U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended March 31, 1996.
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 May 13, 1996:
1,340,842 (adjusted for seven-for-one reverse split, see Note 7).
Traditional Small Business Issuer (check one) Yes __X__ No ____
PART 1. FINANCIAL INFORMATION
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 115,851 $ 742,981
Accounts receivable, net 212,450 285,956
Inventory (Note 4) 985,750 927,201
Other current assets 29,659 104,587
------------ ------------
Total current assets 1,343,710 2,060,725
Property and equipment, net 70,771 138,769
Intangible assets, net 1,230,935 1,416,072
Other assets 135,819 138,553
------------ ------------
Total assets $ 2,781,235 $ 3,754,119
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 5) $ 182,714 $ 481,438
Accrued compensation and payroll taxes 218,907 214,978
Other accrued expenses - related parties (Note 5) 27,004 149,399
Other accrued expenses - unrelated parties (Note 5) 200,988 348,815
Note payable - unrelated party 0 125,000
Note payable - related party 0 160,000
Deferred revenue 121,605 177,506
Current portion of long-term debt 718 3,948
------------ ------------
Total current liabilities 751,936 1,661,084
Debentures payable - related parties 40,000 40,000
Debentures payable - unrelated parties 540,000 540,000
------------ ------------
Total liabilities 1,331,936 2,241,084
------------ ------------
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 600,000 0
1,428,571 shares authorized, 400,000 and
none issued and outstanding, respectively
(Note 6 & 7)
Common stock, $.07 par value; 14,285,714 shares 12,130,808 11,492,407
authorized, 1,296,150 and 720,060 issued and
outstanding, respectively (Notes 5, 6 & 7)
Accumulated deficit (11,216,750) (9,942,423)
Equity adjustment from foreign currency translation (64,759) (36,949)
------------ ------------
Total shareholders' equity 1,449,299 1,513,035
------------ ------------
Total liabilities and shareholders' equity $ 2,781,235 $ 3,754,119
============ ============
</TABLE>
HEALTHWATCH , INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 535,115 $ 989,613 $ 1,531,833 $ 2,953,238
Product cost of sales 414,225 671,598 1,173,462 2,109,387
----------- ----------- ----------- -----------
Gross profit 120,890 318,015 358,371 843,851
Operating costs and expenses:
Selling, general and administrative 363,866 306,138 1,030,246 1,362,257
Depreciation and amortization 87,198 93,642 261,596 280,923
Research and development 65,391 166,490 263,200 424,388
----------- ----------- ----------- -----------
Total operating costs and expenses 516,455 566,270 1,555,042 2,067,568
Loss from continuing operations (395,565) (248,255) (1,196,671) (1,223,717)
Other income (expense):
Interest income 798 463 7,998 4,515
Interest expense (15,132) (18,725) (50,756) (51,954)
Miscellaneous (Note 5) 0 0 10,102 0
----------- ----------- ----------- -----------
Total other income (expense) (14,334) (18,262) (32,656) (47,439)
Net loss before extraordinary item $ (409,899) $ (266,517) $(1,229,327) $(1,271,156)
Extraordinary item:
Loss from reduction in note receivable 0 (13,639) 0 (13,639)
=========== =========== =========== ===========
Net loss $ (409,899) $ (280,156) $(1,229,327) $(1,284,795)
=========== =========== =========== ===========
Net loss per share (Note 3) $ (0.32) $ (0.69) $ (1.05) $ (3.32)
=========== =========== =========== ===========
Weighted average number
of shares outstanding (Note 7) 1,268,918 403,296 1,169,871 387,393
=========== =========== =========== ===========
</TABLE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
<S> <C> <C>
Net loss $(1,229,327) $(1,267,095)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Stock issued as payment of expenses 140,125 220,050
Depreciation and amortization 261,596 280,923
Gain on extinguishment of debt (10,102) 0
Loss from reduction in note receivable 0 13,639
Decrease (increase) in assets:
Accounts receivable 73,506 244,099
Inventory (58,549) 126,028
Other current assets 104,928 (11,370)
Other assets 2,733 14,728
Increase (decrease) in liabilities:
Accounts payable (66,088) (105,616)
Accrued expenses - related parties 9,818 0
Accrued expenses - unrelated parties (176,495) (56,078)
Deferred revenue - related parties (55,901) 16,425
----------- -----------
Net cash used in operating activities (1,003,756) (524,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,461) (2,649)
Payment received on note receivable 0 110,485
----------- -----------
Net cash provided by investing activities (8,461) 107,836
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable (285,000) 90,000
Repayment of long-term debt (3,230) (6,846)
Net proceeds (costs) of issuance of common stock 701,127 (13,164)
Payments received on stock subscriptions 0 495,000
----------- -----------
Net cash provided by (used in) financing
activities 412,897 564,990
----------- -----------
Effect of exchange rate changes on cash (27,810) 5,689
----------- -----------
Increase (decrease) in cash and cash equivalents (627,130) 154,248
Cash - beginning of period 742,981 49,934
=========== ===========
Cash - end of period $ 115,851 $ 204,182
=========== ===========
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of March 31, 1996, the results of operations and its cash
flows for the three and nine months ended March 31, 1996 and 1995. 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 its operational and financial plans relative to the
Company's ability to continue in existence. Management's plans in this regard,
include the completion of development of the Company's new proprietary product
to be used in the intravenous ("IV") drug infusion industry. The Company's new
IV product, the "Pacer", has received FDA approval. The Company commenced the
first hospital evaluation of the Pacer in November 1995 and it is currently
being evaluated by a number of hospitals in California, Illinois and Texas.
