SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
JUNE 30, 1996 0-11476
HEALTHWATCH, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 84-0916792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 CADES WAY, VISTA, CA 92083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(619) 598-4333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.07 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months and (2) has been subject to such filing requirementsfor the past 90 days.
Yes _X_ No___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [___].
Registrant's revenues for fiscal year ended June 30, 1996: $2,041,464.
Aggregate market value of voting stock held by non-affiliates of
registrant as of September 30, 1996: Approximately $5,800,000.
Number of shares outstanding as of September 30, 1996: 1,864,728 shares
of Common Stock, $.07 par value.
Documents incorporated by reference: None.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
HealthWatch develops, manufactures and markets medical products,
including the PACER, a new infusion therapy ("IV") device, Cambridge
electrocardiograph stress test systems and Life Sciences vascular diagnostic
systems. The Company's primary focus since 1993 has been on the development of
the PACER. The PACER, which is less expensive, smaller and lighter and easier to
use than most competing infusion therapy devices, was introduced to the
marketplace during fiscal 1996.
Prior to the introduction late in the 1980s of diagnostic-related
groups ("DRGs"), health-care providers were generally compensated for their
services on a cost-plus basis. In this environment, product features and
technology drove product purchase decisions, even if the benefits derived from
the added features and higher technology did not justify the higher cost. With
the advent of DRGs and managed care, third-party payors shifted their payment
policies toward fixed fees for services rendered or capitated payment
arrangements whereby providers were reimbursed a fixed amount for patients
serviced by their organizations. In today's health-care environment, providers
are required to focus on cost, to carefully match patient benefits with the cost
of the services provided.
HealthWatch's strategy is to develop and market medical products
designed to improve the cost-effective delivery of high-quality health care. The
PACER, the Company's first infusion therapy product, enables hospitals,
long-term care facilities, home-care agencies and others to maintain the quality
of the IV therapy they provide while also reducing significantly the cost of
such services. These cost savings are achieved both due to the PACER'S
substantially lower price than the price of most competing IV systems and
because the PACER can be used with generic IV tubing which usually is
substantially less expensive than proprietary dedicated IV tubing required to be
used with most competing systems.
Markets for the Company's Cambridge and Life Services 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 these
diagnostic products and for delays in obtaining purchase orders from
institutions which are evaluating possible consolidations. 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 less expensive and
easier to use than most competing products.
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. Except as otherwise noted, all information in this report has been
adjusted to reflect a seven-for-one reverse split of the Company's Common Stock
effective as of May 13, 1996.
RISK FACTORS
In addition to considering the other information set forth in this
Registration Statement, investors 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 year, 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 diagnostic products, HealthWatch intends to concentrate its efforts
on the marketing of the PACER, its first IV product. While marketing of the
PACER has begun, the Company does not expect to be able to produce and ship
significant quantities of the PACER until the first six months of calendar 1997.
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 in the initial marketing stage and there can be no assurance that the
Company will be able to realize significant revenues from the sale of the PACER.
There can be no assurance that the Company will be able to operate at a profit
in the future.
NEED FOR ADDITIONAL FINANCING. The Company estimates that it needs
approximately $800,000 of additional debt or equity capital to sustain its
operations during the next twelve months. In addition to the $800,000 required
to sustain operations, the Company estimates that it will need to obtain from
$800,000 to $1,400,000 of additional working capital to fully 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.
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 Company's infusion therapy products are expected to be not
only easier to use but also less costly than existing competing products. While
the first IV 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 proprietary 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 IV products. There can be no assurance that the Company will be able
to obtain necessary governmental approvals for additional IV products or that
any products based on the proprietary technology can be successfully introduced
to the marketplace.
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 IV products are expected to be not only easier to use but
also less costly than existing competing products. While the first IV product,
the PACER, 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 Company's
proprietary 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 IV products. There
can be no assurance that the Company will be able to obtain necessary
governmental approvals for additional IV products or that any products based on
the Company's 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 generally 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.
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.
LENGTH OF SALES CYCLE; LIMITED SALES AND MARKETING EXPERIENCE. The
decision to purchase IV equipment is often an enterprise-wide decision by
prospective hospitals or other health-care customers and may require the Company
to engage in a lengthy evaluation/purchase-sales cycle. The sales cycle for IV
instruments can range from three to nine months or more. The sales cycle may
also be subject to a prospective customer's budgetary constraints and internal
acceptance reviews, over which the Company has little or no control.
Consequently, if sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternate sources in time to compensate for the shortfall.
If a larger order is delayed or lost to a competitor, the Company's revenues for
that quarter could be materially diminished.
The Company has limited experience in the areas of sales, marketing and
distribution. The Company's sales and marketing staff will require additional
personnel in the future. There can be no assurance that the Company will be able
to build an adequate sales and marketing staff, that establishing such a sales
and marketing staff will be cost-effective, or that the Company's sales and
marketing efforts will be successful.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. The Company
historically has relied upon a combination of copyright, trade secret and
nondisclosure and other contractual provisions to protect its proprietary
rights. While the Company's licensed IV technology includes a U.S. patent, this
patent may not provide significant protection with respect to the development of
a competing product with capabilities similar to the Company's initial IV
product. Notwithstanding the Company's efforts to protect its proprietary
rights, it may be possible for competitors of the Company to imitate the
Company's products or develop independently competing products.
Disputes regarding the Company's intellectual property could force the
Company into expensive and protracted litigation or costly agreements with third
parties. An adverse determination in a judicial or administrative proceeding or
failure to reach an agreement with a third party regarding intellectual property
rights could prevent the Company from manufacturing and selling certain of its
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 a few 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 that these
competitors will continue to compete aggressively with tactics such as offering
volume discounts based on "bundled" purchases of a broader-range of medical
equipment and supplies, a tactic that the Company is unable to pursue except on
a joint venture basis. There can be no assurance that such competition will not
adversely affect the Company's results of operations or its ability to maintain
or increase sales and market share. Competition could require that the Company
commit significantly greater resources to the introduction of its IV products
than would otherwise be required.
The market for infusion therapy products is affected by continuing
improvements and enhancements in technology. There can be no assurance that the
Company's competitors or potential competitors will not succeed in developing or
marketing products that provide more desirable characteristics, or are more
effective or less expensive than those developed or marketed by the Company. In
addition, technological advances in drug delivery systems, the development of
therapies that can be administered by methods other than infusion therapy, and
the development of new medical treatments that cure certain complex diseases or
reduce the need for infusion therapy could adversely impact the Company's
business.
LIMITED ASSEMBLY EXPERIENCE. The Company's products are currently
assembled by the Company at its facility. To be successful, the Company must
assemble its products in compliance with regulatory requirements, in sufficient
quantities and on a timely basis, while maintaining product quality and
acceptable assembly costs. The Company has limited experience assembling its
products in large commercial quantities. There can be no assurance that the
Company will be able to assemble products in large commercial quantities on a
timely basis and at an acceptable cost. If the Company becomes unable to
assemble the PACER at its facility in a timely and efficient manner, the
Company's ability to supply product to its customers may be adversely affected
until such time as the Company is able to establish alternative assembly
arrangements.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT. The Company's products are
generally purchased by health-care providers, which then seek reimbursement from
various public and private third-party payors, such as Medicare, Medicaid and
indemnity insurers, for health-care services provided to patients. Government
and private third-party payors are increasingly attempting to contain health
care costs by limiting both the extent of coverage and the reimbursement rate
for new diagnostic and therapeutic products and services. The Health Care
Financing Administration of the United States Department of Health and Human
Services ("HCFA"), which administers Medicare, and most private insurance
companies do not provide reimbursement for services that they determine to be
experimental in nature or that are not considered "reasonable and necessary" for
diagnosis or treatment. Many private insurers are influenced by HCFA actions in
making their own coverage decisions on new products or services. There can be no
assurance that third-party reimbursement for the services provided using the
Company's products will continue to be available to its customers or that any
such reimbursement will be adequate. Disapproval of, or limitations in, coverage
by HCFA or other third-party payors could materially and adversely affect market
acceptance of the Company's products which could, in turn, have a material
adverse affect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION. The medical devices manufactured and marketed by
the Company are subject to regulation by the FDA and, in some instances, by
state and foreign authorities. Pursuant to the Federal Food, Drug, and Cosmetic
Act (the "FFDCA") and the regulations promulgated thereunder, the FDA regulates
the clinical testing, manufacture, packaging, labeling, distribution and
promotion of medical devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
("GMP") regulations) and Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval ("PMA") from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.
If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency.
The Company received 510(k) clearance to begin marketing the PACER in
the United States in April 1994.
The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission. The Company does not believe
that changes made to the PACER since the original 510(k) Submission require a
new 510(k) Submission for the PACER. However, there can be no assurance that the
FDA would agree with the Company's determination.
The Company has recently filed a new 510)k) Submission for the PACER in
order to incorporate two new features, an automatic flow stop and an increased
rate range for infusions. Additional product modifications, including new
software features, that the Company may develop in the future will likely
require 510(k) clearance if the modifications could affect the safety or
efficacy of the Company's products. There can be no assurance that the Company
will obtain 510(k) clearance on a timely basis, if at all, for any device
modification for which it files a future 510(k) Submission. If 510(k) clearance
is granted, there can be no assurance that it will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to conditions of use.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with GMP regulations which impose certain process, procedure and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. The FDA has proposed changes to the GMP
regulations which, if finalized, would likely increase the cost of complying
with GMP requirements. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of FDA regulations.
In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to suggest
that one of its devices may have caused or contributed to death or serious
injury, or where one of its devices malfunctions and, if the malfunction were to
recur, the device would be likely to cause or contribute to a death or serious
injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law, the FDA can refuse to clear pending 510(k) Submissions; withdraw
previously cleared 510(k) Submissions; require notification to users regarding
newly found unreasonable risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, formal recalls or temporary
marketing suspension; impose civil penalties; or institute legal proceedings to
detain or seize products, enjoin future violations, or seek criminal penalties
against the Company, its officers or employees. Civil penalties for FFDCA
violations may be assessed by the FDA in lieu of or in addition to instituting
legal action. Civil penalties may range up to $15,000 per violation for
violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil
penalties may not be imposed for GMP violations, unless the violations involve a
significant or knowing departure from the requirements of the FFDCA or a risk to
public health. The FDA provides manufacturers with an opportunity to be heard
prior to the assessment of civil penalties. If civil penalties are assessed,
judicial review is available.
The Company intends to export, its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export (a "CPE"). To obtain a CPE the device manufacturer must
certify to the FDA that the product has been granted clearance in the United
States and that the manufacturing facilities appeared to be in compliance with
GMPs at the time of the last FDA inspection. The FDA will refuse to issue a CPE
if significant outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use distributors to assist in obtaining any necessary foreign governmental and
regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company has recently received Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
PACER. To maintain "UL" status, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.
PRODUCT LIABILITY EXPOSURE. Manufacturers of medical devices face the
possibility of substantial liability for damages in the event that the use of
their products is alleged to have resulted in adverse effects to a patient. The
Company maintains product liability insurance with coverage limits of $1.0
million per occurrence with an annual aggregate policy limit of $1.0 million.
The Company's product liability insurance provides coverage only for products
currently manufactured and distributed. There can be no assurance that liability
claims will not exceed the limits of such coverage or that such insurance will
continue to be available on commercially reasonable terms or at all.
Furthermore, the Company does not maintain insurance that would provide coverage
for any costs or losses resulting from any required recall of its products due
to alleged defects, whether instituted by the Company or a regulatory agency.
CHANGES IN HEALTH-CARE INDUSTRY. The health-care industry is
experiencing significant pressure to reduce costs. 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.
LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK;
APPLICABILITY OF "PENNY STOCK RULES". Federal regulations under the Securities
and Exchange Act of 1934, as amended, (the "Exchange Act") regulate the trading
of so-called "penny stocks" (the "Penny Stock Rules"), which are generally
defined as any security not listed on a national securities exchange or Nasdaq,
priced at less than $5.00 per share and offered by an issuer with limited net
tangible assets and revenues. In addition, equity securities listed on Nasdaq
which are priced at less than $5.00 are deemed penny stocks for the limited
purpose of Section 15(b)(6) of the Exchange Act. Therefore, during the time in
which the Common Stock is quoted on the Nasdaq SmallCap Market and is priced
below $5.00 per share, trading of the Common Stock is subject to the provisions
of Section 15(b)(6) of the Exchange Act which make it unlawful for any
broker-dealer to participate in a distribution of any penny stock without the
consent of the Securities and Exchange Commission if, in the exercise of
reasonable care, the broker-dealer is aware of or should have been aware of the
participation of a previously sanctioned person. In such event, it may be more
difficult for broker-dealers to sell the Company's Common Stock and purchasers
of the shares of Common Stock may have difficulty in selling their shares in the
future in the secondary trading market.
In the event that the Company's Common Stock is delisted from the
Nasdaq SmallCap Market and the Company fails other relevant criteria, trading of
the Common Stock would be subject to the full range of the Penny Stock Rules.
Under these rules, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include: (i) obtaining financial and investment
information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and (iii) providing
the investor a written identification of the shares being offered and in what
quantity. If the Penny Stock Rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. Accordingly, delisting from
the Nasdaq SmallCap Market and the application of the comprehensive Penny Stock
Rules may make it more difficult for broker-dealers to sell the Company's Common
Stock and purchasers of the shares of Common Stock may have difficulty in
selling their shares in the future in the secondary trading market.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND
CONVERTIBLE DEBENTURES. As of September 30, 1996, there were 940,828 shares of
Common Stock reserved for issuance upon the exercise of stock purchase warrants
or options or the conversion of Debentures. To the extent the trading price of
the Company's Common Stock at the time of exercise or conversion of any such
warrants, options or Debentures 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 14,285,714 shares of Common Stock, of which 1,864,728 shares
were outstanding on September 30, 1996. 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 1,428,571 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.
