 610,623 $ 863,904 $ 1,301,974
Peripheral Vascular .. $ 1,206,772 $ 1,409,528 $ 2,417,951
Supplies & Technical
Services ........... $ 1,698,857 $ 1,796,714 $ 2,374,937
TOTAL ............ $ 3,516,252 $ 4,070,146 $ 6,094,862
Medical Services:
Management ........... $ 0 $ 0 $ 437,894
Billing .............. $ 0 $ 0 $ 239,454
TOTAL ............ $ 0 $ 0 $ 677,348
Operating Profit (Loss):
Medical Products ..... $(1,843,239) $(2,000,959) $(1,344,523)
Medical Services ..... $ 0 $ 0 $ 186,797
For the year ended June 30, 1995, the Company reported a decline in
revenues of $253,281 for cardiology products, $202,756 for peripheral vascular
products and $97,857 for supplies and technical services when compared with
fiscal 1994. For the year ended June 30, 1994, the Company reported a decline in
revenues of $438,070 for cardiology products, $1,008,423 for peripheral vascular
products and $578,223 for supplies and technical services when compared with
fiscal 1993. For the year ended June 30, 1993, product revenues declined
$1,145,244 compared to the year ended June 30, 1992. The Company attributes the
reduction in revenues for its cardiology and peripheral vascular products
primarily to a general slowdown in the purchases of capital medical devices due
to the uncertainty in the market for such products caused by proposed
health-care reforms and efforts to reduce health-care costs. In addition the
Company's revenues have been adversely affected by the lack of adequate working
capital, changes in sales personnel, as well as the need to reduce prices for
its products to meet price reductions by competitors, again , the Company
believes, due to the softness in the markets for its products. Revenues from
supplies and technical services are related to the placement of new cardiology
and peripheral vascular products.
Foreign sales accounted for $1,318,233, $1,228,205 and $1,529,752 of
the Company's medical product revenues during fiscal 1995, 1994 and 1993,
respectively. The revenues from the international market are generated by
distributor sales and a wholly owned subsidiary, Cambridge Medical Equipments
LTD., in England. Cambridge Medical Equipments LTD. accounted for revenues of
$561,364, $476,856 and $628,183 for the three years ended June 30, 1995, 1994
and 1993, respectively. International product sales are primarily through
distributors. HealthWatch currently has approximately 42 distributors worldwide.
For additional information regarding the Company's business segments see Note 18
of the Notes to the Consolidated Financial Statements. Neither HealthWatch nor
any of its affiliates does business with the government of Cuba or any person or
affiliate located in Cuba.
MEDICAL PRODUCTS
HealthWatch's goal has been to build a medical products business, with
an emphasis on cardiac and vascular diagnostic products and IV instrumentation
products for hospital, physician and home care use. Cardiology products are
marketed under the "Cambridge" brand name and peripheral vascular products are
marketed under the "Life Sciences" brand name. IV products are expected to be
marketed under the "Cambridge" brand name.
HealthWatch's first cardiology acquisition was the acquisition in June
1990 of the assets of Telemed, a 20-year old electrocardiograph and ECG overread
service business. HealthWatch considered Telemed's primary value to be its ECG
software-based analysis program which had been validated by a database of over
20 million ECG'S. During January 1995, the Company sold the Telemed ECG analysis
program to an unrelated party for $75,000. The Company retained a license to use
the program with its Cambridge products.
HealthWatch's second cardiology acquisition was the acquisition in
December 1990, of Cambridge Medical Instruments (located in the United States)
and Cambridge Medical Equipments (located in the United Kingdom). Cambridge,
founded in 1911 by Sir Horace Darwin, son of the naturalist Charles Darwin, was
the first company to manufacture electrocardiograph diagnostic equipment.
HealthWatch considered the primary value of the Cambridge acquisition to be the
Cambridge name and the Cambridge exercise stress test product line.
In October 1990, HealthWatch acquired Life Sciences, a 16-year old
company engaged in the design, manufacture and marketing of Doppler and
ultrasound imaging systems for the noninvasive assessment of peripheral vascular
diseases. Life Sciences has an installed base in excess of 2,850 systems.
HealthWatch considered Life Sciences' primary value to be its established
product line and strong name recognition in the hospital and vascular laboratory
markets.
In September 1993, HealthWatch acquired Metamed, a company formed in
1992 to develop a line of IV therapy and drug delivery devices. HealthWatch
expects to begin shipping its first Metamed product, an IV controller, during
the second quarter of fiscal 1996. HealthWatch considered Metamed's primary
value to be its licensed patented technology.
Cardiac and peripheral vascular diseases represent the first and third
causes, respectively, of death in the United States. Sales of products and
services for both of these market segments, which have shown significant growth
during the last 15 to 20 years, showed limited growth in more recent years due,
HealthWatch believes, to general uncertainties in the health-care industry as a
result of proposed reform of the United States' health-care delivery system and
overall constraints on health-care costs. HealthWatch believes that while growth
rates may be less than in prior years, markets for such products will continue
to grow due to the continuing increase in life expectancy and emphasis on early
detection and treatment of cardiac and peripheral vascular diseases.
The IV instrumentation marketplace has undergone substantial change
during the past three to four years due, in part, to the use of newer
pharmaceuticals which require instrumented controls to insure precise delivery
of the drugs, an increase in the desire to provide for concurrent intravenous
delivery of different drugs and a rapid increase in the use of IV instruments in
connection with the care of patients in their homes.
GLOSSARY OF TERMS
CHANNEL (single, three and multi) - Format for recording ECG test data,
a channel representing information from one lead. A single channel ECG machine
prints information from one lead at a time, whereas a three or multichannel
machine prints information from three or multiple leads, respectively, at a
time. Each lead represents a position on the patient from which data is
gathered.
DOPPLER - Measurement by sound or light wave length.
ELECTROCARDIOGRAPH (ECG) - A method of recording the magnitude and
direction of electrical activity of heart cells during each cardiac cycle. Data
is gathered by leads from up to 12 different locations on the patient's body.
ECG OVERREAD SERVICE - A service that provides for a second
reading/interpretation of ECG tests. ECG'S may be transmitted electronically via
modems to a central location for computerized overread/interpretation.
EXERCISE STRESS TESTING - Also called Graded Exercise Testing (GXT), is
the recording of a patient's ECG under a controlled exercise environment.
EXTREMITIES or limbs - Upper extremities include the arms, forearms,
wrists and hands and the lower extremities include the thighs, legs, ankles and
feet.
INFRARED - Invisible heat or light rays having wavelengths longer than
those of red light.
IV - Intravenous delivery of fluids and pharmaceuticals.
OPHTHALMIC ARTERY - Artery supplying blood to the eyes and adjacent
structures.
OCULAR - Pertaining to the eye.
PERIPHERAL VASCULAR - All blood vessels other than those of the heart.
PULMONARY EMBOLI - Blood clots in blood vessels in the lungs.
THROMBOSIS - Development or presence of a blood crust, clot or plug in
one of the cavities of the heart or in a blood vessel.
ULTRASOUND - A form of energy consisting of sound-like vibrations or
waves of high frequency.
VASCULAR - Pertaining to or involving blood vessels (arteries and
veins).
CARDIOLOGY PRODUCTS. ECG equipment provides a method of recording the
magnitude and direction of the electrical activity of the heart cells during
each cardiac cycle. By measuring and identifying electrical activity intervals,
axes and amplitudes of the wave forms, detailed information about cardiac
disease and the functional process of the heart can be derived.
ECG equipment is found in hospitals, clinics and physicians' offices,
as well as ambulances. Recordings are routinely taken by nurses, technicians and
physicians. In most situations, final ECG interpretations must be performed by
physicians.
ECG tests conducted while patients are resting are augmented in certain
situations by other tests, including exercise stress testing. Under induced
stress, a patient may unmask abnormalities not detected at rest with a standard
ECG. However, the ready availability of the ECG and its ease of use and low cost
make it part of most diagnostic workups for cardiac patients. The ECG is one of
the most frequently performed tests in medicine.
HealthWatch's cardiology products include the Cambridge 6600 series and
6900 series lines of ECG and cardiac stress test systems which include
proprietary systems developed by Cambridge and systems manufactured by other
companies. The Cambridge 6900 is a stand-alone ECG stress test system with an
available treadmill or ergometer for cardiac stress test analysis.
The Cambridge MC6000 series of electrocardiograph equipment offers a
wide range of options, from the basic 12-lead system (MC6600) to an advanced
exercise testing configuration (MC6900A). The Telemed software has been migrated
to the Cambridge MC6000 series to complete this product line. Cambridge ECG
equipment sells for $6,500 for low-end licensed products to $13,500 for the
MC6900.
HealthWatch sold the Telemed interpretive software in January 1995.
HealthWatch retained a license to use the Telemed software with its Cambridge
products.
PERIPHERAL VASCULAR PRODUCTS. While peripheral vascular disease is
generally less likely to produce catastrophic consequences than is cardiac
disease, it may cause significant disability and lifestyle restrictions as well
as death. Vascular disease diagnosis and management has historically been done
by vascular surgeons. With the aging of the U.S. population, a greater awareness
of vascular disease in general, and better surgical and medical management
options, more medical specialists are becoming involved in the diagnosis and
treatment of vascular disease. The capability and sophistication of the
equipment needed to diagnose peripheral vascular disease varies greatly from the
needs of the primary-care physician who may only be attempting to determine
whether or not a patient has symptoms of peripheral vascular disease to the
needs of the vascular laboratory which may be trying to establish the exact
location and severity of the disease.
HealthWatch currently markets two products under the "Life Sciences"
brand name. First, the Modular Vascular Lab (MVL), a computer-controlled
instrument which, through the use of various plug-in modules, can perform a wide
range of vascular diagnostic studies. During fiscal 1992, the Company
re-designed the MVL to simplify the options available and to reduce the cost of
this equipment. The re-designed MVL is referred to as the "MVL Classic."
The MVL produces detailed color reports and is easily operated with a
remote hand controller which allows the vascular technician to concentrate on
the patient rather than on operation of the MVL. The modular concept permits the
customer to purchase only the diagnostic testing modalities desired and to add
new modalities at any time. The MVL includes:
* MVL BASE UNIT. Includes the Modulab with space for ten plug-in
modules, a high resolution color graphics monitor, color printer,
keyboard, strip-chart recorder, remote hand-controller, foot
switch and storage cart.
* PVR MODULE. Calibrated Pulse Volume Recorder, used in the
diagnosis of arterial and venous disease in both the upper and
lower extremities.
* CWD/PPG MODULE. Continuous wave Doppler and photoplethysmograph.
The Doppler is used to measure blood velocity in both arteries
and veins by using high frequency ultrasound. The
photoplethysmograph measures blood flow using an infrared sensing
device.
* SFA-11 MODULE. Spectrum frequency analysis is used in conjunction
with the CWD/PPG module, Imager module or external input source.
The SFA-11 performs real-time analysis of Doppler frequency
shifts using computerized analysis which transforms audio or
visual images into a quantifiable frequency or velocity.
* OPG MODULE. Ocular pneumoplethysmograph, used to measure pressure
changes of the ophthalmic artery, which in turn reflects the
absence or presence of disease in blood vessels that supply
oxygen to the brain.
* IPG-II MODULE. Impedance plethysmograph, used for the detection
of deep venous thrombosis (DVT) by measuring the change in
electrical impedance (resistance) of a limb as blood flow is
occluded (obstructed) and then restored. DVT is a major source of
pulmonary emboli which can be fatal.
* PAG MODULE. Phonoangiograph, used as a sensitive quantitative
stethoscope to "listen" to the vascular system.
There is currently an installed base of over 350 MVL'S. Prices range
from $23,500 for a basic system, consisting of the MVL base unit, PVR module and
CWD/PPG module, to $70,000 for a fully configured system.