Management believes the product's profitability will contribute greatly toward
the future operations of the Company.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1996 and 1995 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 March 31, 1996 and June 30, 1995:
3/31/96 6/30/95
-------- --------
Raw materials $611,165 $655,960
Work in process 256,295 135,235
Finished goods 118,290 136,006
-------- --------
$985,750 $927,201
======== ========
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the nine months ended March 31, 1996.
The Company had $10,102 of accounts payable forgiven during the first nine
months resulting in a gain from the extinguishment of debt and issued an
aggregate of 747,528 shares of its Common Stock in payment of trade accounts
payable of $351,338. The Company has issued an additional 191,057 shares valued
at $83,089 in exchange for services, 285,000 shares of Common Stock valued at
$97,400 in payment of bonuses granted in fiscal 1994 and 1995 and 11,500 shares
valued at $5,405 in payment of bonuses granted in fiscal 1996. As of March 31,
1996, the Company declared a preferred dividend of $15,000.
Note 6: Convertible/Redeemable Preferred Stock:
In May 1995 as settlement of a dispute with certain common stockholders, 400,000
shares of Common Stock were converted into 400,000 shares of the Company's
Series A 10% - Cumulative Preferred Stock. Accrued dividends aggregating $15,000
are included in accrued liabilities - unrelated parties at March 31, 1996.
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
The preferred stock was initially convertible into Common Stock at a conversion
price of $1.50 per share. 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, 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 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 Common Stock prior
to the conversion.
On April 2, 1996, holders of the preferred stock notified the Company of their
election to convert 200,000 shares of preferred stock into shares of Common
Stock at the reduced conversion price of $.25 per share. The Company has until
June 14, 1996 to redeem the 200,000 shares of Series A Preferred Stock for an
aggregate redemption price of $300,000.
Note 7: Common Stock
During the nine months ended March 31, 1996, the Company issued an aggregate of
1,224,500 shares of Common Stock for $349,350 as the result of warrants
exercised at prices ranging from $.25 to $.30 per share. On May 3, 1996 the
Company announced a seven-for-one reverse split of its Common Stock, effective
May 13, 1996. The number of shares reported herein have been adjusted to reflect
the result of this reverse stock split.
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 a deciding factor on health-care purchases.
Results of Operations
Revenues declined 45.9% and 48.1% during the 1996 third quarter and nine months,
respectively, compared to the 1995 periods, 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
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, the Pacer, 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 the Pacer in the fourth quarter of fiscal 1996.
Cost of products sold were 38.3% and 44.4% lower in the three and nine-month
periods ended March 31, 1996, respectively, compared to the similar fiscal 1995
periods, due primarily to lower sales and to reduced operating costs. Gross
margins were 22.6% and 23.4% in the three and nine month periods ended March
31,1996, respectively, compared to 32.1% and 28.6% for the similar fiscal 1995
periods. The lower gross margins in the three and nine month fiscal 1996 periods
were primarily due to decreased sales revenues. Selling, general and
administrative expenses as a percent of sales were 68.0% and 67.3% in the three
and nine-month periods ended March 31, 1996, respectively, compared to 30.9% and
46.1% in the prior year periods. These increases were due primarily to the lower
sales level and to planned expenditures associated with the introduction of the
new IV product.
Research and development expenses decreased 38.0% in the fiscal 1996 periods
compared to the fiscal 1995 periods as development efforts on the Pacer declined
as the Company's efforts with this new product shifted to production of the
initial units.
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
At March 31, 1996, the Company had $328,301 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 the first three quarters
of fiscal 1996, the Company also issued an aggregate of 938,585 shares of its
Common Stock in payment of trade accounts payable and for services.
The Company believes it needs to raise approximately $800,000 of additional
working capital to sustain operations during the next twelve months. While not
required to sustain operations, the Company believes it should raise an
additional $800,000 - $1,400,000 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 3 and 5.
Not applicable
Item 4. On May 3, 1996, the Company announced a seven-for-one reverse split
of it's capital stock, effective May 13, 1996. As a result of this
split, the Company's authorized shares were decreased from 100,000,000
shares of Common Stock, $.01 par value, to 14,285,714 shares of Common
Stock, $.07 par value, and from 10,000,000 shares of Preferred Stock,
$.01 par value, to 1,428,571 shares of Preferred Stock, $.07 par value.
The split did not effect the relative rights of the holders of the
Company's capital stock. The share numbers shown in this report have
been adjusted to reflect the reverse split.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits -
Exhibit 27 - Financial Data Schedule
The Company was not required to file a report on form 8-K during the quarter
ended March 31, 1996.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: May 13, 1996
HealthWatch, Inc.
BY /s/ Lindley S. Branson
Lindley S. Branson
(President & Chief
Executive Officer)
BY /s/ Annette Agner
Annette Agner
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 115,851
<SECURITIES> 0
<RECEIVABLES> 234,398
<ALLOWANCES> (21,948)
<INVENTORY> 985,750
<CURRENT-ASSETS> 1,343,710
<PP&E> 884,432
<DEPRECIATION> (813,661)
<TOTAL-ASSETS> 2,781,235
<CURRENT-LIABILITIES> 751,936
<BONDS> 580,000
0
600,000
<COMMON> 12,130,808
<OTHER-SE> (11,281,509)
<TOTAL-LIABILITY-AND-EQUITY> 2,781,235
<SALES> 1,531,833
<TOTAL-REVENUES> 1,531,833
<CGS> 1,173,462
<TOTAL-COSTS> 1,173,462
<OTHER-EXPENSES> 1,555,042
<LOSS-PROVISION> (26,837)
<INTEREST-EXPENSE> 50,756
<INCOME-PRETAX> (1,229,327)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,229,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,229,327)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