BUSINESS SEGMENTS
HealthWatch's business consists of one business segment: medical
products. Revenues for the Company's medical products for the past three fiscal
years are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Medical Products
Cardiology $ 564,993 $ 610,623 $ 863,904
Peripheral Vascular $ 472,497 $ 1,206,772 $ 1,409,528
Supplies & Technical
Services $ 1,003,974 $ 1,698,857 $ 1,796,714
---------------- ---------------- ---------------
TOTAL $ 2,041,464 $ 3,516,252 $ 4,070,146
</TABLE>
For the year ended June 30, 1996, the Company reported a decline in
revenues of $45,630 for cardiology products, $734,275 for peripheral vascular
products and $694,883 for supplies and technical services when compared with
fiscal 1995. 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. 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 $566,427, $1,318,233 and $1,228,205 of the
Company's medical product revenues during fiscal 1996, 1995 and 1994,
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
$381,739, $561,364 and $476,856 for the three years ended June 30, 1996, 1995
and 1994, 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 16
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. 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. 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 customer base.
In September 1993, HealthWatch acquired Metamed, a company formed in
1992 to develop a line of IV therapy and drug delivery devices. HealthWatch
considered Metamed's primary value to be its proprietary 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.
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
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.
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).
IV PRODUCTS. The concept of automated intravenous 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.
The Company has adopted the concept of drop counting systems and
applied computer technology to develop a system which determines the flow rate
and volume based on the input through a flow sensor. The Company's 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 Company's devices are
designed to be used with a variety of IV sets, including most 10, 15, 20 and 60
drop sets, the standard drop sizes for IV tubing used in the United States,
compared to other devices which generally can be used only with proprietary IV
sets designed for the particular controller or pump being used. The ability to
be used with a variety of sets is also expected to make the Company's system
easier to use and to lower total costs incurred in providing IV therapy to
patients.
The PACER, the Company's first IV product, a controller, which was
approved for marketing by the FDA in April 1994, has recently been introduced
and initial marketing efforts commenced. The PACER'S list price is $1,200,
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 approximately 1,000,000 IV
controllers and pumps currently being used in the U.S. and that approximately
140,000 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.
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 from $4,500 to $13,500.
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.
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 1996 and 1995, sales of supplies and revenues from
service and maintenance activities accounted for approximately 49 and 44
percent, respectively, of HealthWatch's revenues from its medical products
business segment.
SALES AND MARKETING
The Company has a Director of Sales and Marketing, one full-time and
three part-time field sales support representatives and one customer service
representative. 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.
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.
Initially, HealthWatch intends to distribute the PACER, its first IV
product, through independent dealers or 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. 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 instrument's lower cost 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.
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 November and December 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 1996. 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 generally 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.
RESEARCH AND DEVELOPMENT
The Company expects to incur additional expenses for the completion of
the design-related work and initial product builds for the IV controller system.
In addition, subject to available capital resources, the Company may make
certain enhancements to its Modular Vascular Laboratory, a product sold under
the Life Sciences name. During the years ended June 30, 1996, 1995 and 1994, the
Company spent $345,240, $499,099 and $201,713, 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. While the Company's licensed
IV technology includes a U.S. patent, the patent may not provide significant
protection with respect to development of a competing product with capabilities
similar to the Company's initial IV product. 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 certain 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 generally 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 a
few companies, including, Baxter Healthcare Corporation, Abbott Laboratories,
IVAC Corporation and IMED Corporation. 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.
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
The medical devices manufactured and marketed by the Company are
subject to regulation by the FDA and, in some instances, by state and foreign
authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act and the
regulations promulgated thereunder, the FDA regulates the clinical testing,
manufacture, packaging, labeling, distribution and promotion of medical devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
regulations) and Class II devices are subject to general and special controls
(for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.
If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency. "Substantial equivalence" means
that a device has the same intended use and the same technological
characteristics as the legally marketed device, or the same intended use and
different technological characteristics, provided that it can be demonstrated
that the device is as safe and effective as the legally marketed device, and
does not raise different questions regarding safety and effectiveness. A
"legally marketed device" to which a new device may be compared for a
determination regarding substantial equivalence is a device that was legally
marketed prior to May 28, 1976, when the Medical Device Amendments were added to
the FFDCA, or a device which has been reclassified from Class III to Class II or
I, or a device which has been found to be substantially equivalent through the
510(k) premarket notification process.
Commercial distribution of a device for which a 510(k) Submission is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a legally marketed device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. This may include a requirement for clinical testing of the device. It
generally takes from four to twelve months from submission of a 510(k) to obtain
a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, in
which case a PMA may be required, or that additional information is needed
before a substantial equivalence determination can be made, in which case data
from safety and effectiveness tests, including clinical tests, may be required.
A "not substantially equivalent" determination or a request for additional
information could delay the market introduction of new products that fall into
this category.
The Company received 510(k) clearance to begin marketing the PACER in
the United States in April 1994.
The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission.
The Company does not believe that changes made to the PACER since the
original 510(k) Submission require a new 510(k) Submission for the PACER.
However, there can be no assurance that the FDA would agree with the Company's
determination. If in the future the FDA concluded that the changes required a
new 510(k) Submission, the FDA could prohibit the Company from marketing the
PACER until the Company files a new 510(k) Submission and obtains clearance from
the FDA. The FDA could also take regulatory action against the Company for any
prior distribution of the PACER which incorporated changes. Alternatively, the
FDA could use its discretion not to take any regulatory steps with regard to
this issue.
The Company has recently filed a new 510(k) Submission for the PACER in
order to incorporate two new features, an automatic flow stop and an increased
rate range for infusions. Additional product modifications, including new
software features, that the Company may develop in the future will likely
require 510(k) clearance if the modifications could affect the safety or
efficacy of the Company's products. If the Company determines that any
modifications that it may make to its cleared devices do not require a new
510(k) Submission, there can be no assurance that the FDA would agree with the
Company's determinations and would not require a new 510(k) Submission for any
modifications made to the devices. If the FDA requires the Company to file a new
510(k) Submission for any modification to the device, the Company may be
prohibited from marketing the device as modified until it obtains clearance from
the FDA. There can be no assurance that the Company will obtain 510(k) clearance
on a timely basis, if at all, for any device modification for which it files a
future 510(k) Submission. If 510(k) clearance is granted, there can be no
assurance that it will not contain significant limitations in the form of
warnings, precautions or contraindications with respect to conditions of use.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with GMP regulations which impose certain process, procedure and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. The FDA has proposed changes to the GMP
regulations which, if finalized, would likely increase the cost of complying
with GMP requirements. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of FDA regulations.
In addition, the Medical Device Reporting regulation obligates the
Company to inform the FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to a death or serious injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law, the FDA can refuse to clear pending 510(k) Submissions; withdraw
previously cleared 510(k) Submissions; require notification to users regarding
newly found unreasonable risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, formal recalls or temporary
marketing suspension; impose civil penalties; or institute legal proceedings to
detain or seize products, enjoin future violations, or seek criminal penalties
against the Company, its officers or employees. Civil penalties for FFDCA
violations may be assessed by the FDA in lieu of or in addition to instituting
legal action. Civil penalties may range up to $15,000 per violation for
violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil
penalties may not be imposed for GMP violations, unless the violations involve a
significant or knowing departure from the requirements of the FFDCA or a risk to
public health. The FDA provides manufacturers with an opportunity to be heard
prior to the assessment of civil penalties. If civil penalties are assessed,
judicial review is available.
The Company intends to export, its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export. To obtain a CPE the device manufacturer must certify to the
FDA that the product has been granted clearance in the United States and that
the manufacturing facilities appeared to be in compliance with GMPs at the time
of the last FDA inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company has recently received Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
PACER. To maintain "UL" status, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.
KEY EMPLOYEES; ADVISORY BOARD
The executive officers and key employees of HealthWatch are as follows:
Name Age Positions With The Company
---- --- --------------------------
Lindley S. Branson 54 President and Chief Executive and Chief
Financial Officer
Douglas C. Layman 45 Vice President--Engineering
George T. Mier 45 Director of Sales and Marketing
Robert P. Apgar 43 Director of Manufacturing
David N. Thompson 40 Director, Service, Quality Control and
Regulatory Compliance
Annette D. Agner 39 Treasurer/Controller
Lindley S. Branson has been President and Chief Executive and Chief
Financial Officer of the Company since September 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. Mr. Branson currently devotes
approximately 50% of his time to the Company.
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.
George T. Mier. Mr. Mier has been Director of Sales and Marketing of
the Company since March 1996. Prior to joining HealthWatch, he was Vice
President Sales and Customer Care and Senior Consultant for Innotech, Inc., a
manufacturer of opthalmic equipment and disposables, from 1993 to 1995, National
Sales Director, World Learning, Inc., an educational company, from 1992 to 1993
and National Sales Manager or Regional Manager for American Optical Corp., a
medical products company, from 1988 to 1992.
Robert P. Apgar. Mr. Apgar has been Director of Manufacturing of the
Company since November 1995. Prior to joining HealthWatch, he was a Project
Director with Ivac Corporation, a medical products company in the intravenous
instrumentation business, a position he had held for more than five years.
David L. Thompson. Mr. Thompson has been employed by HealthWatch and
Life Sciences, Inc., a predecessor company, for more than 18 years, recently as
Director, Service, Quality Control and Regulatory Compliance.
Annette D. Agner. Ms. Agner has been Treasurer/Controller of the
Company since 1993 and has been employed by the Company for more than 10 years.
The Company has recently formed an Advisory Board consisting of five
physicians in order to assist the Company in developing its marketing and sales
strategy for its new PACER product, to help the Company evaluate and develop new
products and possible additions to its IV product line. The members of the
Advisory Board are as follows:
Michael M. Stamos, M.D. Dr. Stamos is Assistant Professor of Surgery,
Chief, Colon & Rectal Surgery, at the University of California, Los Angeles. Dr.
Stamos has published internationally and lectured on medical device research and
conducted studies of emerging technologies for companies such as Phizer and
Johnson & Johnson.
Jack L. Moore, M.D. Dr. Moore is an Attending Physician at Kaiser
Hospital-Bellflower, California, and is currently President of the medical staff
for the hospital and past President of the California Society of
Anesthesiologists and the Los Angeles County Society of Anesthesiologists.
James W. Futrell, M.D. Dr. Futrell is an Attending Physician at Cedars
Sinai Medical Center, Chief Executive Officer of a 120-physician IPA in Los
Angeles and past President of the Los Angeles County Society of
Anesthesiologists.
Kenneth M. Holt, M.D. Dr. Holt is President of Specific Communications
Management Services Organization, Harbor City, California. Dr. Holt is former
Chief of Staff, Bay Harbor Hospital.
Robert W. Finley, M.D. Dr. Finley is a Family Physician, in private
practice in Bellflower, California, and is Chief of Staff, Bellflower Medical
Center.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET FOR THE COMPANY' S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
The number of record holders of the Company's Common Stock on September
30,1996 was 729. The high and low sale prices as reported on the Nasdaq Small
Cap Market are shown in the table below (adjusted to reflect the seven-for-one
reverse stock split effective May 13, 1996). These quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions.
QUARTER ENDED HIGH LOW
------------- ---- ---
1994
September 30 14.00 7.875
December 31 10.50 7.00
1995
March 31 2.84375 2.625
June 30 3.28125 1.96875
September 30 4.8125 2.1875
December 31 4.375 2.1875
1996
March 31 3.9375 2.1875
June 30 4.188 2.00
September 30 4.50 3.1875
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.
HealthWatch has incurred losses from operations in each of its last
three fiscal years. 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
RESULTS OF OPERATIONS
1996 COMPARED TO 1995. The following table compares the results of
operations for fiscal 1996 fiscal 1995 to present a comparative basis for the
analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
1996 vs 1995
------------------- -----------------------
1996 1995 Increase (Decrease)
-------------------
------------------- -----------------------
<S> <C> <C> <C> <C>
Product sales $ 2,041,464 $ 3,516,252 ($1,474,788) (41.9%)
Product cost of sales 1,603,454 2,399,543 (796,089) (33.2)
----------- -----------
Gross profit 438,010 1,116,709 (678,699) (60.8)
Selling, general & administrative. 1,685,445 2,105,148 (419,703) (19.9)
Research & development 345,240 499,099 (153,859) (30.8)
Depreciation & amortization 325,872 355,701 (29,829) (8.4)
----------- ----------
Total operating costs & expenses 2,356,557 2,959,948 (603,391) (20.4)
----------- ----------
Loss from continuing
operations (1,918,534) (1,843,239) (75,300) (4.1)
Other income (expenses):
Interest income 8,030 4,546 3,484 76.6
Interest expense (66,196) (76,943) (10,747) (14.0)
Miscellaneous 0 85,182 85,182 100
----------- -----------
Total other income (expenses) (58,166) 12,785 (70,953) (555.0)
----------- -----------
Extraordinary Item 7,974 61,603 (53,629) (87.1)
----------- -----------
Net Loss ($1,968,739) ($1,768,851) $199,888 11.3%
============ ===========
</TABLE>
Revenues declined 41.9% during 1996, compared to 1995, due primarily 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.
Cost of products sold were 33.2% lower in 1996, compared to 1995, due
primarily to lower sales and to reduced operating costs. Gross margin was 21.5%
in 1996, compared to 31.7% for 1995. The lower gross margin in 1996 was due
primarily to the decreased sales revenues during the period.
Selling, general and administrative expenses as a percent of sales were
82.6% in 1996, compared to 60.0% 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 product and increased promotional expenses.