The second product is the Pulse Volume Recorder (PVR-IV) with
calibrated PVR (records height and width of wave length, volume of air in cuff
and pressure), bi-directional Doppler (measures blood velocity using
ultrasound), photoplethysmograph (measures blood flow using an infrared sensing
device) and optional ocular pneumo-plethysmograph (measures pressure changes in
certain arteries). The basic unit is used to diagnose blood vessel disease in
both the upper and lower extremities. There is an installed base of over 2,500
PVR'S, of which over 1,000 are PVR-IV's. The PVR-IV is priced at $15,000. The
PVR is suitable for busy vascular labs, where high patient volume is a major
consideration, foreign markets, smaller U.S. hospitals, and physician offices
which cannot cost-justify the MVL.
IV PRODUCTS. IV infusion systems generally rely upon either gravity
(controllers) or mechanical devices (pumps) to provide the force required to
deliver fluids and pharmaceuticals intravenously to patients. While gravity
delivery is the most simple and cost effective means of IV delivery, it has
historically had significant limitations in accuracy and ability to control the
flow of the fluid. The need for accurate intravenous delivery systems has
increased as the potency for new pharmaceuticals has increased and as treatment
procedures have increasingly utilized concurrent intravenous delivery of several
different pharmaceuticals to treat patients.
The concept of automated delivery was developed in the early 1970s with
the introduction of drop counting IV delivery systems which relied on counting
drops of assumed volume for system accuracy. IV delivery systems have evolved
into sophisticated computer controlled controller and pump systems. Controller
systems rely on gravity to provide the delivery force whereas pump systems use
either a syringe pump or peristaltic mechanism to force the fluid to the
patient.
Metamed has adopted the older concept of drop counting systems and
applied computer technology to develop a system which measures the size (volume)
of the drop falling in the drip chamber and determines the flow rate based on
the input through a flow sensor. Metamed has developed a controller and intends
to develop a pump utilizing its licensed patented measurement technology. The
Metamed measurement system requires substantially less power than competing
systems, which enables the required electronics and controls to be incorporated
into the flow sensor itself, resulting in smaller and lighter systems as well as
systems that the Company believes will be easier to use and less costly than
controller and pump systems currently being marketed. In addition, the Metamed
devices are designed to be used with a variety of IV sets compared to other
devices which generally can be used only with proprietary IV sets designed for
the particular controller or pump being used. This ability to be used with a
variety of sets is also expected to make the Metamed system easier to use and to
lower total costs incurred in providing IV therapy to patients.
In December 1994, HealthWatch introduced the Pacer, its first IV
product, a controller, which was approved for marketing by the FDA in April
1994, and expects to begin shipping this product during the second quarter of
fiscal 1996. The Pacer is in the final product validation stage with independent
product validation and initial field trials scheduled for October 1995. The
Pacer is expected to sell for $1,300-$1,600, compared to competing single
channel products, normally IV pumps, which sell for in excess of $2,000 for
products with features similar to those for the Pacer to up to $6,500 or more
for more complicated pump products with specialized operating features. The
Pacer may be used with a variety of IV sets, including generic sets which
generally sell for significantly less than proprietary sets which normally must
be used with competing IV pump products. The use of generic IV sets can save
users from $1.25 to $9.25 per IV set used. It is not unusual for hospitals to
use annually from 140 to 200 sets per IV instrument.
HealthWatch believes that there are more than 900,000 IV controllers
and pumps currently being used in the U.S. and that approximately 120,000 IV
instruments are sold annually in the U.S. and that the international market is
equal in size to the U.S. market. The Company intends to market the Pacer based
on its ease of use and the potentially significant cost savings which users of
the Pacer may recognize, both due to the lower cost for the Pacer and the
ability to use lower-priced IV sets. The Company does not intend, at least
initially, to market the Pacer for use in critical care or other similar
environments where more complicated products with operating features
specifically designed for these environments are generally used.
SUPPLIES AND TECHNICAL SERVICES. In addition to the sale of medical
instruments, HealthWatch sells disposable supplies, such as ECG recording paper
and electrodes and electrasound gels and cuffs, to purchasers of its cardiology
and peripheral vascular equipment and provides technical service/maintenance for
such equipment. During fiscal 1995, sales of supplies and revenues from service
and maintenance activities accounted for approximately 48 percent of
HealthWatch's revenues from its medical products business segment.
SALES AND MARKETING. The Company has a Vice President of Sales and
Marketing, one international sales/marketing manager, one field sales support
representative and one customer service representative. The Company has in
excess of 40 dealers representing its products worldwide.
During the last quarter of the fiscal year ended June 30, 1993,
HealthWatch modified its sales and marketing strategy to focus on sales to
hospitals and other health-care institutions due to changes and uncertainties in
the health-care industry which, HealthWatch believes, adversely affects
physician purchases of diagnostic equipment. These sales are made directly to
hospitals, specialty physicians and vascular laboratories.
The Company markets internationally through selected independent
manufacturers' representatives and distributors who have appropriately trained
staff capable of providing sales and service for the Company's products. The
Company presently has 42 foreign independent manufacturers' representatives and
distributors who service approximately 70 percent of the international markets.
HealthWatch intends to continue to pursue disposable supply sales,
customer upgrades and service/customer support; development of a network of
domestic independent manufacturers' representatives responsible for sales to
hospitals; and, expansion of international sales. The Company's ability to
develop and implement marketing programs for its existing products and to
develop a direct sales force for its products has been limited because of its
lack of working capital.
HealthWatch believes that its vascular products account for
approximately 15%-20% of the U.S. markets for such products and that its
cardiovascular products account for less than 1%-2% of the markets for these
products.
Initially, HealthWatch intends to distribute the Pacer, its first IV
product, through independent manufacturers' representatives. The Company
believes that the long-term success of any marketing program for its IV
instruments may require that the Company obtain a line of disposable IV sets to
distribute with its IV instruments. HealthWatch believes that there are more
than 900,000 IV instruments currently being used in the U.S. and that
approximately 120,000 IV instruments are sold annually in the U.S., and that the
international market is equal in size to the U.S. market. The Company intends to
market its IV instruments based on their ease of use and potentially significant
cost savings which users may recognize, both due to the instruments' lower costs
and the ability to use lower-priced IV sets.
MANUFACTURING. The Company's manufacturing operations consist primarily
of what is referred to in the industry as "FAT" (final assembly and testing).
The Company has utilized outside consultants to assist in the design of its
products. The Company attempts to maintain a limited inventory of finished
products and normally attempts to fill orders within a month of their receipt.
The Company generally does not have any significant backlog of orders; however,
during the last quarter of fiscal 1994 and the first quarter of fiscal 1995, the
Company had a backlog of orders of $431,509 and $453,262, respectively. The
majority of this backlog was the result of orders received, but not forecasted
and the lead times involved in procurement of raw materials. The Company shipped
the majority of the products on backorder early in the second quarter of fiscal
1995.
HealthWatch is in the beginning stages of producing the Pacer, its
first IV product. Current plans call for producing approximately 100 units of
the Pacer during September and October 1995, increasing production to 250 units
per month by February, 1996. Since the Company's primary activities relating to
the production of this product are the assembly, testing and shipping of the
final product, the Company believes that if it has adequate working capital to
fund the purchase of raw materials and component parts it will be able to
increase production levels rapidly after December, 1995. Due to the difficulty
of obtaining the original microprocessor chip to be used in the Pacer, the
Company redesigned the Pacer so that it uses a different microprocessor chip
which is more readily available to the Company. Several of the key components
for the Pacer must be ordered 60 or more days in advance of their anticipated
need in order to assure their availability on a timely basis. This need
substantially increases the Company's working capital requirements and may limit
its ability to rapidly increase production capabilities for the Pacer should
this be required in order to meet rapidly increasing order rates for this
product.
Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers and may
be available to the Company only if it places significant orders which represent
several months or more of the Company's projected needs for such materials. The
need to purchase significant quantities of these materials in advance of their
use, substantially increases the Company's working capital requirements. There
can be no assurance that the Company's current suppliers for these products will
continue to supply them to the Company. While alternative sources for such items
are currently available, the Company could be required to re-design its products
in order to be able to use the alternative materials provided by these
additional suppliers. Any such re-design of the Company's products could be
expensive and time-consuming and could require six or more months to complete.
The Company believes that it either has or has commitments to supply quantities
of the most critical components for its new IV product.
During fiscal 1994, HealthWatch completed the relocation of all
manufacturing operations from Broomfield, Colorado to Vista, California. This
move was made in concert with the Company's strategic plans for growth in the IV
business and the anticipated need for new personnel knowledgeable in the IV
business. The Company's facilities in Vista, California are within a 50 mile
radius of five key competitors in the IV industry and a broad base of
prospective qualified personnel.
RESEARCH AND DEVELOPMENT. The Company expects to incur an additional
expense of approximately $275,000 for the completion of the design related work
and initial product builds for the IV controller and pump systems. In addition,
subject to available capital resources, the Company plans to make certain
enhancements to its Modular Vascular Laboratory, a product sold under the Life
Sciences name. During the years ended June 30, 1995, 1994 and 1993, the Company
spent $499,094, $201,713 and $281,918, respectively, on research and development
activities.
PROPRIETARY INFORMATION. The Company seeks protection of its
proprietary interest in software products and trade secrets. The Company
historically has not relied on patents to protect the proprietary aspects of its
products, but has begun to do so with the products associated with the IV
instrumentation business, the licensed technology for which is covered by a U.S.
patent. HealthWatch maintains nondisclosure and confidentiality agreements with
its employees. While the enforceability of such agreements cannot be assured,
the Company believes that they provide a deterrent to the use of information
which may be proprietary to the Company. The Company licenses the technology for
its IV products from Howard R. Everhart, a former officer and director of the
Company, and licenses the technology for certain components of its other
products from unrelated persons for which it pays license or royalty fees.
PRODUCT WARRANTY AND SERVICE. The Company warrants its products against
defects in material and workmanship for one year. Warranty service is ordinarily
provided by the Company. If a product defect cannot be easily fixed at the
customer's office, the Company's policy is to replace the defective component
and return it to the Company's office for repairs.
COMPETITION. There are many companies that produce equipment which
competes with the Company's cardiology products. While there is significant
competition for each of the Company's peripheral vascular products, the number
of competitors, particularly ones that offer as broad a range of products as
does HealthWatch, is significantly less in the peripheral vascular markets than
in the cardiology markets. Many of the Company's competitors, particularly in
the cardiology markets, have substantially greater financial and marketing
resources than the Company. Hewlett-Packard Corporation, Marquette Electronics,
Inc. and Quinton Instruments Co., all of which are substantially larger than
HealthWatch, account for a substantial portion of the market for ECG products
similar to those sold by HealthWatch. For the products to be sold in the IV
instrumentation business there are a number of competitors which provide mostly
"high end" IV controllers and pumps. Over 80% of the domestic market for IV
instruments is dominated by five companies, Baxter Healthcare Corporation,
Abbott Laboratories, IVAC Corporation, IMED Corporation and Minimed,
Incorporated. All of these companies are substantially larger than HealthWatch.
The international market for IV products is largely fragmented with local
manufacturers.
Competition for medical products generally is on the basis of product
performance and cost. The Company's cardiology and vascular products generally
are priced in the mid range of competing products with the Life Sciences fully
configured MVL product priced at the high-end of the peripheral vascular market.
HealthWatch believes that its cardiology and vascular systems are favorably
priced when compared to competing products which provide comparable features and
quality. The Cambridge and Life Sciences names are well known in their
respective markets. In the IV instrumentation market, competition has
historically been based on product performance and reputation. With the
implementation of the Health Care Reform Act in 1986, competition in these
markets has become more focused on the cost per use of the IV instruments.
HealthWatch IV instruments are expected to be substantially lower in cost per
use than currently marketed products in both the hospital and home-care markets.
The Company expects to encounter intense competition in the market for its IV
products. This could require that the Company commit significantly greater
resources to the introduction of its IV products than would otherwise be
required.
