U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended September 30, 1995.
Commission file number 0-11476
HEALTHWATCH, INC.,
Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2445 Cades Way, Vista California 92083
(Address of Principal Executive Offices)
(619) 598-4333
(Issuer's Telephone Number, Including Area Code)
_______________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes__X___ No_____
Number of registrant's common shares outstanding at September 30, 1995:
7,782,779.
Traditional Small Business Issuer (check one) Yes __X__ No ____
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, June 30,
ASSETS 1995 1995
Current assets:
<S> <C> <C>
Cash $505,494 $ 742,981
Accounts receivable, net 197,461 285,956
Inventory (Note 4) 1,002,587 927,201
Other current assets 60,171 104,587
Total current assets 1,765,713 2,060,725
Property and equipment, net 113,282 138,769
Intangible assets, net 1,354,359 1,416,072
Other assets 135,307 138,553
Total assets $3,368,661 $3,754,119
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 5) $120,807 $481,438
Accrued compensation and payroll taxes 218,733 214,978
Other accrued expenses - related parties (Note 5) 5,361 149,399
Other accrued expenses - unrelated parties (Note 5) 254,315 348,815
Note payable - related party -0- 160,000
Notes payable - unrelated parties -0- 125,000
Deferred revenue 177,126 177,506
Current portion of long-term debt 2,895 3,948
Total current liabilities 779,237 1,661,084
Debentures payable - related parties 40,000 40,000
Debentures payable - unrelated parties 540,000 540,000
Total liabilities 1,359,237 2,241,084
Shareholders' equity:
Cumulative preferred stock, $.01 par value; 10,000,000 shares 600,000 -0-
authorized, 400,000 and none issued and outstanding,
respectively. (Note 6)
Common stock, $.01 par value; 100,000,000 shares authorized, 11,753,010 11,492,407
7,782,779 and 5,040,423 issued and outstanding, respectively
(Notes 5 & 6)
Accumulated deficit (10,296,615) (9,942,423)
Equity adjustment from foreign currency translation (46,971) (36,949)
Total shareholders' equity 2,009,424 1,513.035
Total liabilities and shareholders' equity $3,368,661 $3,754,119
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
1995 1994
<S> <C> <C>
Product sales $578,035 $1,005,718
Product cost of sales 399,583 765,295
Gross profit 178,452 240,423
Operating costs and expenses:
Selling, general and administrative 336,795 538,533
Depreciation and amortization 87,200 93,641
Research and development 87,919 112,507
Total operating costs and expenses 511,914 744,681
Loss from continuing operations (333,462) (504,258)
Other income (expense):
Interest income 3,397 2,315
Interest expense (18,349) (16,911)
Miscellaneous (Note 5) 9,222 -0-
Total other income (expense) (5,730) (14,596)
Net loss $(339,192) $(518,854)
Net loss per share (Note 3) $(0.05) $(0.22)
Weighted average number of shares outstanding 7,432,694 2,403,262
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(339,192) $(518,854)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Stock issued as payment of expenses 62,507 73,350
Depreciation and amortization 87,200 93,641
Gain on Extinguishment of Debt (9,222) -0-
Decrease (increase) in assets:
Accounts receivable 88,495 32,126
Inventory (75,386) (21,576)
Other current assets 74,416 49,592
Other assets 3,246 5,772
Increase (decrease) in liabilities:
Accounts payable (128,873) (42,422)
Accrued expense - related parties (11,825) (14,451)
Accrued expenses - unrelated parties (93,346) 8,847
Deferred revenue (380) (4,000)
Net cash used in operating activities (342,360) (337,615)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment -0- 0
Payments received on note receivable -0- 27,685
Net cash provided by investing activities -0- 27,685
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable (285,000) (10,000)
Repayment of long-term debt (1,053) (3,864)
Net proceeds (costs) of issuance of common stock 400,948 (13,164)
Payments received on stock subscriptions -0- 375,000
Net cash provided by (used in) financing activities 114,895 347,972
Effect of exchange rate changes on cash (10,022) 1,844
Increase (decrease) in cash (237,487) 39,886
Cash - beginning of period 742,981 49,934
Cash - end of period $505,494 $89,820
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three months ended September 30, 1995 and 1994
(Unaudited)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of September 30. 1995, the results of operations and its
cash flows for the three months ended September 30, 1995 and 1994. This report
should be read in conjunction with the Company's Financial Statements and Notes
thereto contained in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1995.