Research and development expenses decreased 30.8% in 1996, compared to
1995, 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.
Interest expenses decreased 14% in 1996, compared to 1995, due to a
lower level of borrowing. Miscellaneous income decreased 100% in 1996, compared
to 1995, due primarily to the sale in 1995 of the Telemed interpretive software.
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) (100.0)
Gain on sales of assets -- 14,298 (14,298) (100.0)
Miscellaneous 85,182 (3,480) 88,662 N/M
--------- ---------
Total other income
(expenses) 12,785 (839,654) (852,439) (101.5)
--------- ---------
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.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $308,626 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 148,714 Units of its securities, at a
purchase price of $7.00 per Unit. Each Unit consisted of four shares of Common
Stock and two redeemable Common Stock Purchase Warrants. During 1996, the
Company also issued an aggregate of 148,775 shares of its Common Stock in
payment of trade accounts payable in the amount of $308,095 and for services in
the amount of $182,126, and sold 303,532 shares of its Common Stock upon
exercise of stock purchase warrants for an aggregate consideration, net of
expenses, of $608,417.
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.
SAFE HARBOR STATEMENT
Information and statements in this report, other than historical
information, should be considered forward looking and reflect management's
current views of future events and financial performance that involve a number
of risk and uncertainties. The factors that could cause actual results to differ
materially include, but are not limited to, the items discussed under Item 1
"BUSINESS-Risk Factors."
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements are attached at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS , PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of HealthWatch are as follows:
Director
Name Since Age Positions With The Company
- ---- -------- --- --------------------------
Lindley S. Branson -- 54 President and Chief Executive
and Chief Financial Officer
Douglas C. Layman -- 45 Vice President--Engineering
Annette D. Agner -- 39 Treasurer/Controller
Sanford L. Schwartz 1983 46 Chairman of the Board of
Directors
Kenneth A. Selzer, M.D. 1988 41 Director
Lindley S. Branson has been President and Chief Executive and Chief
Financial Officer of the Company since September 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. Mr. Branson currently devotes
approximately 50% of his time to the Company.
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.
Annette D. Agner. Ms. Agner has been Treasurer/Controller of the
Company since 1993 and has been employed by the Company for more than 10 years.
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 President and Chief Executive
Officer of Integrated Neuroscience Consortium, Inc., a trial management
organization formed in September 1996; is a physician with North County
Neurology Associates, a medical group, which position he has held since 1993;
and 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.
CERTAIN FILINGS
On May 1, 1991, comprehensive new rules promulgated by the Securities
and Exchange Commission relating to the reporting of securities transactions by
directors and officers became effective. To the Company's knowledge, based
solely on a review of the copies of such reports furnished to the Company and
written representations that no other reports were required, during the two
fiscal years ended June 30, 1996, all required reports were timely filed, except
that Annette Agner, Controller of the Company, was nine month's late in
reporting a stock grant declared in December 1993.
ITEM 10. EXECUTIVE COMPENSATION.
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, 1996, to the Company's President and Chief Executive
Officer, former President and Chief Executive Officer and Chairman of the Board
of Directors. No officer or director of the Company received compensation of
$100,000 or more in fiscal 1996.
<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>
Lindley S. Branson 1996 $54,000 -- 18,571shs. -- --
President and CEO 1995 -- -- -- -- --
1994 -- -- -- -- --
John D. Greenbaum, 1996 $49,405 -- 1,429shs. 4,286shs. --
President and CEO 1995 $101,207 -- 3,571shs.(1) -- $6,818
1994 $150,000 -- -- -- $7,200
Sanford L. Schwartz, 1996 $ 36,247(2) -- -- -- --
Chairman of the 1995 $ 33,250(2) -- 11,035shs.(1) 35,714shs.(2) --
Board of Directors 1994 $ 25,000(2) -- -- 2,142shs. --
- ------------
</TABLE>
(1) Includes for Messrs. Greenbaum and Schwartz, 3,928 and 3,892 shares,
respectively, subject to previously granted options which were repriced
during the fiscal year.
(2) 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.
During fiscal 1995, Kenneth A. Selzer, M.D., a director of the Company,
received a stock award of 3,571 shares of Common Stock (fair market value at
date of grant of $9,500) and was granted options for 10,714 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.
STOCK BASED COMPENSATION
The Company has a 1989 Incentive Stock Option Plan and 1993 and 1995
Stock Option Plans ("the Plans") for its key employees directors and consultants
to purchase shares of the Company's Common Stock. The 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 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 and has
awarded stock grants to officers, directors, employees and consultants in
consideration for services. 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. At
September 30, 1996, the Company had an aggregate of 481,700 shares reserved
under the Plans and its 1995 Stock Bonus and Salary Deferral Plan, including
191,639 shares reserved for issuance pursuant to outstanding stock options under
the Plans.
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 22,456 shares), including 3,928, 3,892 and 5,250
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 1996 to the named
executive officers of the Company.
<TABLE>
<CAPTION>
Percent of Total Exercise Expiration
Name Options Granted Options Granted Price Date
----------------------------- -------------------- ---------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Lindley S. Branson 18,571 shs. 14.8% $3.29 12/11/00
John D. Greenbaum 1,429 shs. 1.1% $3.29 2/6/97
Sanford L. Schwartz None - - -
</TABLE>
The following table shows the number of options exercised during fiscal
1996 and the 1996 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, 1996 at June 30, 1996
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------ -------------------------------- -------------------------
<S> <C> <C> <C>
Lindley S. Branson None 18,571/-0- shs. $-0-/$-0-
John D. Greenbaum None 5,000/-0- shs. $ -0-/$-0-
Sanford L. Schwartz None 6,472/4,564 shs. $ 21,422/$15,107
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of September 30, 1996, 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, 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 Amount Beneficially
Beneficial Owner, Name of Owned
Director, or Identity of Group Percentage
------------------------------ ------------------- ----------
<S> <C> <C>
Lindley S. Branson 91,428(1) 4.8%
Sanford L. Schwartz 58,467(1)(2) 3.1%
Kenneth A. Selzer, M.D. 17,681(1) *
All Officers and Directors as a Group 186,679(1) 9.6%
(5 persons)
</TABLE>
----------------
* Less than one percent of shares outstanding.
(1) 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 Memorandum upon exercise of outstanding stock purchase options or
warrants or conversion of outstanding debentures: Branson--32,857
shares; Schwartz--17,777 shares; Selzer--14,110 shares; all officers
and directors as a group--82,236 shares.
(2) Includes 35,714 shares owned by Creative Business Strategies, Inc., a
company with which Mr. Schwartz is affiliated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal years 1996, 1995 and 1994, the Company paid certain
directors or affiliated companies fees for services rendered. For information
regarding amounts paid in fiscal 1996 and 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 36,492 and 34,820 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 being 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.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Listing of 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).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 - filed herewith.
4.7 HealthWatch, Inc. 1995 Stock Bonus and Salary Deferral Plan -
filed herewith.
4.8 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).
4.9 Warrant Agreement dated May 19, 1995 between the Company and
Corporate Stock Transfer, Inc. (6).
4.10 Form of Loan and Standby Purchase Agreement (6).
4.11 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant (6).
4.12 Form of Subscription and Purchase Agreement, including form
of Warrant (7)
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 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and Metamed,
Inc. (5).
10.4 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies,
Inc. (6).
10.5 Form of Exclusive Distributor Agreement - filed herewith.
11 Computation of Earnings Per Share - filed herewith.
21 Subsidiaries of the Company (5).
23.1 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
27.1 Financial Data Schedule - filed herewith.
(1) Incorporated herein by reference to Registration Statement, Form 10-K
for the year ended June 30, 1990 (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 Registration Statement, Form SB-2
(File No. 333-09107).
(8) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).
(b) During the quarter ended June 30, 1996, Registrant did not file a
report on Form 8-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHWATCH, INC.
Date: September 30, 1996 By /s/ Lindley S. Branson
----------------------
Lindley S. Branson,
(President and Chief Executive
Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Lindley S. Branson September 30, 1996
- --------------------------------------------
Lindley S. Branson, (President, Chief
Executive Officer, Chief Financial
Officer (Principal Executive and
Financial Officer)
/s/ Annette D. Agner September 30, 1996
- --------------------------------------------
Annette D. Agner
Controller (Principal Accounting Officer)
/s/ Sanford L. Schwartz September 30, 1996
- --------------------------------------------
Sanford L. Schwartz
(Director)
/s/ Kenneth A. Selzer, M.D. September 30, 1996
- --------------------------------------------
Kenneth A. Selzer, M.D.
(Director)
HEALTHWATCH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1996 AND 1995
HEALTHWATCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
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, 1996 and 1995, 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, 1996 and 1995, 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 16, 1996
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND 1995
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 79,083 $ 742,981
Accounts receivable, net of allowance for doubtful
accounts of $11,567 and $29,487, respectively 229,543 285,956
Inventory (Note 3) 818,935 927,201
Subscription receivable (Note 4) 104,568 --
Other current assets 27,134 104,587
------------ ------------
Total current assets 1,259,263 2,060,725
Property and equipment, net (Note 5) 72,086 138,769
Intangible assets, net (Note 6) 1,169,232 1,416,072
Other assets 117,971 138,553
------------ ------------
Total assets $ 2,618,552 $ 3,754,119
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 215,804 $ 481,438
Accrued compensation and payroll taxes 235,241 214,978
Other accrued liabilities - related parties 34,154 143,799
Other accrued liabilities - unrelated parties 298,304 354,415
Note payable - related party (Note 7) -- 160,000
Notes payable - unrelated parties (Note 8) -- 125,000
Deferred revenue 171,202 177,506
Current portion of long-term debt (Note 9) -- 3,948
------------ ------------
Total current liabilities 954,705 1,661,084
Debentures payable - related parties (Note 10) 15,000 40,000
Debentures payable - unrelated parties (Note 10) 565,000 540,000
------------ ------------
Total liabilities 1,534,705 2,241,084
------------ ------------
Contingencies and commitments (Note 11) -- --
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares authorized,
200,000 and 0 shares issued
and outstanding, respectively (Notes 11 and 17) 14,000 --
Common stock, $.07 par value; 14,285,714
shares authorized, 1,624,581 and 720,060
issued and outstanding, respectively (Note 17) 113,720 50,404
Additional paid-in capital 12,958,348 11,442,003
Accumulated deficit (11,963,662) (9,942,423)
Equity adjustment from foreign currency translation (38,559) (36,949)
------------ ------------
Total shareholders' equity 1,083,847 1,513,035
------------ ------------
Total liabilities and shareholders' equity $ 2,618,552 $ 3,754,119
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
Product sales $ 2,041,464 $ 3,516,252
Product cost of sales 1,603,454 2,399,543
----------- -----------
Gross profit 438,010 1,116,709
Operating costs and expenses:
Selling, general and administrative - related parties 173,413 149,100
Selling, general and administrative - unrelated parties 1,512,032 1,956,048
Depreciation and amortization 325,872 355,701
Research and development - related parties -- 54,047
Research and development - unrelated parties 345,240 445,052
----------- -----------
Total operating costs and expenses 2,356,557 2,959,948
----------- -----------
Loss from continuing operations (1,918,547) (1,843,239)
Other income (expense):
Interest income 8,030 4,546
Interest expense - unrelated parties (64,621) (72,395)
Interest expense - related parties (1,575) (4,548)
Miscellaneous -- 85,182
----------- -----------
Total other income (expense) (58,166) 12,785
----------- -----------
Loss from continuing operations before
extraordinary item (1,976,713) (1,830,454)
Extraordinary item - gain from
extinguishment of debt (Note 15) 7,974 61,603
----------- -----------
Net loss $(1,968,739) $(1,768,851)
=========== ===========
Income (loss) per share of common stock:
Continuing operations $ (1.68) $ (4.55)
Extraordinary item .01 .15
----------- -----------
Net loss per share $ (1.67) $ (4.40)
=========== ===========
Weighted average number of shares outstanding 1,175,434 402,310
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
PREFERRED STOCK (NOTE 17) COMMON STOCK (NOTE 17)
SHARES AMOUNT SHARES AMOUNT
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 -- $ -- 371,791 $ 26,025
Receipt of subscription -- -- -- --
Common stock issued in public offering (Note 12) -- -- 313,627 21,954
Common stock issued for services -- -- 29,286 2,050
Common stock issued in private placement -- -- 4,285 300
Common stock issued for conversion of debentures (Note 10) -- -- 1,071 75
Contractual dividend (Note 11) -- -- -- --
Equity adjustment from foreign currency translation -- -- -- --
Net loss -- -- -- --
------------ ------------ --------- ------------
Balances at June 30, 1995 -- -- 720,060 50,404
Common stock issued in public offering (Note 12) -- -- 218,372 15,286
Common stock bonuses -- -- 8,844 619
Common stock issued for accrued stock bonuses -- -- 47,856 3,350
Preferred stock issued for conversion
of common stock (Note 11) 400,000 28,000 (57,143) (4,000)
Common stock issued for conversion
of preferred stock (Note 11) (200,000) (14,000) 171,428 12,000
Common stock issued for services -- -- 55,127 3,859
Common stock issued in settlement of liabilities -- -- 93,648 6,555
Common stock warrants exercised -- -- 303,532 21,247
Common stock issued for conversion of notes payable -- -- 62,857 4,400
Contractual dividend (Note 11) -- -- -- --
Equity adjustment from foreign currency translation -- -- -- --
Net loss -- -- -- --
------------ ------------ --------- ------------
Balances at June 30, 1996 200,000 $ 14,000 1,624,581 $ 113,720
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(WIDE TABLE CONTINUED FROM ABOVE)
ADDITIONAL TOTAL
PAID-IN ACCUMULATED EQUITY SUBSCRIPTION SHAREHOLDERS'
CAPITAL DEFICIT ADJUSTMENT RECEIVABLE EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$ 10,700,887 $ (8,128,572) $ (39,560) $ (225,000) $ 2,333,780
-- -- -- 225,000 225,000
387,650 -- -- -- 409,604
294,800 -- -- -- 296,850
44,700 -- -- -- 45,000
13,966 -- -- -- 14,041
-- (45,000) -- -- (45,000)
-- -- 2,611 -- 2,611
-- (1,768,851) -- -- (1,768,851)
------------ ------------ ------------ ------------ ------------
11,442,003 (9,942,423) (36,949) -- 1,513,035
226,532 -- -- -- 241,818
32,786 -- -- -- 143,205
106,450 -- -- -- --
(24,000) -- -- -- --
2,000 -- -- -- --
178,267 -- -- -- 182,126
301,540 -- -- -- 308,095
587,170 -- -- -- 608,417
105,600 -- -- -- 110,000
-- (52,500) -- -- (52,500)
-- -- (1,610) -- (1,610)
-- (1,968,739) -- -- (1,968,739)
------------ ------------ ------------ ------------ ------------
$ 12,958,348 $(11,963,662) $ (38,559) $ -- $ 1,083,847
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the combined financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,968,739) $(1,768,851)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 325,872 355,701
Stock issued as payment of expenses 215,531 296,850
Extraordinary gain on extinguishment of debt (7,974) (61,603)
Discount on note receivable -- 13,639
(Increase) decrease in assets:
Accounts receivable 56,413 467,109
Inventory 108,266 279,108
Other current assets 77,453 51,702
Other assets 20,582 (15,705)
Increase (decrease) in liabilities:
Accounts payable 12,560 (161,619)
Accrued liabilities - related parties 36,842 78,025
Accrued liabilities - unrelated parties 2,840 (127,702)
Deferred revenue (6,304) 4,197
----------- -----------
Net cash used in operating activities (1,126,658) (589,149)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (12,349) (2,649)
Payments received on note receivable -- 110,485
----------- -----------
Net cash provided by (used in) investing activities (12,349) 107,836
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 745,667 454,604
Proceeds from subscriptions receivable -- 450,000
Proceeds from issuance of note payable - related party -- 150,000
Repayment of note payable - related party (15,000) --
Proceeds from issuance of note payable - unrelated parties -- 125,000
Repayment of note payable - unrelated party (160,000) --
Repayment of long-term debt (3,948) (7,855)
Dividends to preferred stockholders (90,000) --
----------- -----------
Net cash provided by financing activities 476,719 1,171,749
----------- -----------
Effect of exchange rate changes on cash (1,610) 2,611
----------- -----------
Increase (decrease) in cash (663,898) 693,047
Cash - beginning of year 742,981 49,934
----------- -----------
Cash - end of year $ 79,083 $ 742,981
=========== ===========
</TABLE>
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, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
---------- ----------
Cash paid during the year for interest $ 64,986 $ 75,724
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1996:
The Company had $7,974 of accounts payable forgiven (Note 15),
resulting in an extraordinary gain.