GOVERNMENT REGULATION. From time to time, legislation or regulations
have been proposed which, if enacted, would regulate health-care spending. The
Company is unable to predict what legislation or regulations may be enacted or
what impact, if any, such actions would have on the Company. Further,
governmental reimbursement systems, pursuant to which hospitals and physicians
are reimbursed for medical procedures at a fixed rate according to
diagnosis-related groups, have an economic impact on the purchase and use of
medical equipment. A material decrease in current reimbursement levels for tests
performed by the Company's equipment might have a material adverse affect on the
Company's ability to market its products.
The United States Food and Drug Administration ("FDA"), pursuant to the
Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act, amended in
1990 (the "1976 Act"), and regulations promulgated thereunder, regulates the
testing, manufacturing, packaging, distribution and marketing of medical devices
in the United States, including the products manufactured by HealthWatch.
Comparable agencies in certain foreign countries also regulate the Company's
activities.
The FDA classifies medical devices intended for human use into three
categories, depending upon the degree of regulatory control deemed appropriate
with respect to each device. The Company's products are Class II devices for
which permission to market can be obtained under section 510(k) of the medical
device amendments to the Food, Drug and Cosmetic Act. Products requiring
permission to market under 5l0(k) may be approved after adequate demonstration
of safety, effectiveness and documentation that the product is substantially
equivalent to a similar device in interstate commerce prior to 1976. In 1990,
Congress enacted the Safe Medical Device Act which requires manufacturers to
obtain permission to market prior to placing the product into interstate
commerce. Manufacturers may, however, market devices outside the U.S. without
510(k) permission to market subject to local government approval and/or a
certificate of export from the FDA. The 1976 Act also requires compliance with
specific manufacturing and quality assurance standards. The FDA has published
regulations defining good manufacturing practices to provide that the
manufacturing process for any device is controlled to maximize the probability
that the finished product meets all quality and design specifications.
FDA regulations also require that each manufacturer establish a quality
assurance program by which the manufacturer monitors the manufacturing process
and maintains records which show compliance with the FDA regulations and the
manufacturer's written specifications and procedures relating to the devices.
The FDA makes unannounced inspections of medical device manufacturers and may
issue reports or citations where the manufacturer has failed to comply with all
appropriate regulations and procedures.
Compliance with the provisions of the Act and the FDA's regulations is
time-consuming and expensive. HealthWatch believes it is in substantial
compliance with the provisions of the 1976 Act and regulations under the 1976
Act.
MEDICAL SERVICES
CROSSROADS MEDICAL CENTER. On December 2, 1988, HealthWatch completed
the sale of seven Denver-area medical centers. HealthWatch continued to operate
through March 1993, its first medical center, the Crossroads Medical Center,
located in Boulder, Colorado. On March 31, 1993, the Company sold the assets of
its medical management business to an unaffiliated company.
HEALTH CARE PROFESSIONAL BILLING. Following the sale of seven of the
Company's medical centers, the HealthWatch billing department began marketing
its services to non-HealthWatch physicians under the name "Health Care
Professional Billing." On February 1, 1993, the Company sold the assets of this
business to an unrelated company.
EMPLOYEES
At August 31, 1995, the Company employed 33 persons, consisting of 6
general administrative, 4 sales and marketing, 10 manufacturing, 5 service, 5
engineering and research and product development personnel and 3 service related
persons at Cambridge Medical Equipments LTD. No retirement or pension or similar
program is in effect for the benefit of the Company's employees.
PROPERTIES
The Company's principal offices are located in 24,535 square feet of
space in Vista California, leased for a 65-month term ending January 6, 1999,
with a two-year renewal option, The incremental rate for this space is $14,400
per month.
The Company leases 2,500 square feet of office space in Cambridge,
England on a month-to-month basis for $1,530 per month.
MANAGEMENT
The directors and executive officers of HealthWatch are as follows:
<TABLE>
<CAPTION>
Director
Name Since Age Positions With The Company
<S> <C> <C> <C>
John D. Greenbaum Sept. 1993 - Sept. 42 President and Chief Executive and Chief
1995* Financial Officer*
William B. Bevan -- 49 Vice President--Sales and Marketing
Douglas C. Layman -- 45 Vice President--Engineering
Sanford L. Schwartz 1983 45 Chairman of the Board of Directors
Kenneth A. Selzer, M.D. 1988 40 Director
__________
</TABLE>
* Mr. Greenbaum resigned as a director of the Company effective September 8,
1995 and as an officer of the Company effective September 30, 1995. Mr.
Greenbaum has agreed to provide consulting services to the Company during
October and November 1995. Lindley S. Branson, age 53, has been elected
President and Chief Executive Officer of the Company effective October 1,
1995. Mr. Branson has been a partner with the Minneapolis, Minnesota law
firm of Gray, Plant, Mooty, Mooty & Bennett, P.A. for more than the last
five years.
John D. Greenbaum has been President and Chief Executive and Chief
Financial Officers of the Company since September 1993 and provided management
consulting services to the Company from July 1993 to September 1993. From April
1993 to September 1993, Mr. Greenbaum was Chief Executive Officer of Metamed,
Inc., a development-stage company in the intravenous instrumentation business.
From December 1991 to April 1993, he was Chief Executive Officer of Colorado
MEDtech, Inc. (or one of its predecessor companies), a product development and
medical products company. Prior to 1991, Mr. Greenbaum was employed for more
than nine years by IVAC Corp., then a division of Eli Lilly & Company, a medical
products company, where he served in various capacities, including Director of
Product Development, Director of Manufacturing and Director of Quality Assurance
and Regulatory Affairs.
William B. Bevan. Mr. Bevan has been Vice President of Sales and
Marketing of the Company since November 29, 1993. Mr. Bevan was Manager of
Sales, Disctronics Medical Systems, a wholly-owned subsidiary of a Swiss-owned
manufacturer of insulin delivery systems, from October 1992 to November 1993,
Vice President of Sales for Kipp Group, a manufacturer of disposable components
for medical products from September 1991 to October 1992 and Director of
International Operations for IMED Corp., a manufacturer of infusion therapy
devices and disposables from April 1988 to August 1991.
Douglas C. Layman. Mr. Layman has been Vice President of Engineering of
the Company since April 1995 and provided engineering consulting services to the
Company from March 1995 to April 1995. From February 1982 to February 1995, Mr.
Layman was a Technical Manager in Research and Development for IVAC Corp., a
division of River Acquisitions (formerly a division of Eli Lilly & Company), a
medical products company in the intravenous instrumentation business.
Sanford L. Schwartz. Mr. Schwartz, Chairman of the Board of Directors
of the Company, has been a consultant with Creative Business Strategies, Inc., a
business/development consulting firm, since July 1992. He served as Chief
Executive Officer of the Company from June 1983 to September 1993. Mr. Schwartz
is a director of Renaissance Entertainment Corporation.
Kenneth A. Selzer, M.D. Dr. Selzer is a physician with the U.C.S.D.
Medical Center, La Jolla, California, which position he has held since June
1993. He was a resident in neurology at Vanderbilt University from January 1991
to May 1993 and has been a general partner of La Jolla Consulting Group, a
consulting firm which specializes in biomedical products, biotechnology and
health care services, since January 1989. From November 1985 to December 1988,
Dr. Selzer was President of Integrated Healthcare Services, Inc., a company
which provided administrative services to medical centers.
COMPENSATION
The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1995, to the Company's President and Chief Executive
Officer, Chairman of the Board of Directors, Vice President of Sales and
Marketing and Vice President of Operations (the only executive officers whose
aggregate remuneration exceeded $100,000 in any of such years):
<TABLE>
<CAPTION>
Name and Principal Fiscal Options Restricted All Other
Position Year Salary Bonus (No. of Shares) Stock Awards Compensation
<S> <C> <C> <C> <C> <C> <C>
John D. Greenbaum, 1995 $101,207 -- 27,500 shs.(1) -- $6,818
President and Chief, 1994 $150,000 -- 25,000 shs. -- $7,200
Executive Officer 1993 $ 22,653 -- 2,500 shs. 1,250 shs. $ 600
William B. Bevan, 1995 $107,961 (2) -- 131,250 shs.(1) -- --
Vice President, 1994 $ 57,404 (2) -- 6,250 shs. -- --
Sales & Marketing 1993 -- -- -- -- --
Sanford L. Schwartz, 1995 $ 33,250 (3) -- 77,250 shs.(1) 250,000 shs.(3) --
Chairman of the 1994 $ 25,000 (3) -- -- 15,000 shs. --
Board of Directors 1993 $ 35,000 (3) -- -- -- --
Howard R. Everhart, 1995 $ 96,254 -- -- -- $58,516 (4)
Vice President 1994 $ 84,333 -- 27,500 shs. -- $40,435 (4)
of Operations 1993 $ 11,667 -- -- -- --
____________
</TABLE>
(1) Includes for Messrs. Greenbaum, Bevan and Schwartz, 27,500, 31,250 and
27,250 shares, respectively, subject to previously granted options
which were repriced during the fiscal year. See "Stock Options."
(2) Includes sales commissions.
(3) Includes amounts paid to Creative Business Strategies, Inc. ("CBS").
Mr. Schwartz is an officer, director and principal shareholder of CBS.
The fair market value as of the date of grants of the shares of Common
Stock subject to the stock awards were $81,000 in 1995 and $26,250 in
1994.
(4) Includes license fees of $40,000 paid to Mr. Everhart during each of
fiscal 1995 and 1994, pursuant to a license agreement whereby he
licensed to the Company certain technology and related patent rights.
During fiscal 1995, Kenneth A. Selzer, M.D., a director of the Company,
received a stock award of 25,000 shares of Common Stock (fair market value at
date of grant of $9,500) and was granted options for 75,000 shares of Common
Stock in consideration for services rendered both as a director and as a
consultant to the Company. Dr. Selzer's outstanding stock options were also
repriced during the year. See "Stock Options."
STOCK OPTIONS
The Company has the 1989 Incentive Stock Option Plan and the 1993 Stock
Option Plan ("the 1989 and 1993 Plans") for its key employees directors and
consultants to purchase shares of the Company's Common Stock. The 1989 and 1993
Plans provide that the purchase price of the shares covered by incentive stock
options may not be less than the fair market value of the shares on the date the
option was granted. Nonstatutory stock options granted can be granted at
exercise prices of 85% or more of the fair market value of the Company's Common
Stock on the date of grant. To date, all options granted under the 1989 and 1993
Plans have been at exercise prices equal to the fair market value of the Common
Stock on the date the Company agreed to grant the options.
The Company has, from time to time, also provided nonstatutory stock
options outside of the Plans to directors, officers and consultants. These
nonstatutory options generally have had a term of three to five years and have
had exercise prices equal to the fair market value of the Company's Common Stock
on the date the options were granted.
Directors' Report. On May 1, 1995, the Board of Directors unanimously approved
repricing all outstanding stock options held by current employees and directors
of the Company (a total of 157,189 shares), including 27,500, 27,250 and 36,750
shares subject to options held by John D. Greenbaum, Sanford L. Schwartz and
Kenneth A. Selzer, M.D., respectively, all of whom were directors of the
Company. Mr. Greenbaum was also President and Chief Executive Officer of the
Company at the time of such action. It was the Board of Directors' opinion that
the repricing of these options was appropriate in view of the Company's
inability to provide adequate cash compensation, particularly to its officers
and directors, due to the Company's lack of working capital. On May 1, 1995,
John D. Greenbaum was being paid a salary of $4,167 per month, which represented
a substantial reduction in the $12,500 per month salary he was to have been paid
pursuant to his employment agreement with the Company, and the Company had an
accrued obligation of $43,161 to Sanford L. Schwartz and an affiliated company
which was then past due.
The following table shows option grants during fiscal 1995 to the named
executive officers of the Company.