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 the
Company's 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. Management 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: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1995 and 1994 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at September 30, 1995 and June 30, 1995:
9/30/95 6/30/95
Raw materials $ 651,682 $655,960
Work in process 250,647 135,235
Finished goods 100,258 136,006
$1,002,587 $927,201
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the quarter ended September 30, 1995.
The Company had $9,222 of accounts payable forgiven resulting in a gain from the
extinguishment of debt. The Company issued an aggregate of 684,711 shares of its
common stock in payment of trade accounts payable of $321,814. The Company
issued an additional 100,000 shares valued at $40,400 in exchange for services.
The Company issued 285,000 shares of the Company's common stock valued at
$97,400 in payment of shares granted as a bonus in fiscal 1994 and 1995.
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three months ended September 30, 1995 and 1994
(Unaudited)
Note 5 Continued:
The Company declared a preferred stock dividend of $15,000.
Note 6: 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 $60,000 which are included in accrued
liabilities - unrelated parties at September 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 September 30, 1995, the preferred stock had been issued and 400,000 shares
of common stock were retired.
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 deciding factor on health-care purchases.
Results of Operations
Revenues declined 42.5% during the 1996 first quarter compared to the 1995
quarter, primarily due to a decline in product sales. The Company believes that
product sales continue to be depressed as a result of the Company's lack of
adequate working capital which has adversely affected its level of sales as the
Company has not been able to adequately support both the development of its new
IV product and selling efforts and enhancements to its existing products. In
addition, the Company believes that 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 also contribute to depressed sales.
Completion of the Company's first IV product was delayed 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 or third quarter of fiscal 1996.
Cost of products sold during the fiscal 1996 first quarter were 47.8% lower than
in the fiscal 1995 quarter, due primarily to lower sales. Gross margins were
30.9% and 23.9% for the fiscal 1996 and fiscal 1995 quarters, respectively. The
higher gross margin for the 1996 period was primarily due to the lower cost of
sales due to the Company's efforts to reduce its operating costs.
Selling, general and administrative expenses as a percent of sales were 58.3% in
fiscal 1996 compared to 53.5% in the prior year. This increase was due primarily
to the lower sales level and to planned expenditures associated with the
introduction of the new IV products.
Research and development expenses decreased 21.9% in fiscal of 1996 quarter
compared to the fiscal 1995 quarter as development efforts on the Company's IV
controller have declined as the Company's efforts with the new IV product shift
to production of the initial units.
Liquidity and Capital Resources
At September 30, 1995, the Company had $702,955 of cash and accounts receivable.
Due to the Company's operating losses, 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. 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 $800,000 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 $600,000 - $1,200,000 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.
PART II. OTHER INFORMATION
Items 1 through 6.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibits - None
The Company was not required to file a report on form 8-K during the quarter
ended September 30, 1995.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: __________________
HealthWatch, Inc.
BY______________________
Lindley S. Branson
(President & Chief
Executive Officer)
BY______________________
Annette Agner
(Chief Accounting Officer)
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 505,494
<SECURITIES> 0
<RECEIVABLES> 219,307
<ALLOWANCES> (21,846)
<INVENTORY> 1,002,587
<CURRENT-ASSETS> 1,765,713
<PP&E> 875,968
<DEPRECIATION> (762,686)
<TOTAL-ASSETS> 3,368,661
<CURRENT-LIABILITIES> 779,237
<BONDS> 580,000
<COMMON> 11,753,010
0
600,000
<OTHER-SE> (10,343,586)
<TOTAL-LIABILITY-AND-EQUITY> 3,368,661
<SALES> 578,035
<TOTAL-REVENUES> 578,035
<CGS> 399,583
<TOTAL-COSTS> 399,583
<OTHER-EXPENSES> 511,914
<LOSS-PROVISION> (16,467)
<INTEREST-EXPENSE> 18,349
<INCOME-PRETAX> (348,414)
<INCOME-TAX> 0
<INCOME-CONTINUING> (348,414)
<DISCONTINUED> 0
<EXTRAORDINARY> 9,222
<CHANGES> 0
<NET-INCOME> (339,192)
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