Notes payable holders converted $110,000 of notes to 62,857 shares of
common stock valued at $110,000 (Note 8).
Shareholders converted 57,143 shares of common stock valued at $600,000
to 400,000 shares of preferred stock (Note 11).
Shareholders converted 200,000 shares of preferred stock valued at
$300,000 to 171,428 shares of common stock (Note 11).
The Company paid $270,250 of accounts payable and $37,845 of accrued
liabilities - related parties by issuing 93,648 shares of common stock
(Note 13).
The Company issued 55,127 shares of common stock valued at $182,126 in
exchange for services.
The Company issued 40,713 shares of common stock valued at $97,400 as
payment of accrued related party stock grants (Note 13) and 7,143
shares of common stock valued at $12,400 as payment of accrued
unrelated party stock grants.
The Company issued 8,844 shares of common stock valued at $33,405 as
payment of employee bonuses.
In June 1996, warrants to purchase 46,461 shares of common stock were
exercised and the corresponding shares were issued in exchange for a
receivable aggregating $104,568 (Note 4).
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 15),
resulting in an extraordinary gain.
Debenture holders converted $15,000 of debentures to 1,071 shares of
common stock valued at $14,041, net of $959 of debenture issuance costs
written-off.
The Company issued 29,286 shares of common stock valued at $296,850 in
exchange for services.
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, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
HealthWatch, Inc. (HealthWatch or the Company) has
developed an intravenous ("IV") product that it expects to
begin selling during fiscal year 1997 to hospitals and
medical clinics throughout the United States. In addition,
the Company manufactures and distributes cardiovascular,
noninvasive diagnostic medical instruments to hospitals
and medical clinics worldwide with the majority of sales
occurring in the United States and Great Britain. 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. All significant
intercompany accounts and transactions have been
eliminated.
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 1996. 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 1996 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 Cambridge Medical Equipment
Limited's activity from British pounds to U.S. dollars.
Revenue Recognition:
The Company recognizes revenue from product sales at the
time ownership transfers to the customer, principally, at
shipment.
Stock-Based Compensation:
The Company has not adopted Statement of Financial
Accounting SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) in fiscal 1996. SFAS 123 is
effective for years beginning after December 15, 1995 and
prescribes accounting and reporting standards for all
stock-based compensation plans. Since the Company intends
to elect continued recognition of certain stock-based
compensation using the intrinsic value method prescribed
under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, no effect on
the Company's expense recognition is expected.
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.
Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Reclassifications:
Certain reclassifications have been made in the 1995
financial statements in order to conform with 1996
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 the Company's ability to
continue in existence.
Management's plans in this regard, include the commencement of
sales of the "Pacer", the Company's new proprietary IV
infusion device. During 1996, the Company conducted marketing
evaluations of the Pacer, which resulted in refinements being
made to the product. These marketing evaluations and Company
refinements limited the Pacer's 1996 marketing and sales
efforts. Management plans to implement a full marketing and
sales effort for this product in the second and third quarters
of fiscal 1997. Management believes that sales of Pacer will
contribute greatly toward future operations of the Company,
although no assurance regarding the commercial success of this
product can be provided at this time.
In addition, management has commenced efforts to raise,
through the sales of securities, the additional capital
required to fund planned 1997 activities. In the event that
Pacer is not commercially successful and/or the Company is not
able to raise additional working capital, management plans to
trim general and administrative expenses, and sell or
discontinue any non-performing operating lines and focus its
attention and resources on the remaining business.
NOTE 3: INVENTORY
Inventory consisted of the following at June 30:
1996 1995
----------- -----------
Raw materials $ 728,852 $ 655,960
Work in process 81,894 135,235
Finished goods 8,189 136,006
----------- -----------
Total inventory $ 818,935 $ 927,201
=========== ===========
NOTE 4: SUBSCRIPTION RECEIVABLE
In June 1996, warrants to purchase 46,461 shares of common
stock were exercised and the corresponding shares issued in
exchange for a $104,568 receivable. The receivable was paid to
the Company in July 1996.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
Estimated
Useful Life
1996 1995 In Years
------------ ------------ -----------
<S> <C> <C> <C>
Furniture and equipment $ 859,120 $ 846,771 5
Leasehold improvements 29,197 29,197 5-6
------------ -----------
Total property and equipment 888,317 875,968
Less accumulated depreciation (816,231) (737,199)
------------ -----------
Property and equipment, net $ 72,086 $ 138,769
============ ===========
</TABLE>
Depreciation expense was $79,032 and $98,503 for 1996 and
1995, respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets arose in the acquisition of Life Sciences,
Inc. and consisted of the following at June 30:
<TABLE>
<CAPTION>
Estimated
Useful Life
1996 1995 In Years
----------- ----------- -----------
<S> <C> <C> <C>
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 (1,547,755) (1,300,915)
----------- -----------
Intangible assets, net $ 1,169,232 $ 1,416,072
=========== ===========
</TABLE>
Amortization expense was $246,840 and $257,198 for 1996 and
1995, respectively.
NOTE 7: NOTE PAYABLE - RELATED PARTY
Note payable - related party consisted of the following at
June 30:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
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
=============== ==========
</TABLE>
NOTE 8: 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 12). The notes are
secured by substantially all corporate assets. In August 1995,
the Company repaid $125,000 of the notes payable - unrelated
parties, of which $110,000 was retired by the issuance of
62,857 shares of common stock.
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 142,857 shares of the
Company's common stock at $1.75 per share (Note 11). The
warrants expire in April 1997 and are redeemable by the
Company after April 1, 1996 for $.35 per share.
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Note payable - secured by computer and
software with interest at 15.2%. The note
was repaid in May 1996. $ - $ 3,948
Less current portion - ( 3,948)
----------- ------------
Long-term debt $ - $ -
=========== ============
</TABLE>
NOTE 10: 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 $14.00 of debentures converted.
During 1996, no debentures were converted to common stock.
During 1995, debentures aggregating $15,000 were converted to
1,071 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 1996, as the
result of changes in board membership, $25,000 of the June 30,
1995 debentures payable related parties has been reclassified
as debentures payable - unrelated parties at June 30, 1996.
Debentures payable to related parties consist of debentures
issued to a director/shareholder of HealthWatch.
NOTE 11: 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 57,143 shares of the Company's common stock
purchased for $600,000 into 400,000 shares of the
Company's Series A $1.50 stated value, 10% - cumulative
and convertible preferred stock. These stockholders are
entitled to cumulative dividends accruing from October
1994 aggregating $52,500 and $45,000, respectively, for
the years ended June 30, 1996 and 1995. At June 30, 1996
and 1995, accrued and unpaid dividends aggregating $7,500
and $45,000, respectively, are included in accrued
liabilities - unrelated parties. As of June 30, 1995, the
preferred stock had been authorized but not issued, and
accordingly, these shares were still reflected as common
stock.
In June 1996, 200,000 shares of preferred stock were
converted to 171,428 shares of common stock in accordance
with the conversion option. Subsequent to year end, the
remaining 200,000 shares of preferred stock were converted
to 157,192 shares of common stock in accordance with the
agreement's conversion option.
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:
1997 $ 210,288
1998 210,025
1999 91,025
2000 4,519
2001 -
-----------
$ 515,857
===========
Rent expense for 1996 and 1995 was $204,000 and $204,523,
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 $7,529 and
$19,327, at June 30, 1996 and 1995, respectively, for
estimated future warranty claims. These amounts are
included in other accrued liabilities - unrelated
parties.
Stock Options:
At June 30, 1995, an aggregate of 50,000 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, 1996, the Company had qualified and
nonqualified options outstanding as follows:
Common Shares Exercise Expiration
Under Option Price Per Share Date
1,071 $ 68.32 December 1996
4,762 $ 2.66 January 1997
47,182 $ 2.10 February 1997
1,429 $ 3.29 February 1997
18 $ 45.50 April 1997
42,858 $ 2.10 May 1997
6,257 $ 2.66 August 1997
5,123 $ 15.76 August 1997
1,677 $ 22.75 November 1997
821 $ 2.66 November 1997
107 $ 15.76 November 1997
179 $ 15.76 December 1997
3,571 $ 2.94 September 1998
1,786 $ 2.66 December 1998
536 $ 19.32 December 1998
47,142 $ 3.06 March 1999
3,400 $ 3.00 June 1999
55,571 $ 3.29 December 2000
3,571 $ 7.42 January 2000
3,571 $ 2.66 January 2000
28,571 $ 2.66 May 2000
7,142 $ 3.71 February 2001
14,286 $ 3.00 May 2001
---------
280,631
=========
Various officers and directors have been granted a total
of 63,534 options under the Company's Stock Option Plans
(Note 13) which are included in the above table.
Options to purchase a total of 280,631 common shares were
outstanding, of which 167,848 are exercisable at June 30,
1996.
Stock Warrants:
At June 30, 1996, the Company had warrants outstanding as
follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- --------------- -------------
9,286 $ 3.50 July 1996
297,425 $ 5.25 December 1996
14,286 $ 2.94 December 1996
65,714 $ 1.75 April 1997
14,285 $ 3.50 May 1997
13,392 $ 14.00 August 1997
--------
414,388
========
Additionally, in July 1996, the Company issued warrants
to purchase 280,000 shares of common stock with an
exercise price of $2.70 per share. The warrants were sold
for, in aggregate, $14,000 and expire in November 1996.
The following warrants have redemption rights:
Warrants that represent the right to acquire 297,425
shares at $5.25 per share are redeemable by the Company
after November 15, 1995 for $.35 per share, warrants that
represent the right to acquire 14,286 shares at $2.94 per
share are redeemable by the Company after April 1, 1996
for $.35 per share, and warrants that represent the right
to acquire 65,714 shares at $1.75 per share are
redeemable by the Company after April 1, 1996 for $.35
per share.
Advisory Board:
In May and July 1996, the Company entered into a
thirteen-month agreement with four individuals ("the
Advisory Board") to provide consultation and advice
relating to the introduction of the Company's new
proprietary product into the health-care market. Upon
commencement of the agreement, the Company agreed to pay
the Advisory Board a total of $5,000, issue 1,910 shares
of common stock and non-statutory stock options to
purchase an additional 14,440 shares of common stock at a
per share price ranging from $3.00 to $3.625. In
addition, the Company will pay the advisors a total of
$2,000 and issue common stock totaling $52,500 over the
term of the agreement.
Investment Banking Agreement:
During June 1996, the Company entered into an investment
banking service agreement. Pursuant to the agreement, the
Company will receive certain investment banking services
including advice on investment and shareholder matters in
exchange for 15,000 shares of the Company's common stock.