<TABLE>
<CAPTION>
Name Options Granted Percent of Total Exercise Expiration
Options Granted Price Date
<S> <C> <C> <C> <C>
John D. Greenbaum 2,500 shs. (1) 0.5% $.42 5/24/98
25,000 shs. (1) 5.5% $.42 9/13/98
William B. Bevan 6,250 shs. (1) 1.4% $.38 12/21/98
25,000 shs. (1) 5.5% $.38 10/18/99
100,000 shs. 21.9% $.38 5/1/00
Sanford L. Schwartz 25,000 shs. (1) 5.5% $.38 8/30/97
2,250 shs. (1) 0.5% $.38 11/6/97
50,000 shs. 10.9% $.38 5/1/00
Howard R. Everhart None -- -- --
</TABLE>
(1) Transaction reported is repricing of option on May 1, 1995.
The following table shows the number of options exercised during fiscal
1995 and the 1995 fiscal year-end value of the options held at the end of the
fiscal year by the named executive officer and by the groups indicated.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired on Number of Unexercised Options at in-the-money Options
Exercise June 30, 1995 at June 30, 1995
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
John D. Greenbaum None 10,833/16,667 shs. $ -0-/$-0-
William B. Bevan None 2,083/129,167 shs. $ -0-/$-0-
Sanford L. Schwartz None 26,500/50,750 shs. $ -0-/$-0-
Howard R. Everhart None None --
</TABLE>
OTHER TRANSACTIONS
During fiscal years 1995 and 1994, the Company paid certain directors
or affiliated companies fees for services rendered. For information regarding
amounts paid in fiscal 1995 to such persons, see "Compensation." In fiscal 1994,
no such director and/or affiliated company received fees aggregating $60,000 or
more except for Creative Business Strategies, Inc., a company owned by Sanford
L. Schwartz, Chairman of the Board of Directors, and Allen R. Goldstone, a
former officer/director of the Company, which company was paid on an accrual
basis approximately $62,000 for services rendered during fiscal 1994. In
addition, Messrs. Schwartz and Goldstone received stock grants which, on the
date of grant, had a fair market value of approximately $25,000 each.
During September 1993, the Company completed the acquisition of
Metamed, Inc. Howard R. Everhart, a former officer and director of the Company,
and John D. Greenbaum, President of the Company, were officers and directors and
the principal stockholders of Metamed and received 255,003 and 243,744 shares,
respectively, of the Company's Common Stock in connection with such acquisition.
Messrs. Everhart and Greenbaum were elected officers and directors of the
Company upon completion of the acquisition. HealthWatch learned of Metamed in
connection with the Company's retention of Mr. Greenbaum in 1993 to review and
provide recommendations on improving its operating procedures and personnel. Mr.
Greenbaum had had no prior relationship with the Company or any of its officers
or directors. In accordance with a license agreement amended at the time that
HealthWatch acquired Metamed, Inc., Mr. Everhart is to be paid license fees of a
minimum of $40,000 per year for six years commencing with regulatory approval
for the first licensed product (April 7, 1994). Maximum fees to be paid pursuant
to the agreement are $100,000 in the first year (actual amount paid was
$40,000), $450,000 in the second and third years, $325,000 in the fourth year,
$150,000 in the fifth year and $40,000 in the sixth year.
It is HealthWatch's policy that any transaction involving the Company
and an affiliated party be ratified by a majority of independent outside members
of the Company's Board of Directors who do not have an interest in the
transaction and that any such transaction be on terms no less favorable to the
Company or its affiliates than those that are generally available from an
unaffiliated party. Based on the amounts actually paid by affiliated parties for
services rendered by the Company (or affiliated companies) or paid by the
Company (or affiliated companies) for services rendered by affiliated persons,
the Company's Board of Directors believes that each of the foregoing
transactions were on as favorable terms to the Company (or affiliated companies)
as could have been obtained from unaffiliated persons.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of September 26, 1995, the shares of
Common Stock and percentage of total shares owned by the shareholders known to
beneficially own 5% of the Company's outstanding shares of Common Stock, each
director of the Company, the Selling Shareholders and as to all officers and
directors as a group. All persons indicated have (unless indicated to the
contrary) sole or shared with spouse voting and dispositive power over such
shares.
<TABLE>
<CAPTION>
Name and Address of Beneficial
Owner, Name of Director,
Identity of Group, Name of Amount Percentage Amount to Percentage After
Selling Shareholder Beneficially Owned Before Offering be Sold Offering (1)
<S> <C> <C> <C> <C>
Boulder Financial Group, LLC 800,000 (2) 9.4% 800,000 --
595 Utica Venue
Boulder, CO 80304
Gus W. Boosalis 650,000 (2) 8.1% 200,000 4.2%
5712 Dewey Hill Road
Edina, MN 55439
Lindley S. Branson Profit Sharing Trust 510,000 (2) 6.4% None 4.7%
33 South Sixth Street
Minneapolis, MN 55402
John D. Greenbaum 273,745 (2) 3.6% None 2.6%
Sanford L. Schwartz 342,104 (2)(3) 4.4% None 3.2%
Kenneth A. Selzer, M.D. 37,500 (2) * None *
All Officers and Directors 795,848 (2)(3) 10.3% None 7.4%
as a Group (6 persons)
DSN Enterprises Ltd. 350,000 (2) 4.4% 350,000 --
Write On Communications, Inc. 350,000 (2) 4.4% 350,000 --
Profinca Holdings S.A. 280,000 (2) 3.6% 160,000 1.1%
Springhill Holdings Limited 280,000 (2) 3.6% 160,000 1.1%
Investor Resource Services, Inc. 250,000 (2)(4) 3.2% 250,000 (4) --
SMI Capital Corp. 250,000 (2)(4) 3.2% 250,000 (4) --
Ned H. Chambers, M.D. 199,000 (2) 2.6% 80,000 1.1%
Kenneth and Jill Duckman 1992 Charitable 140,000 (2) 1.8% 80,000 *
Remainder Trust
Steve Neslund 120,000 (2) 1.5% 120,000 --
Matthew E. Milliken Trust 87,500 (2) 1.1% 50,000 *
David A. Milliken Trust 87,500 (2) 1.1% 50,000 *
Gerry Milliken Loving Trust 87,500 (2) 1.1% 50,000 *
Ralph A. Milliken Loving Trust 87,500 (2) 1.1% 50,000 *
________________
</TABLE>
* Less than one percent of shares outstanding.
(1) The percentages after the offering assume that all of the Warrants have
been exercised, that the Preferred Stock has been converted into
400,000 shares of Common Stock and that no shares of Common Stock have
been issued by the Company in payment of dividends on the Preferred
Stock. Based on the foregoing assumptions there would be 10,672,779
shares of Common Stock outstanding upon completion of the offering of
Common Stock pursuant to this Prospectus.
(2) Includes for the following persons the number of shares set forth
opposite their name which are issuable within 60 days of the date of
this Prospectus upon exercise of outstanding stock purchase options or
warrants or conversion of outstanding debentures or Preferred Stock:
Boulder Financial Group, LLC--800,000 shares; Boosalis--350,000 shares;
Branson Trust--280,000 shares; Greenbaum--27,500 shares;
Schwartz--34,750 shares; Selzer--12,500 shares; DSN Enterprises
Ltd.--350,000 shares; Write On Communications, Inc.--350,000 shares;
Profinca Holdings S.A.--200,000 shares; Springhill Holdings
Limited--200,000 shares; Investor Resource Services, Inc.--250,000
shares; SMI Capital Corp.--250,000 shares; Chambers--114,000 shares;
Duckman Trust--100,000 shares; Milliken Trusts--62,500 shares each; and
all officers and directors as a group--87,249 shares.
(3) Includes 250,000 shares owned by Creative Business Strategies, Inc., a
company with which Mr. Schwartz is affiliated.
(4) The shares represent the number of shares of Common Stock currently
issuable upon conversion of Preferred Stock plus 50,000 shares subject
to stock purchase warrants. The conversion rate for such Preferred
Stock is subject to adjustment in the future based upon the then price
of the Company's Common Stock. See "Description of Securities -
Preferred Stock." The number of shares beneficially owned and offered
hereby could also increase in the event that the Company elects to
issue shares of Common Stock in lieu of cash payment of dividends on
the Preferred Stock. In the event that the maximum number of shares
which could currently be issued upon conversion of the Preferred Stock
were so issued and the Company elected to pay dividends by the issuance
of additional shares of Common Stock, the Amount Beneficially Owned and
Amount to be Sold by each of such Selling Shareholders would be
1,490,000 shares and 1,490,000 shares, respectively.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $.01 par value. At September 26, 1995, 7,672,779 shares of Common Stock
were issued and outstanding. All shares of Common Stock have equal voting rights
and, when validly issued and outstanding, have one vote per share in all matters
to be voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as fully
paid and nonassessable shares. Cumulative voting in the election of directors is
not allowed, which means that the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able to
elect all the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors. On liquidation
of the Company each common shareholder is entitled to receive a pro rata share
of the Company's assets available for distribution to common shareholders.
Holders of shares of Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock and intends
to retain earnings, if any, to finance the development and expansion of its
business. Future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including earnings, capital
requirements and the financial condition of the Company.
WARRANTS
The Warrants which grant to the holders thereof the right to purchase
an aggregate of 2,600,000 shares of the Common Stock which are included in this
offering, were issued in four separate independently negotiated transactions.
Warrants for an aggregate of 1,000,000 shares were issued to ten investors who
provided short-term loans to the Company and standby purchase commitments
pursuant to which they agreed to purchase an aggregate of 250,000 Units of the
Company's securities if such purchases were required for the Company to satisfy
the minimum purchase requirement for the Unit offering to be effective. These
Warrants are at an exercise price of $.25 per share and expire on April 1, 1997.
Warrants for 1,500,000 shares have been issued to three companies as part
consideration for services being rendered by such companies. The exercise price
for these Warrants is $.30 per share (for 1,300,000 shares) and $.50 per share
(for 200,000 shares) and they expire on May 31 and July 28, 1996. Warrants for
100,000 shares were issued to two of the Company's shareholders in connection
with their conversion of 400,000 shares of Common Stock into 400,000 shares of
Preferred Stock. These Warrants have an exercise price of $.42 per share and
expire on December 31, 1996.
The number of shares issuable upon exercise of the Warrants and the
exercise prices are subject to equitable adjustment upon the occurrence of
certain events such as stock splits, stock dividends and recapitalizations. The
Warrants may be exercised on surrender of the applicable Warrant Certificate on
or before the expiration date of the applicable Warrant exercise, with the form
of "Election to Purchase" executed as directed, and accompanied by payment of
the full exercise price of the number of Warrants being exercised.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock in series to be designated by the Board of Directors. There currently are
400,000 authorized shares of Series A Convertible Preferred Stock. No additional
shares of Preferred Stock are expected to be issued by the Company in the
immediate future; however, the Board may use its authority to issue Preferred
Stock to effect the business purposes of the Company. Material provisions
concerning the terms of any series of Preferred Stock such as dividend rate,
conversion features and voting rights, will be determined by the Board of
Directors of the Company at the time of such issuance. The ability of the Board
to issue Preferred Stock also could be used by the Company as a means of
resisting a change of control of the Company and, therefore, could be considered
an "anti-takeover" device.
The Series A Convertible Preferred Stock is convertible into shares of
Common Stock at a $1.50 per share and is redeemable at the option of the Company
at a $1.50 per share. If HealthWatch does not redeem this Preferred Stock,
one-half of the Preferred Stock becomes convertible into Common Stock at a
reduced conversion price on March 12, 1996, and the balance becomes convertible
into Common Stock at a reduced conversion price on August 12, 1996. In both
cases, such stock becomes convertible at the lesser of $1.00 per share or 50% of
the then market value of the Common Stock, provided that the conversion price
shall not be less than $.25 per share or, if less, the lowest price at which the
Company has sold Common Stock prior to such conversion. This Preferred Stock has
no voting rights except as may be required by law. These shares of Preferred
Stock have no preemptive or subscription rights.
PLAN OF DISTRIBUTION
The shares of Common Stock which are the subject of this offering
include 2,600,000 shares of Common Stock issuable upon exercise of outstanding
Warrants representing the right to acquire such shares at exercise prices
ranging from $.25 to $.42 per share. In addition, this Prospectus also relates
to the offer by certain Selling Shareholders of up to 2,400,000 shares of Common
Stock issuable upon conversion of the Preferred Stock and up to 480,000 shares
of Common Stock which may be issued to such Selling Shareholders in payment of
dividends on the Preferred Stock in lieu of cash payments of such dividends.
The Company has been advised that the shares of Common Stock offered
hereby may be sold from time to time by the Selling Shareholders or by pledgees,
donees, transferees, or other successors in interest. Such sales may be made in
the over-the-counter market or otherwise at prices and at terms then prevailing
or at prices related to the then current market price or in negotiated
transactions. The Common Stock may be sold by one or more of the following: (a)
a block trade in which the broker or dealer so engaged will attempt to sell the
Common Stock as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (d) in privately negotiated transactions not
involving a broker or dealer. In effecting sales, brokers or dealers engaged to
sell the Common Stock may arrange for other brokers or dealers to participate.
Brokers or dealers engaged to sell the Common Stock will receive compensation in
the form of commissions or discounts in amounts to be negotiated immediately
prior to each sale. Such brokers or dealers and any other participating brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with such sales. The Company
will receive no proceeds from any sales of Common Stock by the Selling
Shareholders. It is anticipated that the brokers or dealers, if any,
participating in the sales of such securities will receive the usual and
customary selling commissions.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Company by
the firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. A
member of such firm owns 230,000 shares of Common Stock and warrants
representing the right to acquire an additional 280,000 shares of Common Stock.
EXPERTS
The audited financial statements of the Company for the fiscal years
ended June 30, 1995 and 1994 included in this Prospectus and elsewhere in the
Registration Statement have been examined and reported on by Silverman Olson
Thorvilson & Kaufmann, Ltd., whose reports have been included in this Prospectus
and in the Registration Statement upon the authority of that firm as experts in
accounting and auditing.
HEALTHWATCH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1995 AND 1994
HEALTHWATCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Shareholders' Equity F-5
Consolidated Statement of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-20
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
HealthWatch, Inc.
Vista, California
We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and its subsidiaries, as of June 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthWatch, Inc.
and its subsidiaries as of June 30, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
August 18, 1995
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Current assets:
Cash $ 742,981 $ 49,934
Accounts receivable, net of allowance for doubtful
accounts of $29,487 and $95,143, respectively 285,956 753,065
Inventory (Note 3) 927,201 1,206,309
Current portion of note receivable (Note 4) -- 114,189
Subscriptions receivable (Note 13) -- 225,000
Other current assets 104,587 156,289
Total current assets 2,060,725 2,504,786
Note receivable (Note 4) -- 9,935
Property and equipment, net (Note 5) 138,769 234,623
Intangible assets, net (Note 6) 1,416,072 1,673,270
Other assets 138,553 123,807
Total assets $ 3,754,119 $ 4,546,421
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 481,438 $ 699,060
Accrued compensation and payroll taxes 214,978 255,395
Other accrued liabilities - related parties 149,399 76,974
Other accrued liabilities - unrelated parties 348,815 391,100
Note payable - related party (Note 8) 160,000 10,000
Notes payable - unrelated parties (Note 9) 125,000 --
Deferred revenue 177,506 173,309
Current portion of long-term debt (Note 10) 3,948 7,399
Total current liabilities 1,661,084 1,613,237
Long-term debt (Note 10) -- 4,404
Debentures payable - related parties (Note 11) 40,000 85,000
Debentures payable - unrelated parties (Note 11) 540,000 510,000
Total liabilities 2,241,084 2,212,641
Contingencies and commitments (Note 12) -- --
Shareholders' equity:
Cumulative preferred stock, $.01 par value; 10,000,000
shares authorized, no shares issued (Note 12) -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 5,040,423 and 2,602,535
issued and outstanding, respectively 11,492,407 10,726,912
Accumulated deficit (9,942,423) (8,128,572)
Equity adjustment from foreign currency translation (36,949) (39,560)
Stock subscriptions receivable (Note 13) -- (225,000)
Total shareholders' equity 1,513,035 2,333,780
Total liabilities and shareholders' equity $ 3,754,119 $ 4,546,421
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Product sales $ 3,516,252 $ 4,070,146
Product cost of sales 2,399,543 2,951,490
Gross profit 1,116,709 1,118,656
Operating costs and expenses:
Selling, general and administrative - related parties 149,100 94,586
Selling, general and administrative - unrelated parties 1,956,048 2,418,872
Depreciation and amortization 355,701 404,444
Research and development - related parties 54,047 --
Research and development - unrelated parties 445,052 201,713
Total operating costs and expenses 2,959,948 3,119,615
Loss from continuing operations (1,843,239) (2,000,959)
Other income (expense):
Interest income 4,546 14,084
Interest expense - unrelated parties (72,395) (80,476)
Interest expense - related parties (4,548) (8,500)
Miscellaneous 85,182 (3,480)
Metamed product development costs (Note 19) -- (775,580)
Gain on sale of investment (Note 7) -- 84,799
Loss on disposal of fixed assets -- (70,501)
Total other income (expense) 12,785 (839,654)
Loss from continuing operations before
extraordinary item (1,830,454) (2,840,613)
Extraordinary item - gain from
extinguishment of debt (Note 17) 61,603 24,328
Net loss $ (1,768,851) $ (2,816,285)
Income (loss) per share of common stock:
Continuing operations $ (.65) $ (1.48)
Extraordinary item .02 .01
Net loss per share $ (.63) $ (1.47)
Weighted average number of shares outstanding 2,816,173 1,912,915
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT ADJUSTMENT
<S> <C> <C> <C> <C>
Balances at June 30, 1993 1,214,026 $ 8,729,566 $ (5,312,287) $ (14,640)
Common stock issued for Metamed acquisition 625,000 700,000 -- --
Common stock issued in private placement 300,000 519,364 -- --
Common stock issued for stock
subscriptions (Note 13) 300,000 450,000 -- --
Common stock issued for
conversion of debentures 77,500 132,718 -- --
Common stock warrants exercised 18,750 34,628 -- --
Common stock warrants issued -- 30,000 -- --
Common stock options exercised 20,187 45,855 -- --
Common stock issued for services 47,072 84,781 -- --
Equity adjustment from foreign
currency translation -- -- -- (24,920)
Net loss -- -- (2,816,285) --
Balances at June 30, 1994 2,602,535 10,726,912 (8,128,572) (39,560)
Receipt of subscription (Note 13) -- -- -- --
Common stock issued in public
offering (Note 14) 2,195,388 409,604 -- --
Common stock issued for services 205,000 296,850 -- --
Common stock issued in private placement 30,000 45,000 -- --
Common stock issued for conversion
of debentures (Note 11) 7,500 14,041 -- --
Contractual dividend (Note 12) -- -- (45,000) --
Equity adjustment from foreign
currency translation -- -- -- 2,611
Net loss -- -- (1,768,851) --
Balances at June 30, 1995 5,040,423 $ 11,492,407 $ (9,942,423) $ (36,949)
(table continued)
SUBSCRIPTION SHAREHOLDERS'
RECEIVABLE EQUITY
Balances at June 30, 1993 -- $ 3,402,639
Common stock issued for Metamed acquisition -- 700,000
Common stock issued in private placement -- 519,364
Common stock issued for stock
subscriptions (Note 13) (225,000) 225,000
Common stock issued for
conversion of debentures -- 132,718
Common stock warrants exercised -- 34,628
Common stock warrants issued -- 30,000
Common stock options exercised -- 45,855
Common stock issued for services -- 84,781
Equity adjustment from foreign
currency translation -- (24,920)
Net loss -- (2,816,285)
Balances at June 30, 1994 (225,000) 2,333,780
Receipt of subscription (Note 13) 225,000 225,000
Common stock issued in public
offering (Note 14) -- 409,604
Common stock issued for services -- 296,850
Common stock issued in private placement -- 45,000
Common stock issued for conversion
of debentures (Note 11) -- 14,041
Contractual dividend (Note 12) -- (45,000)
Equity adjustment from foreign
currency translation -- 2,611
Net loss -- (1,768,851)
Balances at June 30, 1995 -- $ 1,513,035
</TABLE>
The accompanying notes are an integral part
of the combined financial statements.
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,768,851) $(2,816,285)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 355,701 404,444
Stock issued as payment of expenses 296,850 14,781
Extraordinary gain on extinguishment of debt (61,603) (24,328)
Discount on note receivable 13,639 --
Metamed product development costs -- 775,580
Loss on sale of property and equipment -- 70,501
(Increase) decrease in assets:
Accounts receivable 467,109 226,170
Inventory 279,108 458,135
Other current assets 51,702 45,820
Other assets (15,705) (57,592)
Increase (decrease) in liabilities:
Accounts payable (156,019) 174,379
Accrued liabilities - related parties 72,425 44,701
Accrued liabilities - unrelated parties (127,702) 124,611
Deferred revenue 4,197 (50,137)
Net cash used in operating activities (589,149) (609,220)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (2,649) (66,670)
Proceeds from sale of property and equipment -- 106,656
Payments received on note receivable 110,485 89,956
Net cash provided by investing activities 107,836 129,942
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 454,604 617,975
Proceeds from subscriptions receivable 450,000 --
Proceeds from issuance of note payable - related party 150,000 10,000
Proceeds from issuance of note payable - unrelated parties 125,000 --
Repayment of long-term debt (7,855) (119,316)
Net cash provided by financing activities 1,171,749 508,659
Effect of exchange rate changes on cash 2,611 (24,920)
Increase in cash 693,047 4,461
Cash - beginning of year 49,934 45,473
Cash - end of year $ 742,981 $ 49,934
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1995 1994
Cash paid during the year for interest $ 75,724 $ 90,912
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1995:
The Company forgave $13,639 of a note receivable in exchange for the
repayment of the note before maturity.
The Company had $61,603 of accounts payable forgiven (Note 17), resulting
in an extraordinary gain.
Debenture holders converted $15,000 of debentures to 7,500 shares of common
stock valued at $14,041, net of $959 of debenture issuance costs
written-off.
The Company issued 205,000 shares of common stock valued at $296,850 in
exchange for services.
The Company declared a contractual dividend of $45,000 (Note 12).
During the year ended June 30, 1994:
In connection with the acquisition of Metamed, Inc., the Company acquired
$9,819 of property and equipment, $3,406 of other assets net of $33,081 of
accounts payable for 625,000 shares of common stock valued at $700,000.
Along with $11,426 of prepaid merger costs and $44,298 of accrued
professional fees incurred, the $775,580 excess purchase price was charged
to expense as incomplete development costs.
The Company entered into agreements to issue 300,000 shares of common stock
in exchange for a subscriptions receivable of $450,000.
Debenture holders converted $155,000 of debentures to 77,500 shares of
common stock valued at $132,718, net of $10,410 of debenture issuance costs
written-off and $11,872 of registration fees paid.
The Company issued 47,072 shares of common stock valued at $84,781 in
exchange for services.
The Company had $24,328 of accounts payable forgiven (Note 17), resulting
in an extraordinary gain.
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
HealthWatch, Inc. (HealthWatch or the Company) manufactures and
distributes medical products to hospitals and medical clinics
worldwide. The Company grants credit to its customers in the
normal course of business.
Principles of Consolidation:
The consolidated financial statements include the accounts of
HealthWatch and HealthWatch Technologies, Inc., a wholly-owned
subsidiary of the Company, and its wholly-owned subsidiaries Life
Sciences, Inc. and Cambridge Medical Equipment Limited.
Inventory:
Inventory is recorded at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is
computed using straight-line methods and is expensed based upon
the estimated useful lives of the assets.
Expenditures for additions and improvements are capitalized,
while repairs and maintenance are expensed as incurred.
Intangible Assets:
Intangible assets have been accounted for under the provisions of
Accounting Principles Board Opinion No. 17 "Intangible Assets".