In addition, for any shareholder transactions introduced
by the investment banker, the Company will pay fees based
on a sliding scale from 1% to 5% of the dollar value of
the transaction.
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 required the
Company to pay $65,000 to the landlord. Pursuant to the
settlement, the $65,000 accrued interest at 11% and was
payable in installments through November 1995. As of June
30, 1995, $50,000 of the settlement is included in
accrued liabilities - unrelated parties. The liability
was paid during 1996.
NOTE 12: PUBLIC SECURITIES OFFERING
At June 30, 1995, the Company was offering up to 200,000
units of its securities for sale to the public at $7.00
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 313,627
shares of common stock and 156,813 warrants to purchase
shares of common stock, resulting in proceeds net of
commission and other direct expenses (aggregating
$139,244) of $409,604.
During 1996, the Company completed the offering and sold
an additional 218,372 shares of common stock and 109,186
warrants to purchase shares of common stock resulting in
additional proceeds net of commissions and other direct
expenses (aggregating $140,333) of $241,818.
NOTE 13: RELATED PARTY TRANSACTIONS
Stock Options:
At June 30, 1996, 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
------------- --------------- -------------
5,036 $2.66 August 1997
642 $2.66 November 1997
3,571 $2.66 January 2000
3,571 $7.42 January 2000
25,000 $2.66 May 2000
25,714 $3.29 December 2000
--------
63,534
========
Of the total outstanding options granted to officers and
directors as discussed above, options to acquire up to an
aggregate of 37,840 shares of common stock are
exercisable at June 30, 1996.
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 rate
based on unit sales. The maximum and minimum fees to be
paid for each of the years are as follows:
Year Ending Minimum Maximum
June 30, Fee Fee
-------------- ---------- ------------
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
---------- -------------
$ 200,000 $1,415,000
========== ==========
During 1996 and 1995, licensing fee expense was $40,000,
of which $10,000 remains unpaid at June 30, 1996 and 1995
and is included in other accrued liabilities - related
parties.
Consulting Agreements:
Creative Business Strategies, Inc. (CBS), a company owned
by two persons, a current director of the Company and a
former director, provides the Company with business
development consulting services in exchange for a fee.
During 1996 and 1995, the Company had incurred $37,147
and $31,100, respectively, of fees to CBS, of which
$15,900 and $34,813, remained unpaid at June 30, 1996 and
1995, respectively, and are included in other accrued
liabilities - related parties. In addition, during 1996,
the Company paid $37,845 of fees by issuing 11,506 shares
of common stock.
A former officer/director and current shareholder of the
Company provided general and current business consulting
services to the Company. During 1996, the Company
incurred and paid $52,000 of fees, of which $16,000 was
paid through the issuance of 4,286 shares of common
stock.
For the year ended June 30, 1996, the Company incurred
legal fees aggregating $68,332 to an entity in which one
of its principals became an officer of the Company on
October 1, 1995. As of June 30, 1996, $7,875 of the 1996
fees remains unpaid and is included in other accrued
liabilities - related party.
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.
Stock Grants:
During 1995, two members of the Company's Board of
Directors were granted an aggregate of 39,285 shares of
the Company's common stock as a bonus valued at $72,400.
During 1994, two members of the Company's Board of
Directors were granted 1,428 shares of the Company's
common stock as a bonus valued at $25,000.
As of June 30, 1995, none of the shares underlying these
grants had been issued, and accordingly the value of
these bonuses ($97,400 at June 30, 1995) are included in
other accrued liabilities - related parties. During 1996,
the 40,713 shares of common stock were issued in
accordance with these grants.
NOTE 14: INCOME TAXES
The effective tax rate varies from the maximum federal
statutory rate as a result of the following items:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<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 6.0
Loss to be carried forward 28.0 28.0
----------- -----------
Income tax provision - % - %
=========== ===========
Deferred taxes consisted of the following at June 30:
1996 1995
----------- -----------
Asset:
Net operating loss carryforward $ 1,759,000 $ 1,400,000
Other 138,000 100,000
----------- -----------
Net deferred tax asset 1,897,000 1,500,000
Less valuation allowance (1,897,000) (1,500,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
For financial statement purposes, no tax benefit has been
reported in 1996 and 1995 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.
The net change in the deferred tax valuation allowance
was an increase of $397,000 and $100,000 for the years
ended June 30, 1996 and 1995, respectively.
At June 30, 1996, 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 $ - $ 9,634
2001 - 3,798
2002 - 14,560
2003 322,286 -
2004 122,457 -
2005 318,718 -
2006 235,901 -
2007 1,461,790 -
2008 281,054 -
2009 1,644,839 -
2010 1,666,725 -
2011 1,650,000 -
------------ ------------
$7,703,770 $ 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 to offset future taxable
income may be significantly limited due to ownership changes
as defined in the Internal Revenue Code.
NOTE 15: EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT
During 1996, the Company negotiated with trade creditors to
settle $16,684 of past due accounts payable for $8,710. The
transactions resulted in an extraordinary gain of $7,974.
NOTE 16: GEOGRAPHICAL SEGMENT INFORMATION
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
United States $ 1,659,725 $ 2,954,888
Great Britain 381,739 561,364
Eliminations - -
----------- -----------
Consolidated $ 2,041,464 $ 3,516,252
=========== ===========
Operating profit (loss):
United States $(1,933,324) $(1,893,411)
Great Britain 14,777 50,172
Eliminations - -
----------- -----------
Consolidated $(1,918,547) $(1,843,239)
=========== ===========
Identifiable Assets:
United States $ 2,404,559 $ 3,491,948
Great Britain 213,993 262,171
Eliminations - -
----------- -----------
Consolidated $ 2,618,552 $ 3,754,119
=========== ===========
</TABLE>
Exports of U.S. produced medical products were $184,688 and
$756,869 during 1996 and 1995, respectively.
NOTE 17: REVERSE STOCK SPLIT
On May 13, 1996 the Board of Directors approved a
one-for-seven reverse stock split of the Company's common
stock. Accordingly, all share, per share, weighted average
share, stock option and stock warrant information in these
financial statements have been restated to reflect the split.
HEALTHWATCH, INC.
INDEX TO EXHIBITS
FORM 10-KSB (For Fiscal Year Ended June 30, 1996)
Exhibit
No. Description
------- -------------
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).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 - filed herewith.
4.7 HealthWatch, Inc. 1995 Stock Bonus and Salary Deferral Plan -
filed herewith.
4.8 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).
4.9 Warrant Agreement dated May 19, 1995 between the Company and
Corporate Stock Transfer, Inc. (6).
4.10 Form of Loan and Standby Purchase Agreement (6).
4.11 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant (6).
4.12 Form of Subscription and Purchase Agreement, including form of
Warrant (7)
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 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and Metamed,
Inc. (5).
10.4 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies, Inc.
(6).
10.5 Form of Exclusive Distributor Agreement - filed herewith.
11 Computation of Earnings Per Share - filed herewith.
21 Subsidiaries of the Company (5).
23.1 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
27.1 Financial Data Schedule - filed herewith.
----------------
(1) Incorporated herein by reference to Registration Statement, Form 10-K
for the year ended June 30, 1990 (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 Registration Statement, Form SB-2
(File No. 333-09107).
(8) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).
EXHIBIT 4.6
HEALTHWATCH, INC.
1995 STOCK OPTION PLAN
Article I. Establishment and Purpose
1.1 Establishment. HealthWatch, Inc., a Minnesota Corporation
("Company"), hereby establishes a stock option plan for employees and others
providing services to the Company and its Subsidiary Corporations, as described
herein, which shall be known as the "1995 STOCK OPTION PLAN" (the "Plan"). It is
intended that certain of the options issued pursuant to the Plan to employees
may, subject to the Plan being approved by the stockholders of the Company by
December 8, 1996, constitute incentive stock options within the meaning of
section 422A of the Internal Revenue Code and that other options issued pursuant
to the Plan shall constitute nonstatutory options. The Board shall determine
which options are to be incentive stock options and which are to be nonstatutory
options and shall enter into option agreements with recipients accordingly.
1.2 Purpose. The purpose of this Plan is to enhance stockholder
investment by attracting, retaining and motivating key employees and consultants
of the Company and its Subsidiary Corporations, and to encourage stock ownership
by such employees and consultants by providing them with a means to acquire a
proprietary interest in the Company's success.
Article II. Definitions
2.1 Definitions. Whenever used herein, the following terms shall have
the respective meanings set forth below, unless the context clearly requires
otherwise, and when said meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (i) an act or acts of personal dishonesty taken by
Employee or Consultant and intended to result in substantial
personal enrichment to Employee or Consultant at the expense of
the Company; (ii) repeated violations by Employee or Consultant
of his obligations which are demonstrably willful and deliberate
on Employee's or Consultant's part and which are not remedied
within a reasonable period after Employee's or Consultant's
receipt of written notice of such violations from the Company;
(iii) the conviction of Employee or Consultant of a felony that
is materially and demonstrably injurious to the Company; (iv)
sexual harassment by Employee or Consultant of any other Employee
or Consultant of the Company; or (v) illegal use of drugs. No
act, or failure to act, on Employee's or Consultant's part shall
be considered "dishonest," "willful," or "deliberate," unless
done, or admitted to be done, by Employee or Consultant in bad
faith and without reasonable belief that Employee's or
Consultant's action or omission was in the best interest of the
Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Committee provided for by Article IV
hereof, which may be created at the discretion of the Board.
(e) "Company" means HealthWatch, Inc., a Minnesota Corporation.
(f) "Consultant" means any person or entity, including an officer or
director of the Company or a Subsidiary Corporation, who provides
services (other than as an Employee) to the Company or a
Subsidiary Corporation, and shall include a Non-Employee
Director, as defined below.
(g) "Date of Exercise" means the date the Company receives notice, by
an Optionee, of the exercise of an Option pursuant to section 8.1
of this Plan. Such notice shall indicate the number of shares of
Stock the Optionee intends to exercise.
(h) "Employee" means any person, including an officer or director of
the Company or a Subsidiary Corporation, who is employed by the
Company or a Subsidiary Corporation.
(i) "Fair Market Value" means the fair market value of Stock upon
which an option is granted under this Plan.
(j) "Incentive Stock Option" means an Option granted under this Plan
which is intended to qualify as an "incentive stock option"
within the meaning of Section 422A of the Code.
(k) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or of any Subsidiary Corporation at the
time an Option is granted hereunder.
(l) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option
within the meaning of Section 422A of the Code. Nonstatutory
Options may be granted at such times and subject to such
restrictions as the Board shall determine without conforming to
the statutory rules of Section 422A of the Code applicable to
incentive stock options.
(m) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified period
of time. For purposes of this Plan, an Option may be either an
Incentive Stock Option or a Nonstatutory Option.
(n) "Optionee" means an Employee or Consultant holding an Option
under the Plan.
(o) "Parent Corporation" shall have the meaning set forth in Section
425(e) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(p) "Subsidiary Corporation" shall have the meaning set forth in
Section 425(f) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
(q) "Significant Shareholder" means an individual who, within the
meaning of Section 422A(b)(6) of the Code, owns stock possessing
more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Parent Corporation or
Subsidiary Corporation of the Company. In determining whether an
individual is a Significant Shareholder, an individual shall be
treated as owning stock owned by certain relatives of the
individual and certain stock owned by corporations in which the
individual is a stockholder, partnerships in which the individual
is a partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 425(d) of the Code.
(r) "Stock" means the $.07 par value (as adjusted to reflect the
one-for-seven reverse split effective May 13, 1996) common stock
of the Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the feminine
gender, and the definition of any term herein in the singular also shall include
the plural.
Article III. Eligibility and Participation
3.1 Eligibility and Participation. All Employees are eligible to
participate in this Plan and receive Incentive Stock Options and/or Nonstatutory
Options hereunder. All Consultants are eligible to participate in this Plan and
receive Nonstatutory Options hereunder. Optionees in the Plan shall be selected
by the Board from among those Employees and Consultants who, in the opinion of
the Board, are in a position to contribute materially to the Company's continued
growth and development and to its long-term financial success.
Article IV. Administration
4.1 Administration. The Board shall be responsible for administering
the Plan.
The Board is authorized to interpret the Plan; to prescribe, amend, and rescind
rules and regulations relating to the Plan; to provide for conditions and
assurances deemed necessary or advisable to protect the interests of the
Company; and to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations, or other actions made
or taken by the Board, pursuant to the provisions of this Plan, shall be final
and binding and conclusive for all purposes and upon all persons.
At the discretion of the Board this Plan may be administered by a
Committee which shall be an executive committee of the Board, consisting of not
less than three (3) members of the Board. The members of such Committee may be
directors who are eligible to receive Options under this Plan, but Options may
be granted to such persons only by action of the full Board and not by action of
the Committee. Such Committee shall have full power and authority, subject to
the limitations of the Plan and any limitations imposed by the Board, to
construe, interpret and administer this Plan and to make determinations which
shall be final, conclusive and binding upon all persons, including, without
limitation, the Company, the stockholders, the directors and any persons having
any interests in any Options which may be granted under this Plan, and, by
resolution or resolution providing for the creation and issuance of any such
Option, to fix the terms upon which, the time or times at or within which, and
the price or prices at which any such shares may be purchased from the Company
upon the exercise of such Option, which terms, time or times and price or prices
shall, in every case, be set forth or incorporated by reference in the
instrument or instruments evidencing such Option, and shall be consistent with
the provisions of this Plan.
The Board may from time to time remove members from, or add members to,
the Committee. The Board may terminate the Committee at any time. Vacancies on
the Committee, howsoever caused, shall be filled by the Board. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as the Chairman may determine. A majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing by all of
the members of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds (2/3) of the members of the Committee.
Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the Committee as
well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee, but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.
Article V. Stock Subject to the Plan
5.1 Number. The total number of shares of Stock hereby made available and
reserved for issuance under the Plan shall be 400,000 shares (as amended
February 26, 1996 and as adjusted to reflect the one-for-seven reverse stock
split effective May 13, 1996). The aggregate number of shares of Stock available
under this Plan shall be subject to adjustment as provided in section 5.3. The
total number of shares of Stock may be authorized but unissued shares of Stock,
or shares acquired by purchase as directed by the Board from time to time in its
discretion, to be used for issuance upon exercise of Options granted hereunder.
5.2 Unused Stock. If an Option shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares of Stock subject
thereto shall (unless the Plan shall have terminated) become available for other
Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.
Article VI. Duration of the Plan
6.1 Duration of the Plan. The Plan shall be in effect for ten years from
the date of its adoption by the Board. Any Options outstanding at the end of
said period shall remain in effect in accordance with their terms. The Plan
shall terminate before the end of said period, if all Stock subject to it has
been purchased pursuant to the exercise of Options granted under the Plan.
Article VII. Terms of Stock Options
7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Employees or Consultants at any time and from time to time as determined by the
Board; provided, however, that Consultants may receive only Nonstatutory
Options, and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such Employees or Consultants, their present and
potential contributions to the Company and its Subsidiary Corporations, and such
other factors as the Board in its discretion shall deem relevant. The Board also
shall determine whether an Option is to be an Incentive Stock Option or a
Nonstatutory Option.
In the case of Incentive Stock Options the total Fair Market Value
(determined at the date of grant) of shares of Stock with respect to which
incentive stock options granted after December 31, 1986 are exercisable for the
first time by the Optionee during any calendar year under all plans of the
Company under which incentive stock options may be granted (and all such plans
of any Parent Corporations and any Subsidiary Corporations of the Company) shall
not exceed $100,000. (Hereinafter, this requirement is sometimes referred to as
the "$100,000 Limitation".)
Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options permitting exercise in excess of the maximums established by
the preceding paragraph where such excess amount is treated as a Nonstatutory
Option.
The Board is expressly given the authority to issue amended or
replacement Options with respect to shares of Stock subject to an Option
previously granted hereunder. An amended Option amends the terms of an Option
previously granted and thereby supersedes the previous Option. A replacement
Option is similar to a new Option granted hereunder except that it provides that
it shall be forfeited to the extent that a previously granted Option is
exercised, or except that its issuance is conditioned upon the termination of a
previously granted Option.
7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422A of the Code.
7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall be
evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by Section 10.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any other terms or conditions which the Board may
impose. All such terms and conditions shall be determined by the Board at the
time of grant of the Option.
If not otherwise specified by the Board, the following terms and
conditions shall apply to Options granted under the Plan:
(a) Term. The duration of the Option shall be five (5) years from the
date of grant.
(b) Exercise of Option. Unless an Option is terminated as provided
hereunder, an Optionee may exercise his Option for up to, but not
in excess of, the amounts of shares subject to the Option
specified below, based on the Optionee's number of years of
continuous service with the Company or a Subsidiary Corporation
of the Company from the date on which the Option is granted. In
the case of an Optionee who is an Employee, continuous service
shall mean continuous employment; in the case of an Optionee who
is a Consultant, continuous service shall mean the continuous
provision of consulting services. In applying said limitations,
the amount of shares, if any, previously purchased by the
Optionee under the Option shall be counted in determining the
amount of shares the Optionee can purchase at any time. The
Optionee may exercise his Option in the following amounts:
(i) After one year of such continuous services for up to but
not in excess of thirty-three and one-third percent
(33 1/3%) of the shares originally subject to the Option;
(ii) After two years of such continuous services, for up to but
not in excess of sixty-six and two-thirds percent
(66 2/3%) of the shares originally subject to the
Option; and
(iii) At the expiration of the third year of such continuous
services the Option may be exercised at any time and from
time to time within its terms in whole or in part, but it
shall not be exercisable after the expiration of five (5)
years from the date on which it was granted.
The Board shall be free to specify terms and conditions other than those set
forth above, in its discretion.
All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.4 Option Price. No Incentive Stock Option granted pursuant to this
Plan shall have an Option price that is less than the Fair Market Value of Stock
on the date the Option is granted. Incentive Stock Options granted to
Significant Shareholders shall have an Option price of not less than 110 percent
of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be established by the Board and shall not be less
than eighty-five percent (85%) of the Fair Market Value of Stock on the date
this Option is granted.
7.5 Term of Options. Each Option shall expire at such time as the Board
shall determine when it is granted, provided however that no Option shall be
exercisable later than the tenth anniversary date of its grant. By its terms, an
Incentive Stock Option granted to a Significant Shareholder shall not be
exercisable after five years from the date of grant.
7.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.7 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Payment shall be made (i) in cash, or
(ii) if acceptable to the Board, in Stock or in some other form; provided,
however, in the case of an Incentive Stock Option, that said other form of
payment does not prevent the Option from qualifying for treatment as an
"incentive stock option" within the meaning of the Code. Payment may also be
made, in the discretion of the Board, by delivery (including by FAX) to the
Company or its designated agent of an executed irrevocable option exercise form
together with irrevocable instructions to a broker-dealer to sell or margin a
sufficient portion of the shares and deliver the sale or margin loan proceeds
directly to the Company to pay for the exercise price.
Article VIII. Amendment, Modification and Termination of Plan
8.1 Amendment, Modification, and Termination of the Plan. The Board may
at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that no amendment, modification, or termination of the Plan
shall in any manner adversely affect any outstanding grant under the Plan
without the consent of the recipient thereof.
8.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a nominee of the Optionee a certificate or certificates for the requisite
number of shares of Stock.
8.3 Privileges of a Stockholder. An Optionee or any other person entitled
to exercise an Option under this Plan shall not have stockholder privileges with
respect to any Stock covered by the Option until the date of issuance of a stock
certificate for such stock.
Article IX. Termination of Employment or Services
9.1 Death. Unless provided otherwise for a Nonstatutory Option, if an
Optionee's employment in the case of an Employee, or provision of services as a
Consultant, in the case of a Consultant, terminates by reason of death, the
Option may thereafter be exercised at any time prior to the expiration date of
the Option or within 12 months after the date of such death, whichever period is
the shorter, by the person or persons entitled to do so under the Optionee's
will or, if the Optionee shall fail to make a testamentary disposition of an
Option or shall die intestate, the Optionee's legal representative or
representatives. The Option shall be exercisable only to the extent that such
Option was exercisable as of the date of death.
9.2 Termination Other Than For Cause Or Due to Death. Unless provided
otherwise for a Nonstatutory Option, in the event of an Optionee's termination
of employment, in the case of an Employee, or termination of the provision of
services as a Consultant, in the case of a Consultant, other than by reason of
death, the Optionee may exercise such portion of his Option as was exercisable
by him at the date of such termination (the "Termination Date") at any time
within three (3) months of the Termination Date; provided, however, that where
the Optionee is an Employee or Consultant, and is terminated due to disability
within the meaning of Code ss. 422A, he may exercise such portion of his Option
as was exercisable by him on his Termination Date within one year of his
Termination Date. In any event, the Option cannot be exercised after the
expiration of the term of the Option. Options not exercised within the
applicable period specified above shall terminate.
In the case of an Employee, a change of duties or position within the Company or
an assignment of employment in a Subsidiary Corporation or Parent Corporation of
the Company, if any, or from such a Corporation to the Company, shall not be
considered a termination of employment for purposes of this Plan. The Option
Agreements may contain such provisions as the Board shall approve with reference
to the effect of approved leaves of absence upon termination of employment.
9.3 Termination for Cause. Unless provided otherwise for a Nonstatutory
Option, in the event of an Optionee's termination of employment, in the case of
an Employee, or termination of the provision of services as a Consultant, in the
case of a Consultant, which termination is by the Company or a Subsidiary
Corporation for cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.
Article X. Rights of Optionees
10.1 Service. Nothing in this Plan shall interfere with or limit in any
way the right of the Company or a Subsidiary Corporation to terminate any
Employee's employment, or any Consultant's services, at any time, nor confer
upon any Employee any right to continue in the employ of the Company or a
Subsidiary Corporation, or upon any Consultant any right to continue to provide
services to the Company or a Subsidiary Corporation.
10.2 Nontransferability. All Options granted under this Plan shall be
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
Article XI. Optionee-Employee's
Transfer or Leave of Absence
11.1 Optionee-Employee's Transfer or Leave of Absence. For Plan
purposes--
(a) A transfer of an Optionee who is an Employee from the Company to a
Subsidiary Corporation or Parent Corporation, or from one such
Corporation to another, or
(b) a leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company or a Subsidiary Corporation,
and (ii) if the Optionee holds an Incentive Stock Option, which
qualifies under the applicable regulations under the Code which
apply in the case of incentive stock options,
shall not be deemed a termination of employment. However, under no circumstances
may an Optionee exercise an Option during any leave of absence, unless
authorized by the Board.
Article XII. Amendment,
Modification, and Termination of the Plan
12.1 Amendment, Modification, and Termination of the Plan. The Board may
at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that no amendment, modification, or termination of the Plan
shall in any manner adversely affect any outstanding Option under the Plan
without the consent of the Optionee holding the Option.
Article XIII. Acquisition, Merger, or Liquidation
13.1 Acquisition. In the event that an Acquisition occurs with respect to
the Company, the Company shall have the option, but not the obligation, to
cancel Options outstanding as of the effective date of Acquisition, whether or
not such Options are then exercisable, in return for payment to the Optionees of
an amount equal to a reasonable estimate of an amount (hereinafter the "Spread")
equal to the difference between the net amount per share payable in the
Acquisition, or as a result of the Acquisition, less the exercise price of the
Option. In estimating the Spread, appropriate adjustments to give effect to the
existence of the Options shall be made, such as deeming the Options to have been
exercised, with the Company receiving the exercise price payable thereunder, and
treating the shares receivable upon exercise of the Options as being outstanding
in determining the net amount per share. For purposes of this section, an
"Acquisition" shall mean any transaction in which substantially all of the
Company's assets are acquired or in which a controlling amount of the Company's
outstanding shares are acquired, in each case by a single person or entity or an
affiliated group of persons and/or entities. For purposes of this Section a
controlling amount shall mean more than 50% of the issued and outstanding shares
of stock of the Company. The Company shall have such an option regardless of how
the Acquisition is effectuated, whether by direct purchase, through a merger or
similar corporate transaction, or otherwise. In cases where the acquisition
consists of the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with respect to
shares upon a distribution and liquidation by the Company after giving effect to
expenses and charges, including but not limited to taxes, payable by the Company
before the liquidation can be completed.
Where the Company does not exercise its option under this Section 13.1 the
remaining provisions of this Article XIII shall apply, to the extent applicable.
13.2 Merger or Consolidation. Subject to any required action by the
stockholders, if the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to the
Option would have been entitled in such merger or consolidation.
13.3 Other Transactions. A dissolution or a liquidation of the Company or
a merger and consolidation in which the Company is not the surviving corporation
shall cause every Option outstanding hereunder to terminate as of the effective
date of such dissolution, liquidation, merger or consolidation. However, the
Optionee either (i) shall be offered a firm commitment whereby the resulting or
surviving corporation in a merger or consolidation will tender to the Optionee
an option (the "Substitute Option") to purchase its shares on terms and
conditions both as to number of shares and otherwise, which will substantially
preserve to the Optionee the rights and benefits of the Option outstanding
hereunder granted by the Company, or (ii) shall have the right immediately prior
to such dissolution, liquidation, merger, or consolidation to exercise any
unexercised Options whether or not then exercisable, subject to the provisions
of this Plan. The Board shall have absolute and uncontrolled discretion to
determine whether the Optionee has been offered a firm commitment and whether
the tendered Substitute Option will substantially preserve to the Optionee the
rights and benefits of the Option outstanding hereunder. In any event, any
Substitute Option for an Incentive Stock Option shall comply with the
requirements of Code Section 425(a).
Article XIV. Securities Registration
14.1 Securities Registration. In the event that the Company shall deem it
necessary or desirable to register under the Securities Act of 1933, as amended,
or any other applicable statute, any Options or any Stock with respect to which
an Option may be or shall have been granted or exercised, or to qualify any such
Options or Stock under the Securities Act of 1933, as amended, or any other
statute, then the Optionee shall cooperate with the Company and take such action
as is necessary to permit registration or qualification of such Options or
Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, (b) that before any
transfer in connection with the resale of such shares, he will obtain the
written opinion of counsel for the Company, or other counsel acceptable to the
Company, that such shares may be transferred. The Company may also require that
the certificates representing such shares contain legends reflecting the
foregoing.
Article XV. Tax Withholding
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state, and local withholding tax requirements.
Article XVI. Indemnification
16.1 Indemnification. To the extent permitted by law, each person who is
or shall have been a member of the Board shall be indemnified and held harmless
by the Company against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or resulting
from any claim, action, suit, or proceeding to which he may be a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of judgment
in any such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise, or any power that the Company or
any Subsidiary Corporation may have to indemnify them or hold them harmless.
Article XVII. Requirements of Law
17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of
California.
Article XVIII. Effective Date of Plan
18.1 Effective Date. The Plan shall be effective on December 8, 1995, the
effective date of its adoption by the Board.
Article XIX. Compliance with Code.
19.1 Compliance with Code. Incentive Stock Options granted hereunder are
intended to qualify as "incentive stock options" under Code ss. 422A. If any
provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code. In the event that the stockholders of the Company do not approve the
Plan by December 8, 1996, all options granted pursuant to the Plan shall be
deemed to be Nonstatutory Options.