The Company has not adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121) in
fiscal 1995. SFAS 121 is effective for years beginning after
December 15, 1995 and requires the Company to review long lived
assets and certain identifiable intangibles for impairment, by
estimating the future cash flows expected to result from the use
and disposal of the asset in comparison with the carrying value
of the asset. The Company has not determined what effect, if any,
early adoption of SFAS 121 would have on the 1995 financial
statements.
Deferred Revenue:
Deferred revenue represents amounts received on service contracts
but not yet earned. Revenue is recognized on a straight-line
basis over the life of the contract.
Equity Adjustment From Foreign Currency Translation:
The equity adjustment from foreign currency translation arises
upon translating the Cambridge Medical Equipment Limited activity
to U.S. dollars from British pounds.
Revenue Recognition:
The Company recognizes revenue from product sales at the time
ownership transfers to the customer, principally, at shipment.
Income Taxes:
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes, if any. Deferred taxes
represent the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Income (Loss) Per Share of Common Stock:
Income (loss) per share is calculated based on the weighted
average number of shares actually outstanding as the effect of
including the common stock equivalents would be anti-dilutive.
Concentrations of Credit:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade
accounts receivable. Accounts receivable arise from the sale of
medical products to hospitals and medical clinics worldwide. The
Company performs ongoing credit evaluations of its customers'
financial condition, and generally requires no collateral from
its customers. The Company's credit losses are subject to general
economic conditions of the medical industry.
Reclassifications:
Certain reclassifications have been made in the 1994 financial
statements in order to conform with 1995 financial statement
presentation. These reclassifications have no effect on
accumulated deficit or net loss, as originally reported.
NOTE 2: MANAGEMENT'S OPERATING PLANS
As a result of recurring losses and negative cash flow from
operations, management has reviewed their operational and financial
plans relative to their ability to continue in existence.
Management's plans in this regard, include the completion of
development of their new proprietary and patented product to be used
in the intravenous ("IV") drug infusion industry. Their new IV
product, the "Pacer", has received FDA approval and is currently in
its final phase of testing. Currently, management is anticipating
Pacer's market release during the second quarter of fiscal 1996 and
believes the product's profitability will contribute greatly toward
the future operations of the Company.
In the event that this new product is not commercially successful,
management plans to trim general and administrative expenses,
liquidate any excess inventory, and sell or discontinue any
non-performing operating lines in order to focus full attention and
all resources in their remaining products.
NOTE 3: INVENTORY
Inventory consisted of the following at June 30:
1995 1994
Raw materials $ 655,960 $ 929,634
Work in process 135,235 204,296
Finished goods 136,006 72,379
Total inventory $ 927,201 $1,206,309
NOTE 4: NOTE RECEIVABLE
The Company had a note receivable resulting from the 1993 sale of its
medical billing and collections services segment. During 1995, the
note was repaid in exchange for the Company's forgiveness of $13,639
of the remaining note balance.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
Estimated
Useful
Life
1995 1994 In Years
Furniture and equipment $ 846,771 $ 844,122 5
Leasehold improvements 29,197 29,197 5-6
Total property and equipment 875,968 873,319
Less accumulated depreciation (737,199) (638,696)
Property and equipment, net $ 138,769 $ 234,623
Depreciation expense was $98,503 and $132,746 for 1995 and 1994,
respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets arose in the acquisition of Life Sciences and
consisted of the following at June 30:
Estimated
Useful Life
1995 1994 In Years
Technology $1,594,838 $1,594,838 10
Drawings & documentation 347,149 347,149 10
Life Sciences name 300,000 300,000 10
Applications 250,000 250,000 10
Customer base 225,000 225,000 10
2,716,987 2,716,987
Less accumulated amortization (1,300,915) (1,043,717)
Intangible assets, net $1,416,072 $1,673,270
Amortization expense was $257,198 and $271,698 for 1995 and 1994,
respectively.
NOTE 7: INVESTMENT IN DISCOVERY TECHNOLOGIES, INC.
During 1994, the Company sold its remaining 61,189 shares of Discovery
Technologies, Inc. common stock to an outside investor. These shares
were sold for $84,799 and the cancellation of certain indebtedness
owed to the Company which had been written off by the Company as
uncollectible in 1992.
NOTE 8: NOTE PAYABLE - RELATED PARTY
Note payable - related party consisted of the following at June 30:
1995 1994
Note payable to an entity owned by a
shareholder/director of the Company.
The note bears interest at 10%, is
unsecured and due on demand. This note
was repaid in July, 1995. $ 160,000 $ -
Note payable to shareholder/officer of the
Company. The note bears interest at 8%, is
unsecured and due on demand. This note was
repaid during fiscal 1995. - 10,000
Note payable - related party $ 160,000 $ 10,000
NOTE 9: NOTES PAYABLE - UNRELATED PARTIES
Notes payable - unrelated parties consist of short-term loans bearing
interest at 10%, payable at the earlier of October 7, 1995, or when
the Company's gross proceeds from the sale of equity securities
achieves $500,000 (Note 14). The notes are secured by substantially
all corporate assets and were repaid in August 1995.
In connection with these notes and certain other commitments provided
by the noteholders, the Company issued to the note holders warrants to
purchase up to 1,000,000 shares of the Company's common stock at $.25
per share (Note 12). The warrants expire in April 1997 and are
redeemable by the Company after April 1, 1996 for $.05 per share.
NOTE 10: LONG-TERM DEBT
Long-term debt consisted of the following at June 30:
1995 1994
Note payable - secured by computer and
software with interest at 15.2%. The note
matures May 1996. $ 3,948 $ 7,908
Note payable - secured by telephone system with
interest at 10.5%. The note was repaid in 1995. - 3,895
3,948 11,803
Less current portion (3,948) (7,399)
Long-term debt $ - $ 4,404
NOTE 11: DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%, payable
quarterly. The debentures mature September 1997 and are secured by
substantially all corporate assets. The debentures can be converted
into common stock at any time prior to maturity at an initial
conversion rate of one share of common stock for every $2.00 of
debentures converted.
During 1995, debentures aggregating $15,000 were converted to 7,500
shares of the Company's common stock, resulting in an increase in
equity of $14,041, net of $959 of debenture issuance costs
written-off. Additionally in 1995, as the result of changes in board
membership, $35,000 of the June 30, 1994 debentures payable - related
parties has been reclassified as debentures payable - unrelated
parties at June 30, 1995.
During 1994, debentures aggregating $155,000 were converted to 77,500
shares of the Company's common stock, resulting in an increase in
equity of $132,718, net of $10,410 of debenture issuance costs
written-off and $11,872 of registration fees paid.
Debentures payable to related parties consist of debentures issued to
directors, officers and shareholders of HealthWatch.
NOTE 12: CONTINGENCIES AND COMMITMENTS
Convertible/Redeemable Preferred Stock:
In May 1995 as settlement of a dispute with certain common
stockholders, the Company contractually committed to convert
400,000 shares of the Company's common stock into 400,000 shares
of the Company's Series A 10% - cumulative preferred stock. These
stockholders are entitled to cumulative dividends accruing from
October 1994 aggregating $45,000, which are included in accrued
liabilities - unrelated parties at June 30, 1995.
The preferred stock will initially be convertible into shares of
common stock at a conversion price of $1.50. If the Company does
not redeem the preferred stock, one-half of the preferred stock
becomes convertible at a reduced conversion price on March 12,
1995 and the balance becomes convertible at a reduced conversion
price on August 12, 1996. In both cases, the reduced conversion
price is the lesser of $1.00 per share or 50% of the market value
for the common stock, provided that the conversion price shall
not be less than $.25 per share or, if less, the lowest price at
which HealthWatch has sold its common stock prior to the
conversion.
As of June 30, 1995, the preferred stock had been authorized but
not issued. As a result, at June 30, 1995, the 400,000 shares of
common stock to be converted are reflected as common stock
outstanding in the 1995 financial statements.
Stock Options:
At June 30, 1995, an aggregate of 350,000 shares of common stock
were reserved for issuance under the Company's 1983 Incentive
Stock Option Plan and 1989 and 1994 Stock Option Plans. Pursuant
to the plans, the Board of Directors may grant options to key
individuals at their discretion. Option prices under the
Incentive Stock Option Plan may not be less than the fair market
value on the date the option is granted, whereas, non-statutory
stock option prices may not be less than 85% of the fair market
value on the date the option is granted.
As of June 30, 1995, the Company had qualified and nonqualified
options outstanding as follows:
Common Shares Exercise Expiration
Under Option Price Per Share Date
7,500 $ 9.76 December 1996
125 $ 6.50 April 1997
43,814 $ 0.38 August 1997
35,875 $ 2.25 August 1997
11,750 $ 3.25 November 1997
5,750 $ 0.38 November 1997
750 $ 2.25 November 1997
1,250 $ 2.25 December 1997
2,500 $ 0.42 May 1998
25,000 $ 0.42 September 1998
1,250 $ 0.38 September 1998
21,250 $ 0.38 December 1998
6,250 $ 2.76 December 1998
25,000 $ 0.38 December 1999
25,000 $ 1.06 January 2000
25,000 $ 0.38 January 2000
300,000 $ 0.38 May 2000
538,064
Various officers and directors have been granted a total of
398,500 options under the Company's Stock Option Plans (Note 15)
which are included in the above table.
Options to purchase a total of 538,064 common shares were
outstanding, of which 119,067 are exercisable at June 30, 1995.
Stock Warrants:
At June 30, 1995, the Company had warrants outstanding as
follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
180,000 $ 0.25 December 1995
1,097,694 $ 0.75 December 1996
100,000 $ 0.42 December 1996
1,000,000 $ 0.25 April 1997
93,750 $ 2.00 August 1997
400,000 $ 0.30 May 2000
400,000 $ 0.30 June 2000
3,271,444
The following warrants have redemption rights:
Warrants that represent the right to acquire 1,097,694 shares at
$.75 per share are redeemable by the Company after November 15,
1995, warrants that represent the right to acquire 100,000 shares
at $.42 per share are redeemable by the Company after April 1,
1996 for $.05 per share, and warrants that represent the right to
acquire 1,000,000 shares at $.25 per share are redeemable by the
Company after April 1, 1996 for $.05 per share.
Operating Leases:
The Company leases its corporate offices and manufacturing
facilities under non-cancellable operating leases.
Future minimum lease payments are as follows for the years ended
June 30:
1996 $ 172,800
1997 172,800
1998 172,800
1999 158,400
$ 676,800
Rent expense for 1995 and 1994 was $204,523 and $229,990,
respectively.
Warranty Reserve:
The Company sells the majority of its products with repair or
replacement warranties. The Company has established an accrued
warranty reserve of $19,327 and $60,006, at June 30, 1995 and
1994, respectively, for estimated future warranty claims. These
amounts are included in other accrued liabilities - unrelated
parties.
Litigation:
During 1994, the landlord of the Company's former corporate
offices filed a claim against the Company. The claim alleged that
the Company was in breach of its lease and sought damages
aggregating approximately $200,000.
During 1995, a settlement was reached which requires the Company
to pay $65,000 to the landlord. Pursuant to the settlement, the
$65,000 accrues interest at 11% and is payable in installments
through November 1995. As of June 30, 1995, $50,000 of the
settlement is included in accrued liabilities - unrelated
parties.
Lease Guarantee:
During 1994, the lease for the medical services building was
transferred to the 1993 purchaser of the medical service
business; however, the Company has agreed to guarantee the lease
through its July 1998 expiration. As of June 30, 1995, total
future minimum lease payments remaining are $102,900.
NOTE 13: SUBSCRIPTIONS RECEIVABLE:
As of June 30, 1994, the Company had entered into agreements to issue
300,000 shares of common stock at a per share price of $1.50 in
exchange for subscriptions receivable aggregating $450,000. During
fiscal 1995, these subscriptions were received.
NOTE 14: PUBLIC SECURITIES OFFERING
At June 30, 1995, the Company was offering up to 1,400,000 units of
its securities for sale to the public at $1.00 per unit; each unit
consisting of four shares of common stock and two stock purchase
warrants, representing the right to purchase additional shares of
common stock. Through June 30, 1995, the Company had sold 2,195,388
shares of common stock and 1,097,694 warrants to purchase shares of
common stock, resulting in proceeds net of commission and other direct
expenses (aggregating $139,244) of $409,604.
Subsequent to year end, the Company completed the offering and sold an
additional 1,968,560 shares of common stock and 984,280 warrants to
purchase shares of common stock resulting in additional proceeds net
of commissions and other direct expenses (aggregating $111,862) of
$380,278.
NOTE 15: RELATED PARTY TRANSACTIONS
Stock Options:
At June 30, 1995, the Company had outstanding the following
qualified and nonqualified stock options granted to officers and
directors:
Common Shares Exercise Expiration
Under Option Price Per Share Date
35,250 $0.38 August 1997
4,500 $0.38 November 1997
2,500 $0.42 May 1998
25,000 $0.42 September 1998
6,250 $0.38 December 1998
25,000 $0.38 December 1999
25,000 $0.38 January 2000
275,000 $0.38 May 2000
398,500
Of the total outstanding options granted to officers and
directors as discussed above, options to acquire up to an
aggregate of 51,166 shares of common stock are exercisable at
June 30, 1995.
Technology and Patent Licensing Agreement:
The Company has an agreement with a former officer/director and
current stockholder to license certain technology and patent
rights through April 2000 in exchange for a fee. The fee is based
on a variable per unit sold rate. The maximum and minimum fees to
be paid for each of the years are as follows:
Year Ending Minimum Maximum
June 30, Fee Fee
1994 $ 40,000 $ 100,000
1995 40,000 450,000
1996 40,000 450,000
1997 40,000 325,000
1998 40,000 150,000
1999 40,000 40,000
$ 240,000 $1,515,000
During 1995 and 1994, licensing fee expense was $40,000.
Consulting Agreements:
In September 1993, the Company entered into a one year consulting
agreement with Creative Business Strategies, Inc. (CBS), a
company owned by two persons, a current director of the Company
and a former director. Pursuant to the agreement, CBS is to
provide the Company with business development consulting services
in exchange for a monthly fee of $2,000 plus 5.0% of the value of
any CBS-initiated transactions completed by the Company. During
1995 and 1994, the Company had incurred $31,100 and $61,986,
respectively, of fees to CBS, of which $34,813 and $51,586,
remained unpaid at June 30, 1995 and 1994, respectively, and are
included in other accrued liabilities - related parties.
During 1995, a former officer/director and current shareholder of
the Company provided product development services to the Company
in exchange for a fee aggregating $54,047.
In July 1993, the Company entered into a one-year consulting
agreement with one of the Company's Directors. Pursuant to the
agreement, the Company received financial and accounting
consultation in exchange for a monthly fee of $1,500. During
1994, the Company incurred and paid $18,000. As of June 30, 1994,
this individual was no longer a director of the Company.
Stock Grants:
During 1995, two members of the Company's Board of Directors were
granted an aggregate of 275,000 shares of the Company's common
stock as a bonus valued at $78,000. During 1994, two members of
the Company's Board of Directors were granted 10,000 shares of
the Company's common stock as a bonus valued at $25,000.
As of June 30, 1995 and 1994, none of the shares underlying these
grants had been issued, and accordingly the value of these
bonuses ($103,000 at June 30, 1995 and $25,000 at June 30, 1994)
are included in other accrued liabilities - related parties.
NOTE 16: INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate
as a result of the following items:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax benefit computed at the maximum
federal statutory rate (34.0)% (34.0)%
Increase in taxes resulting from amortization
of intangible assets 6.0 9.0
Loss to be carried forward 28.0 25.0
Income tax provision - % - %
Deferred taxes consisted of the
following at June 30:
1995 1994
Asset:
Net operating loss carryforward $1,400,000 $1,275,000
Other 100,000 125,000
Net deferred tax asset 1,500,000 1,400,000
Less valuation allowance (1,500,000) (1,400,000)
Net deferred tax asset $ - $ -
</TABLE>
For financial statement purposes, no tax benefit has been reported in
1995 and 1994 as the Company has had significant losses in recent
years and realization of the tax benefits is uncertain. Accordingly, a
valuation allowance has been established for the full amount of the
deferred tax asset.
At June 30, 1995, the Company had net operating loss carryforwards and
unused investment tax credits as follows for income tax purposes:
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30, Carryforwards Carryforward
2000 $ - $ 16,060
2001 - 2,468
2002 - 9,464
2003 322,286 -
2004 122,457 -
2005 318,718 -
2006 235,901 -
2007 1,461,790 -
2008 281,054 -
2009 1,644,839 -
2009 1,600,000 -
$5,987,045 $ 27,992
The utilization of the carryforwards is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In
addition, the availability of these net operating loss carryforwards
offset future taxable income is significantly limited due to ownership
changes as defined in the Internal Revenue Code.
NOTE 17: EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT
During 1995, the Company negotiated with trade creditors to settle
$99,205 of past due accounts payable for $37,602. The transactions
resulted in an extraordinary gain of $61,603.
In 1994, an obligation to an officer of the Company was discharged
resulting in an extraordinary gain of $24,328.
NOTE 18: GEOGRAPHICAL SEGMENT INFORMATION
1995 1994
Revenues:
United States $ 2,954,888 $ 3,636,777
Europe 561,364 433,369
Eliminations - -
Consolidated $ 3,516,252 $ 4,070,146
Operating profit (loss):
United States $(1,893,411) $(2,007,688)
Europe 50,172 6,729
Eliminations - -
Consolidated $(1,843,239) $(2,000,959)
Identifiable Assets:
United States $ 3,491,948 $ 4,327,317
Europe 262,171 219,104
Eliminations - -
Consolidated $ 3,754,119 $ 4,546,421
Exports of U.S. produced medical products were $756,869 and $794,836
during 1995 and 1994, respectively.
NOTE 19: ACQUISITION
In September 1993, HealthWatch acquired Metamed, Inc. (Metamed).
Pursuant to the agreement, HealthWatch issued 625,000 shares of its
common stock in exchange for 100 percent of the issued and outstanding
common stock of Metamed.
The total Metamed purchase price was $755,724 consisting of 625,000
shares of HealthWatch common stock valued at $700,000 and $55,724 of
professional fees incurred in connection with the acquisition. The
$1.12 per share price used to value the acquisition represented
HealthWatch's approximate trading price at the date of the
transaction, discounted to factor in the reduction in the value
stemming from the restricted distribution rights of these
non-registered shares and the size of the block issued.
HealthWatch accounted for the acquisition under the purchase method
whereby the assets and liabilities of Metamed are recorded at their
fair value as estimated by management, which approximated net book
value as of the date of acquisition for all tangible assets. Net
tangible assets acquired included property, equipment and other assets
of $13,225 and accounts payable of $33,081. The $775,580 excess
purchase price over the fair market value of tangible assets and
liabilities acquired has been charged to expense as incomplete
development of the Metamed product at the date of acquisition.
No dealer, salesman, Selling Shareholder, or
other person has been authorized in connection with
this offering to give any information or to make any
representations other than those contained in this
Prospectus. This Prospectus does not constitute an
offer or a solicitation in any jurisdiction to any
person to whom it is unlawful to make such an offer
or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there
has been no change in the circumstances of the
Company or the facts set forth herein since the date
hereof.
TABLE OF CONTENTS
Page
Available Information 3
Prospectus Summary 4
Risk Factors 7
Market for the Company's
Common Stock and
Related Shareholder Matters 11
Use of Proceeds 12
Proforma Financial Statements 13
Management's Discussion and
Analysis 14
Business 20
Management 32
Principal and Selling Shareholders 36
Description of Securities 39
Plan of Distribution 40
Legal Matters 41
Experts 41
Financial Statements F-1
HEALTHWATCH, INC.
____________________
P R O S P E C T U S
September 27, 1995
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Article IX of the Company's Restated Articles of Incorporation
eliminates certain personal liability of the director of the Company for
monetary damages for certain breaches of directors' fiduciary duties.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee $ 1,004.00
Printing expenses 2,000.00
Fees and expenses of counsel for the Company 10,000.00
Fees and expenses of accountants for the Company 2,500.00
Transfer Agent and Registrar fees 1,000.00
Miscellaneous 3,496.00
Total $ 20,000.00
All of the above expenses, other than the SEC fees, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. During September 1992, the Company issued $750,000 principal amount
of its 10% convertible senior debentures due 1997 to 29 investors, including 23
"accredited" investors. The debentures are convertible into shares of the
Company's Common Stock at a conversion price of $2.00 per share. The debentures
were offered by Elliot, Allen & Co., Inc. (the "Agent") on a best efforts basis
at a commission of 10% of the principal amount of the debentures sold, one-half
of which was paid in cash and one-half paid in the form of a five-year warrant
representing the right to purchase at $2.00 per share, 93,750 shares. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were sold without registration under the Securities Act
of 1933, as amended (the "Act"), in reliance upon Rule 504 of Regulation D
promulgated thereunder.
2. During the quarter ended December 31. 1992, the Company issued 3,125
shares of its Common Stock to Elliot, Allen & Co., Inc., in consideration for
investment banking services. The shares were issued in lieu of cash compensation
for such services and were acquired for investment purposes and without
registration under the Act in reliance upon Section 4(2) thereof and Regulation
505 of Regulation D promulgated thereunder.
3. During May 1993, an aggregate of 41, 250 shares of the Company's
Common Stock were authorized for issuance to five persons, including four
directors and one employee of the Company, in consideration for services
rendered and in lieu of cash payments for such services. In addition, during
September 1993, an additional 10,000 shares of such stock were authorized to be
issued to two of such directors for additional services rendered, again in lieu
of cash payments for such services. The shares authorized to be issued in May,
were issued during September and October 1993 and the shares authorized in
September were issued in December 1993. In each of such instances, the shares
were acquired for investment and were subject to appropriate transfer
restrictions. The shares were issued without registration under the Act in
reliance upon Section 4(2) thereof.
4. Effective September 13, 1993, the Company issued 625,000 shares of
its Common Stock to the shareholders of Metamed, Inc. (five persons) in
connection with the merger of Metamed into a subsidiary of the Company. The
shares were acquired for investment purposes and were subject to appropriate
transfer restrictions. The shares were not registered under the Act in reliance
upon Section 4(2) thereof and Rule 505 of Regulation D promulgated thereunder.
5. During October 1993, the Company issued 100,000 shares of its Common
Stock and Warrants representing the right to acquire 150,000 shares of its
Common Stock in consideration for which such investors paid $200,000. The
investor group was led by Redwood Microcap Fund, Inc. and the Rockies Fund,
Inc., each of which funds also received a warrant representing the right to
acquire 125,000 shares of the Company's Common Stock at a warrant exercise price
of $2.00 per share. The securities were acquired for investment purposes and
pursuant to agreements which provided that the securities would be sold or
transferred only pursuant to the registration under the Act or pursuant to an
exemption therefrom. The securities were issued without registration under the
Act in reliance upon Section 4(2) thereof and Rule 505 of Regulation D
promulgated thereunder. One director and one former director of the Company who
were not otherwise compensated by the Company, were to receive compensation
equal to five percent of the proceeds of such financing for services rendered in
connection with obtaining and negotiating the terms of such financing.
6. During December 1993, pursuant to an agreement entered into in
October 1993, the Company issued 100,000 shares of its Common Stock and Warrants
representing the right to acquire 275,000 shares of its stock at $2.50 per share
to one institutional investor in consideration for which the investor paid
$200,000. The agreement pursuant to which the securities were acquired provided
that the investor was acquiring such securities for investment purposes and
would not sell or transfer such securities except pursuant to a registration
under the Act or pursuant to an exemption therefrom. The securities were not
registered under the Act in reliance upon Section 4(2) thereof and Regulation
505 of Regulation D promulgated thereunder.