Article XX. No Obligation to Exercise Option.
20.1 No Obligation to Exercise. The granting of an Option shall impose no
obligation upon the holder thereof to exercise such Option.
EXHIBIT 4.7
HEALTHWATCH, INC.
1995 STOCK BONUS AND SALARY DEFERRAL PLAN
Article I. Establishment and Purpose
1.1 Establishment. HealthWatch, Inc., a Minnesota Corporation
("Company"), hereby establishes a stock bonus and salary deferral plan for
employees and others providing services to the Company and its Subsidiary
Corporations, as described herein, which shall be known as the "1995 STOCK BONUS
AND SALARY DEFERRAL PLAN" (the "Plan").
1.2 Purpose. The purpose of this Plan is to enhance stockholder
investment by attracting, retaining and motivating key employees and consultants
of the Company and its Subsidiary Corporations, and to encourage stock ownership
by such employees and consultants by providing the Company with a means to
promote their proprietary interest in the Company's success.
Article II. Definitions
2.1 Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below, unless the context clearly requires
otherwise, and when said meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (i) an act or acts of personal dishonesty taken by
Employee or Consultant and intended to result in substantial
personal enrichment to Employee or Consultant at the expense of
the Company; (ii) repeated violations by Employee or Consultant
of his obligations which are demonstrably willful and deliberate
on Employee's or Consultant's part and which are not remedied
within a reasonable period after Employee's or Consultant's
receipt of written notice of such violations from the Company;
(iii) the conviction of Employee or Consultant of a felony that
is materially and demonstrably injurious to the Company; (iv)
sexual harassment by Employee or Consultant of any other Employee
or Consultant of the Company; or (v) illegal use of drugs. No
act, or failure to act, on Employee's or Consultant's part shall
be considered "dishonest," "willful," or "deliberate," unless
done, or admitted to be done, by Employee or Consultant in bad
faith and without reasonable belief that Employee's or
Consultant's action or omission was in the best interest of the
Company.
(c) "Company" means HealthWatch, Inc., a Minnesota Corporation.
(d) "Consultant" means any person or entity, including an officer or
director of the Company or a Subsidiary Corporation, who provides
services (other than as an Employee) to the Company or a
Subsidiary Corporation, and shall include a Non-Employee
Director, as defined below.
(e) "Employee" means any person, including an officer or director of
the Company or a Subsidiary Corporation, who is employed by the
Company or a Subsidiary Corporation.
(f) "Fair Market Value" means the fair market value of Stock which is
subject to a grant under this Plan.
(g) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or of any Subsidiary Corporation at the
time an Option is granted hereunder.
(h) "Parent Corporation" shall have the meaning set forth in the
Company's 1995 Stock Option Plan with the Company being treated
as the employer corporation for purposes of this definition.
(i) "Subsidiary Corporation" shall have the meaning set forth the
Company's 1995 Stock Option Plan with the Company being treated
as the employer corporation for purposes of this definition.
(j) "Stock" means the $.07 par value (as adjusted to reflect the
one-for-seven reverse stock split effective May 13, 1996) common
stock of the Company.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the feminine
gender, and the definition of any term herein in the singular also shall include
the plural.
Article III. Eligibility and Participation
3.1 Eligibility and Participation. All Employees and Consultants are
eligible to participate in this Plan and receive stock grants hereunder.
Participants in the Plan shall be selected by the Board from among those
Employees and Consultants who, in the opinion of the Board, are in a position to
contribute to the Company's continued growth and development and to its
long-term financial success.
Article IV. Administration
4.1 Administration. The Board shall be responsible for administering the
Plan.
The Board is authorized to interpret the Plan; to prescribe, amend, and rescind
rules and regulations relating to the Plan; to provide for conditions and
assurances deemed necessary or advisable to protect the interests of the
Company; and to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations, or other actions made
or taken by the Board, pursuant to the provisions of this Plan, shall be final
and binding and conclusive for all purposes and upon all persons.
At the discretion of the Board this Plan may be administered by a
Committee which shall be an executive committee of the Board, consisting of not
less than three (3) members of the Board. The members of such Committee may be
directors who are eligible to receive stock grants under this Plan, but shares
of Stock may be granted to such persons only by action of the full Board and not
by action of the Committee. Such Committee shall have full power and authority,
subject to the limitations of the Plan and any limitations imposed by the Board,
to construe, interpret and administer this Plan and to make determinations which
shall be final, conclusive and binding upon all persons, including, without
limitation, the Company, the stockholders, the directors and any persons having
any interests in any stock grants under this Plan, and, by resolution or
resolution providing for the creation and issuance of any such Stock, to fix the
terms upon which, the time or times at or within which, and the price or prices,
if any, at which any such shares may be issued by the Company.
The Board may from time to time remove members from, or add members to,
the Committee. The Board may terminate the Committee at any time. Vacancies on
the Committee, howsoever caused, shall be filled by the Board. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as the Chairman may determine. A majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing by all of
the members of the Committee, shall be the valid acts of the Committee. A quorum
shall consist of two-thirds (2/3) of the members of the Committee.
Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the Committee as
well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee, but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Stock granted under it.
Article V. Stock Subject to the Plan
5.1 Number. The total number of shares of Stock hereby made available
and reserved for issuance under the Plan shall be 142,857 shares (as amended
February 26, 1996 and as adjusted to reflect the one-for-seven reverse stock
split effective May 13, 1996). The aggregate number of shares of Stock available
under this Plan shall be subject to adjustment as provided in section 5.3. The
total number of shares of Stock may be authorized but unissued shares of Stock,
or shares acquired by purchase as directed by the Board from time to time in its
discretion.
5.2 Unused Stock. If a Stock grant which is conditional shall expire or
terminate for any reason without having been completed in full, the unissued
shares of Stock subject thereto shall not become available for other grants
under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share.
Article VI. Duration of the Plan
6.1 Duration of the Plan. The Plan shall be in effect for ten years from
the date of its adoption by the Board. The Plan shall terminate before the end
of said period, if all Stock subject to it has been issued under the Plan.
Article VII. Terms of Stock Grants
7.1 Grant of Shares. Shares may be granted to Employees or Consultants at
any time and from time to time as determined by the Board. The Board shall have
complete discretion in determining the number of shares granted to each
participant hereunder. In making such determinations, the Board may take into
account the nature of services rendered by such Employees or Consultants, their
present and potential contributions to the Company and its Subsidiary
Corporations, and such other factors as the Board in its discretion shall deem
relevant.
7.2 Grant Price. No Stock granted pursuant to this Plan shall be granted
at a price, based on the value of the services performed or to be performed in
consideration therefore, as determined by the Board, which is less than the Fair
Market Value of Stock on the date of the grant.
7.3 Conditions of Grants. Grants shall be in full or part consideration
for services rendered or to be rendered and may be made subject to forfeiture in
the event that the recipient thereof does not perform the specified services or
does not continue to provide the services for a specified period of time either
because he/she is terminated for cause or elects to cease providing the services
to the Company.
7.4 Nontransferability. All rights to grants under this Plan shall be
nontransferable by the recipient, other than by will or the laws of dissent and
distribution.
Article VIII. Amendment, Modification and Termination of Plan
8.1 Amendment, Modification, and Termination of the Plan. The Board may
at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that no amendment, modification, or termination of the Plan
shall in any manner adversely affect any outstanding grant under the Plan
without the consent of the recipient thereof.
Article IX. Securities Registration
9.1 Securities Registration. In the event that the Company shall deem it
necessary or desirable to register under the Securities Act of 1933, as amended,
or any other applicable statute, any Stock which shall have been granted
hereunder, or to qualify any such grants or Stock under the Securities Act of
1933, as amended, or any other statute, then the recipients of such grants shall
cooperate with the Company and take such action as is necessary to permit
registration or qualification of such Stock.
Unless the Company has determined that the following representation is
unnecessary, each person receiving a stock grant under the Plan may be required
by the Company, as a condition to the receipt thereof, to make a representation
in writing (a) that he is acquiring such shares for his own account for
investment and not with a view to, or for sale in connection with, the
distribution of any part thereof, (b) that before any transfer in connection
with the resale of such shares, he will obtain the written opinion of counsel
for the Company, or other counsel acceptable to the Company, that such shares
may be transferred. The Company may also require that the certificates
representing such shares contain legends reflecting the foregoing.
Article X. Tax Withholding
10.1 Tax Withholding. Whenever shares of Stock are to be issued under
this Plan, the Company shall have the power to require the recipient of the
Stock to remit to the Company an amount sufficient to satisfy federal, state,
and local withholding tax requirements.
Article XI. Indemnification
11.1 Indemnification. To the extent permitted by law, each person who is
or shall have been a member of the Board shall be indemnified and held harmless
by the Company against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or resulting
from any claim, action, suit, or proceeding to which he may be a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of judgment
in any such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise, or any power that the Company or
any Subsidiary Corporation may have to indemnify them or hold them harmless.
Article XII. Requirements of Law
12.1 Requirements of Law. The issuance of shares of Stock upon stock
grants pursuant to the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
12.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of
California.
Article XIII. Effective Date of Plan
13.1 Effective Date. The Plan shall be effective on December 8, 1995, the
effective date of its adoption by the Board.
EXHIBIT 10.5
EXCLUSIVE DISTRIBUTOR AGREEMENT
THIS AGREEMENT is made this _____ day of _______________, 1996, between
HealthWatch, Inc., a Minnesota corporation having its principal place of
business at 2445 Cades Way, Vista, California 92083 (the "Company") and
______________________________, a ______________________________, having its
principal place of business at _____________________________________________
("Distributor").
WHEREAS, the Company manufactures and distributes medical equipment,
related products and services including those defined in Exhibit A attached
hereto (the "Products"); and
WHEREAS, Distributor has extensive experience in the sale, promotion
and distribution of medical products within the market segment(s) in the
territories set forth in Exhibit B attached hereto (the "Territory");
and
WHEREAS, the Company desires to appoint, and Distributor desires to
distribute, the Products in the Territory upon the terms and conditions set
forth below.
NOW, THEREFORE, in consideration of the promises of the parties hereto,
and the mutual benefits to be gained hereby, the parties agree as follows:
1. Appointment. Subject to the terms and conditions below, during the
term of this Agreement, the Company hereby grants to Distributor the exclusive
right to promote and distribute the Products to end users within the market
segment(s) set forth in Exhibit B in the Territory. Distributor hereby accepts
such appointment and agrees to carry out in good faith the duties and
obligations assigned to it by this Agreement. The Company reserves all rights to
distribute and sell the Products outside the Territory and to distribute and
sell goods and/or services other than the Products within the Territory.
Furthermore, Distributor understands that the Company or others under agreement
with the Company may manufacture products similar to the Products for
distribution or sale under names and symbols other than Company Trademarks (as
defined below), and that others may distribute, sell or market these products in
the Territory. The Company reserves the right to distribute, sell or market the
Products to any national organization or company, without regard to whether or
not offices or divisions of such entity may be located in the Territory or
whether or not any such entity distributes, sells or markets the Products in the
Territory. The Company will, at its discretion, compensate Distributor for any
assistance provided in acquiring such customers, including end-user customers of
such national customers. The amount of such compensation shall be set forth on
Exhibit C hereto which may be amended by the Company from time to time, provided
that once established, the amount of such compensation shall not be reduced
without giving Distributor ninety (90) days' prior written notice thereof.
Finally, this Agreement will not restrict or limit the Company from
distributing, selling or marketing the Products to branches or services of the
United States armed forces, or to other governmental agencies who participate in
a contract between the Company and a branch or service of the United States
armed forces, without regard to whether or not offices of such branches,
services or agencies may be located in the Territory.
2. Company Assistance. The Company agrees during the term of this
Agreement to do the following: (a) provide to Distributor a reasonable number of
copies of the Company's sales literature, catalogs, circulars, bulletins, and
other written information for the Products; (b) replace or refurbish samples and
demonstration equipment sold to Distributor, such replacement or refurbishment
to be in accordance with the terms of Exhibit D hereto; (c) at the Company's
discretion, attend national trade shows and conduct advertising or other
marketing or sales promotion activities with respect to the Products; and (d)
subject to Section 1 above, forward to Distributor all inquiries concerning the
Products which originate in the Territory.
3. Distributor's Obligations. Distributor agrees to employ its best
efforts to promote the distribution and sale of the Products within the
Territory. In connection with the distribution of the Products and in addition,
to those duties otherwise set forth in this Agreement, Distributor agrees to do
the following:
(a) Aggressively identify, develop and respond to leads
respecting new customers for the Products and promote new uses or
applications respecting the Products to existing customers;
(b) Conduct regular and continuing sales promotion programs
and activities (including participation at trade shows, conventions,
scientific conferences and similar events) within the Territory and
distribute, within the Territory, the Company's literature respecting
the Products, including sales brochures and other materials provided by
the Company to stimulate demand for the Products;
(c) Respond promptly to requests from the Territory for
quotations, orders and similar inquiries for the Products, and maintain
careful attention to potential customers' product requirements, and to
the extent Distributor engages agents, employees, distributors or other
representatives, Distributor shall be solely responsible for all
obligations and its performance hereunder;
(d) Maintain an adequate business location in the Territory to
penetrate the market for the sales of the Products within the
Territory;
(e) Except to the extent the Company may in its discretion
reimburse Distributor for all or part of Distributor's expenses
incurred in connection with its activities under subsection 3(b) above,
be responsible for all expenses incurred in performing services by or
on behalf of Distributor in connection with the distribution of the
Products in the Territory;
(f) Make only representations with respect to the performance
of the Products as authorized by the Company and advertise the Products
consistent therewith which, at no time, shall be deceptive, misleading
or injurious to the goodwill associated with the Products; and
(g) Comply with all applicable laws and regulations of every
governmental authority having jurisdiction over the handling, use and
sale of the Products, and refrain from any action which will cause the
Company to be found in violation thereof. If necessary to insure
compliance with U.S. Food and Drug Administration tracking
requirements, Distributor shall provide to the Company on a monthly
basis the following information regarding Products Distributor provides
to its customers: (i) Product Model number; (ii) Product Serial number;
(iii) date received from the Company; (iv) customer name, address and
telephone number; (v) date Product shipped to/received by customer;
(vi) name, address and telephone number of end-use facility of the
Product.