7. During December 1993, the Company agreed to issue a warrant
representing the right to acquire 75,000 shares of its Common Stock at a warrant
exercise price of $3.60 per share to an accredited investor in consideration for
which the investor paid $30,000. The warrant was acquired for investment
purposes and pursuant to an agreement which provided that the warrant or the
shares subject thereto would not be sold or otherwise transferred except
pursuant to a registration under the Act or pursuant to an exemption therefrom.
The securities were not registered under the Act in reliance upon Section 4(2)
thereof and Regulation 505 of Regulation D promulgated thereunder.
8. During June 1994, the Company agreed to issue an aggregate of
400,000 shares of the Company's Common Stock in June and July 1994, to two
institutional investors at a purchase price of $600,000 ($1.50 per share). The
purchase of these shares was completed in October, 1994. The agreements pursuant
to which the shares were purchased provided that the investors were acquiring
such shares for investment purposes and would not sell or transfer such shares
except pursuant to a registration under the Act or pursuant to an exception
therefrom. The shares were not registered under the Act in reliance upon Section
4(2) thereof and Regulation 505 of Regulation D promulgated thereunder. During
May 1995, the 400,000 shares of Common Stock were agreed to be converted into
400,000 shares of Series A Convertible Preferred Stock and warrants representing
the right to acquire 100,000 shares at anytime from July 31, 1995 to December
31, 1996 were issued. The Preferred Stock is redeemable at the option of the
Company at a $1.50 per share and is convertible into shares of Common Stock at a
$1.50 per share, such conversion rate being subject to adjustment based upon the
future market value for the Company's Common Stock.
9. During November 1994, the Company issued 30,000 shares of the
Company's common stock and warrants representing the right, as adjusted, to
purchase 180,000 shares of such stock at $.25 per share to one investor for a
purchase price of $45,000. The securities were acquired for investment purposes
and were not registered under the Act in reliance upon Section 4(2) thereof and
Regulation 505 of Regulation D promulgated thereunder.
10. During November 1994, 5,000 shares of the Company's common stock
were authorized for issuance to one employee in lieu of a cash bonus. The
shares, which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Act in reliance upon
Section 4(2) thereof.
11. During April and May 1995, seven qualified investors loaned to the
Company on a short-term basis an aggregate of $125,000 and provided standby
commitments pursuant to which they agreed to purchase up to 250,000 of the Units
subject to this offering if required for the Company to sell 750,000 Units. The
loans bear interest at the rate of 10% per annum. As additional consideration
for the making of the loans and the granting of the standby commitments, these
investors have been granted two-year warrants representing the right to purchase
up to 1,000,000 shares of the Company's Common Stock at $.25 per share.
Protective Group Securities Corporation assisted the Company in arranging for
the loans and the standby commitments and was paid a fee of $6,500 in connection
therewith. The warrants, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Act in reliance upon Section 4(2) thereof.
12. During May and June, 1995, an aggregate of 275,000 shares of the
Company's common stock were authorized for issuance to two directors in lieu of
cash compensation for services rendered. The shares, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Act in reliance upon Section 4(2) thereof.
13. Effective May 1, 1995, the Company entered into a Consultancy
Agreement pursuant to which it agreed to issue a warrant, as adjusted,
representing the right to acquire up to 800,000 shares of the Company's common
stock at $.30 per share and issued such consultant 50,000 shares of its common
stock in consideration for services to be rendered. The warrant and shares were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.
14. Effective July 27, 1995, the Company entered into an agreement
pursuant to which it has issued 50,000 shares of its common stock and agreed to
issue warrants representing the right to acquire 500,000 shares of the Company's
common stock at $.30 per share and 200,000 shares of such stock at $.50 per
share in consideration for services to be rendered. The shares and warrants were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (2).
4.1 Specimen form of the Company's Common Stock certificate
(2).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.7 Subscription and Purchase Agreement dated as of the 14th
day of August 1992 between the Company and the Purchasers
of the Company's 10% convertible senior debentures due 1997
(including as an appendix thereto the form of the debenture
certificate) (5).
4.8 Subscription and Investment Representation Agreement
between SMI Capital Corp. and the Company (4).
4.9 Subscription and Investment Representation Agreement
between Investor Resource Services, Inc. and the Company
(4).
4.10 Warrant Agreement dated May 19, 1995 between the Company
and Corporate Stock Transfer, Inc. (6)
4.11 Warrant Agreement dated November 30, 1994 between the
Company and investor (6).
4.12 Form of Warrant Certificate -- see Exhibit A to Exhibit
4.10.
4.13 Form of Loan and Standby Purchase Agreement (6).
4.14 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant (6).
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. -
previously filed.
10.1 Lease Agreement dated November 19, 1993, between Steven P.
Cade and Wyeth W. Cade and the Company (5).
10.2 Agreement and Plan of Merger dated July 27, 1993 by and
among the Company, HealthWatch Technologies, Inc., Metamed,
Inc., John D. Greenbaum and Howard R. Everhart (7).
10.3 Employment Agreement dated September 13, 1993 between the
Company and John D. Greenbaum (5).
10.14 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and Metamed,
Inc. (5).
10.3 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies,
Inc. (6)
10.6 Consultancy Agreement dated May 1, 1995 between
HealthWatch, Inc. and Boulder Financial Group (6).
10.7 Agreement dated July 27, 1995 by and between HealthWatch,
Inc. and D.S.N. Enterprises Ltd. -- previously filed.
11 Computation of Earnings Per Share -- filed herewith.
21 Subsidiaries of the Company (5).
23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see
Exhibit 5.1).
23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
24.1 Power of Attorney (included on signature page of the
initial Registration Statement).
27.1 Financial Data Schedule -- filed herewith.
(1) Incorporated herein by reference to Registration Statement, Form 10-K
for the year ended June 30, 1994 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form S-2
(File No. 33-42831).
(4) Incorporated herein by reference to Registration Statement, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-73462).
(6) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-88126).
(7) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vista, State of California, on
September 26, 1995.
HEALTHWATCH, INC.
By /s/ John D. Greenbaum
John D. Greenbaum
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below on the 26th day of
September, 1995, by the following persons in the capacities indicated:
<TABLE>
<S> <C>
/s/ John G. Greenbaum President, Chief Executive Officer and Chief
John D. Greenbaum Financial Officer (Principal Executive and
Financial Officer)
/s/ Annette D. Agner Controller (Principal Accounting Officer)
Annette D. Agner
/s/ Sanford L. Schwartz Director
Sanford L. Schwartz
/s/ Kenneth A. Selzer, M.D. Director
Kenneth A. Selzer, M.D.
</TABLE>
HEALTHWATCH, INC.
<TABLE>
<CAPTION>
INDEX TO EXHIBITS FILED WITH
AMENDMENT NO. 1 TO REGISTRATION STATEMENT
ON FORM SB-2
Exhibit Page
Number Description Number
<S> <C> <C>
3.1 Articles of Incorporation, as amended, of the Company (1). --
3.2 Bylaws, as amended, of the Company (2). --
4.1 Specimen form of the Company's Common Stock certificate (2). --
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3). --
4.3 Form of Incentive Stock Option Agreement (3). --
4.4 Form of Nonstatutory Stock Option Agreement (3). --
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4). --
4.7 Subscription and Purchase Agreement dated as of the 14th day of
August 1992 -- between the Company and the Purchasers of the
Company's 10% convertible senior debentures due 1997 (including as
an appendix thereto the form of the debenture certificate) (5).
4.8 Subscription and Investment Representation Agreement between SMI
Capital -- Corp. and the Company (4).
4.9 Subscription and Investment Representation Agreement between
Investor Resource -- Services, Inc. and the Company (4).
4.10 Warrant Agreement dated May 19, 1995 between the Company and
Corporate Stock -- Transfer, Inc. (6)
4.11 Warrant Agreement dated November 30, 1994 between the Company and
-- investor (6).
4.12 Form of Warrant Certificate -- see Exhibit A to Exhibit 4.10. --
4.13 Form of Loan and Standby Purchase Agreement (6). --
4.14 Exchange Agreement for Preferred Stock and Stock Purchase Warrant
(6). --
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. - previously
filed. --
10.1 Lease Agreement dated November 19, 1993, between Steven P. Cade and
Wyeth W. Cade -- and the Company (5).
10.2 Agreement and Plan of Merger dated July 27, 1993 by and among the
Company, -- HealthWatch Technologies, Inc., Metamed, Inc., John D.
Greenbaum and Howard R. Everhart (7).
10.3 Employment Agreement dated September 13, 1993 between the Company
and John D. -- Greenbaum (5).
10.14 License Agreement dated February 27, 1992, as amended September 13,
1993, between -- Howard R. Everhart and Metamed, Inc. (5).
10.3 Second Amendment to License Agreement dated May 9, 1995 between
Howard R. -- Everhart and HealthWatch Technologies, Inc. (6)
10.6 Consultancy Agreement dated May 1, 1995 between HealthWatch, Inc.
and Boulder -- Financial Group (6).
10.7 Agreement dated July 27, 1995 by and between HealthWatch, Inc. and
D.S.N. -- Enterprises Ltd. -- previously filed.
11 Computation of Earnings Per Share -- filed herewith.
21 Subsidiaries of the Company (5). --
23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see Exhibit
5.1). --
23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. -- filed
herewith.
24.1 Power of Attorney (included on signature page of the initial --
Registration Statement).
27.1 Financial Data Schedule -- filed herewith.
</TABLE>
(1) Incorporated herein by reference to Registration Statement, Form 10-K for
the year ended June 30, 1994 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form S-2 (File
No. 33-42831).
(4) Incorporated herein by reference to Registration Statement, Form 10-KSB,
for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-73462).
(6) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-88126).
(7) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
EXHIBIT 11 - COMPUTATION OF INCOME (LOSS) PER SHARE
JUNE 30, 1995 AND 1994
1995 1994
<S> <C> <C>
Loss from continuing operations $(1,830,454) $(2,840,613)
Extraordinary item 61,603 24,328
Net loss $(1,768,851) $(2,816,285)
Weighted average shares outstanding before
exercise of stock options and warrants and repurchases 2,816,173 1,909,114
Increase in weighted average shares outstanding due
to exercise of stock options and warrants -- 3,801
Decrease in weighted average shares outstanding due
to repurchase under treasury stock method -- -- *
Total weighted average shares outstanding 2,816,173 1,912,915
Income (loss) per share:
Continuing operations $ (.65) $ (1.48)
Extraordinary items .02 .01
Net loss per share $ (.63) $ (1.47)
</TABLE>
* Not included in calculation as effect would be anti-dilutive.
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use of our report dated August 18, 1995,
accompanying the consolidated financial statements of HealthWatch, Inc. as of
June 30, 1995 and 1994, included in the Company's Amendment No. 1 to
Registration Statement No. 33-62403 on Form SB-2 and to the reference made to
our firm under the caption "Experts" in the Registration Statement expected to
be filed by HealthWatch, Inc. on or about September 27, 1995.
SILVERMAN OLSON THORVILSON
& KAUFMANN LTD.
Certified Public Accountants
Minneapolis, Minnesota
September 27, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 742,981
<SECURITIES> 0
<RECEIVABLES> 315,443
<ALLOWANCES> 29,487
<INVENTORY> 927,201
<CURRENT-ASSETS> 2,060,725
<PP&E> 875,968
<DEPRECIATION> 737,199
<TOTAL-ASSETS> 3,754,119
<CURRENT-LIABILITIES> 1,661,084
<BONDS> 580,000
<COMMON> 11,492,407
0
0
<OTHER-SE> (9,979,372)
<TOTAL-LIABILITY-AND-EQUITY> 3,754,119
<SALES> 3,516,252
<TOTAL-REVENUES> 3,516,252
<CGS> 2,399,543
<TOTAL-COSTS> 2,399,543
<OTHER-EXPENSES> 2,959,948
<LOSS-PROVISION> (94,747)
<INTEREST-EXPENSE> 76,943
<INCOME-PRETAX> (1,830,454)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,830,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 61,603
<CHANGES> 0
<NET-INCOME> (1,768,851)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