4. Orders. The Company shall sell the Products to Distributor for
distribution under this Agreement subject to the following conditions:
(a) Distributor shall not intentionally promote or sell the
Products outside the Territory without the written consent of the
Company;
(b) The Company shall fill orders for purchase of the Products
received from Distributor and shall use its best efforts to supply the
Products to Distributor on a timely basis;
(c) The Company reserves the sole right, without limitation
and upon ten (10) days' notice, to alter or change the design,
performance specifications or construction of the Products subject to
this Agreement;
(d) The Products shall be sold to Distributor on those
additional terms and at the prices or discounts set forth in Exhibit E
attached hereto. The prices or discounts listed in the attached Exhibit
may be amended from time to time by the Company, which will be
effective thirty (30) days after notice of such price changes are
mailed to Distributor;
(e) In connection with delivery of the Products to
Distributor, the Company may take a security interest in Distributor's
inventory of the Products, including requesting the execution of a
security agreement and UCC-1 filing statement, in a form acceptable to
the Company. In addition to any other rights and remedies of the
Company, the Company may withhold delivery of the Products ordered by
Distributor if any amounts or prior orders of the Products placed by
Distributor remain unpaid after the due date thereof;
(f) All orders from Distributor shall be submitted on order
forms supplied or approved by the Company; and
(g) Agents of Distributor shall inspect all Products before
any freight bill or delivery sheet is signed. Distributor shall
promptly notify the Company of any defects in the Products delivered to
it.
5. Records and Inspection. Distributor shall keep and preserve complete
and accurate records and books of account for all aspects of Distributor's
business subject to this Agreement and shall make such reports to the Company of
Distributor's activities hereunder as Company may from time to time request. The
Company or its authorized representatives shall be admitted to Distributor's
business premises from time to time during normal business hours to determine
Distributor's compliance with the provisions of this Agreement, including, but
not limited to a review of all the books and records of Distributor relating to
its activities hereunder, together with Distributor's methods of and standard of
care in storing, handling, delivering, and inservicing the Products.
6. Trademarks and Patents. The Products shall bear only the trademarks,
trade names or other marks designated by the Company from time to time (the
"Company Trademarks"). To protect the Company Trademarks, Distributor agrees as
follows:
(a) Distributor shall at all times comply with the reasonable
instructions or requests of the Company with respect to the
application, fixation, manner and styling of the Company's Trademarks,
its packaging and all other documents or promotional materials or
products. Distributor acknowledges that the Company has the sole right,
title and interest in and to the Company's Trademarks, patents,
know-how and all other information of the Company with respect to the
sale and distribution of the Products (the "Company Property");
(b) Distributor agrees to promptly inform the Company upon
assertion of a claim, or institution of proceeding by a third party or
any circumstances giving rise to any claim by the Company against any
third party affecting or otherwise with respect to the Products , the
Company, the Company Trademarks or the Company Property. The Company
shall have complete control of any litigation or proceeding related to
alleged or actual pirating or infringement of the Products, the Company
Property or the Company Trademarks; and
(c) Distributor agrees to use the Company Property and the
Company Trademarks and any goodwill related thereto solely for
advertising and promoting the Products , and that such use and goodwill
shall inure to the benefit of the Company.
7. Confidentiality. Distributor shall treat as confidential and
appropriately safeguard during and after the term of this Agreement, all
information identified as confidential and pertaining to the Products or the
Company, its pricing, business, or assets including but not limited to, any
confidential memorandum, manuals or customer lists provided by the Company. Upon
termination of this Agreement, Distributor shall return to the Company and
refrain after the term from any use of all of the foregoing confidential
materials and samples, manuals, product information, letters and similar
materials supplied to it by the Company.
8. Term and Termination. The initial term of this Agreement shall
commence on the date hereof and shall continue in full force and effect until
June 30, 1999, unless terminated earlier in accordance with the following:
(a) Effective upon ninety (90) days' written notice in the
event either party should breach any material obligation of this
Agreement and the defaulting party fails to cure such default within
such ninety (90)-day period;
(b) Effective immediately in the event of the dissolution,
insolvency, assignment for benefit of creditors or the filing of a
petition in bankruptcy by or against either party hereto;
(c) Effective immediately, at the end of any of the periods
set forth below, in the event that Distributor fails to purchase at
least the number of units of the Products set forth below:
(i) Twenty-five (25) units during the first ninety (90)
days following the effective date hereof;
(ii) An additional seventy-five (75) units by June 30,
1997;
(iii) Three hundred (300) units during the twelve
(12)-month period ending June 30, 1998;
(iv) Five hundred (500) units during the twelve (12)-month
period ending June 30, 1999; and
(v) In the event that the term of this Agreement is
automatically extended as provided herein, six
hundred (600) units during the twelve (12)-month
period ending June 30, 2000, and any additional
twelve (12)-month period thereafter.
Only purchases by Distributor for Distributor's use for
demonstrations or evaluations in the Territory and Distributor's market
segment or for sale to end users residing in the Territory and within
Distributor's market segment shall count toward such minimum purchase
amounts.
(d) During the first one hundred eighty (180) days of this
Agreement, either party may terminate this Agreement for any reason by
giving the other ninety (90) days' written notice thereof. Following
such one hundred eighty (180)-day period, either party may terminate
this Agreement for any reason by giving the other one hundred eighty
(180) days' written notice thereof. In the event this Agreement is
terminated pursuant to this paragraph 8(d), the Company shall, subject
to the terms hereof, pay Distributor a commission equal to five (5)
percent of the amount the Company receives for Products sold, leased or
rented in the Territory, other than sales, leases or rentals of the
Products in the Territory which are not within the exclusive
appointment of Distributor pursuant to Section 1 hereof, during the one
hundred eighty (180) days following such termination.
The term of this Agreement shall, subject to the foregoing, be renewed
for additional twelve (12)-month terms following the initial term unless
terminated by either party by written notice given at least ninety (90) days
prior to the end of the initial or any renewal term. Termination of this
Agreement shall have no effect on any obligation accrued prior to the date of
termination; provided, however, the Company may, in its sole discretion,
condition any acceptance of an order for Products received by it from
Distributor after delivery of notice of termination upon prepayment in cash or
by irrevocable letter of credit or other similar credit instrument acceptable to
the Company.
Upon termination, Distributor shall discontinue the use of the Company
Trademarks and Company Property and shall thereafter cease holding itself out as
an authorized distributor of the Company's Products. Within twenty (20) days of
any termination by the Company pursuant to paragraph 8(a) or 8(d) hereof, the
Company shall repurchase any and all of the Products that Distributor designates
which are new, unused and unencumbered and which are in the Company's then
current catalog. The Company shall pay Distributor the price it originally
charged for the Products, less any credits issued and the cost of freight to
Vista, California or such other destination as the Company may designate.
Termination of this Agreement will not release Distributor of any obligations
arising prior to the effective date of termination, including but not limited to
any obligation to pay money or perform services as provided in this Agreement.
To the extent that any provision of this Agreement with respect to termination
provides for periods of notice and cure less than those required by applicable
law, such provisions shall, to the extent not in accordance with such law, be
superseded by such law.
9. Relationship. The relationship of the parties hereto shall be and at
all times remain independent. Distributor is not an agent, franchisee, partner
or joint venturer of the Company. Distributor is not authorized to enter into or
execute any contract, order, or other commitment and shall have no authority to
otherwise obligate the Company.
10. Warranties. The Company makes no warranties, express or implied, to
Distributor as to the Products, except as set forth in Exhibit F attached
hereto, which may be amended from time to time by the Company, which amendment
will be effective thirty (30) days after notice of such warranty changes are
mailed to Distributor. Distributor represents and agrees that it will make all
statements, representations and warranties with respect to the Products in
strict compliance with Exhibit F, and shall not deviate therefrom except upon
written authorization of the Company. With respect to claims by a customer of
the Company based upon a defect in the Products, the sole and exclusive remedy
of the customer, as well as the sole and exclusive liability of the Company,
shall be limited to repair or replacement, at the Company's sole option, of any
Products which are defective in material workmanship and returned to the Company
in accordance with the Company's applicable standard service rules provided to
Distributor from time to time. In no event shall the Company be liable for
direct, special, incidental or consequential damages or losses or loss of
profits as a result thereof.
The Company assumes no duties or obligations beyond those specified in
this Agreement or the Warranty Agreement attached hereto as Exhibit F.
THE ABOVE-MENTIONED WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR ANY WARRANTY ARISING FROM COURSE OF DEALING
OR USAGE OF TRADE.
Warranty repair service for the Products sold to purchasers within the
Territory shall be performed by the Company in accordance with the Company's
Warranty Policy as in effect as of the date upon which the subject Product is
sold. Distributor acknowledges receipt of a copy of the Company's warranty
policy in effect as of the date of this Agreement.
11. Covenant Not to Compete. In consideration of entering into this
Agreement, Distributor agrees that without the prior written consent of the
Company or as set forth in Exhibit B hereto that during the term of this
Agreement neither Distributor nor any of its related parties or affiliates
shall, directly or indirectly, anywhere in the Territory, sell or market any
product which is similar to or competitive with the Products and that during the
term of this Agreement and for one (1) year thereafter, neither Distributor nor
any of its shareholders, partners, officers, directors, employees or affiliates
shall directly or indirectly, anywhere in the Territory, own, manage, control,
be employed by, or act as a consultant to any person or entity engaged in the
business of designing, producing or manufacturing any product which is similar
to or competitive with the Products.
12. Indemnification. Distributor agrees to indemnify the Company for,
and to hold it harmless against, any loss, liability or expense, including costs
and expenses of investigating any claim and attorneys' fees incurred in
litigation, arising out of or in connection with any acts of Distributor outside
the scope of the acts of Distributor authorized by the Company in this
Agreement. Distributor also agrees to discharge and to hold the Company harmless
on account of any taxes or governmental charges of the government or territory
which may be imposed upon the Company with respect to the execution of this
Agreement or any transactions hereunder or any income earned or payments
received by Distributor hereunder.
13. Notices. All notices, correspondence, and payments shall be in
writing and shall be deemed effective three (3) days after having been deposited
in the United States mail, certified or registered, postage prepaid, and
addressed to the other party at the address set forth above.
14. Miscellaneous. This Agreement, together with the Exhibits attached
hereto, constitute the entire agreement between the parties and shall not be
amended, except by a written instrument signed by both parties, provided that,
as indicated herein, Exhibits C, E and F may be amended by the Company. This
Agreement is personal to Distributor and shall not be assigned by it without the
prior written consent of the Company. In the event of any dispute between the
parties under or relating to this Agreement, such dispute shall be submitted to
and settled by arbitration in Vista, California, in accordance with the rules
and regulations of the American Arbitration Association then in effect, with one
arbitrator selected from the panel of arbitrators of that Association, in
accordance with its Commercial Arbitration Rules. The arbitrator shall have the
right and authority to determine how his or her award or decision as to each
issue and matter in dispute may be implemented or enforced. Any decision or
award shall be final and conclusive on the parties. The parties hereto consent
to the application by any party and interest to any court of competent
jurisdiction for confirmation or enforcement of such award. The party against
whom a decision is made shall pay the fees of the American Arbitration
Association.
15. Governing Law; Severability. This Agreement shall be governed by
and enforced in accordance with the laws of the State of California. If any
provision or term of this Agreement is held to be unlawful or unenforceable, the
remainder of the provision shall remain in full force and effect and shall in no
way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written.
DISTRIBUTOR: THE COMPANY:
HEALTHWATCH, INC.
By By
Its Its
EXHIBIT A
PRODUCTS
PACER Model 100, including any improvements or enhancements thereto,
and related ancillary products.
PACER Model 100 Swing Loks and Power Supply
PACER Model 100 Battery Pack
EXHIBIT B
TERRITORY (BY ZIP CODES)
DISTRIBUTOR'S MARKET SEGMENT(S)
COMPETING PRODUCTS OFFERED BY DISTRIBUTOR
EXHIBIT C
TERMS RESPECTING SALES BY NATIONAL COMPANIES IN TERRITORY
Company Payment to Distributor (1)
- ----------------------------------- --------------------------------------
Universal Hospital Services, Inc.
All other national accounts (2)
- -------------------------
(1) Distributor shall be paid a commission on all sales, leases or rentals
of the Products in the Territory within Distributor's market segment(s)
by the national company equal to the stated percentage of the amount
earned by, net of all credits, discounts or returns, and paid to the
Company by the national company.
(2) As of the date of this Agreement, the Company has no national
accounts/agreements other than Universal Hospital Services, Inc. The
Company will advise Distributor of the names of any additional national
accounts/agreements within fifteen (15) days of the commencement of any
such account/agreement. The commission to be paid with respect to any
such additional accounts/agreements will be __________ percent until,
and unless, amended by the Company pursuant to Section 1 of the
Agreement.
EXHIBIT D
POLICY REGARDING SAMPLES AND DEMONSTRATION EQUIPMENT
The Company shall refurbish/replace PACER Model 100 units used by
Distributor for demonstrations, evaluations or as loaners in accordance with the
following policy, provided that the units have been registered with the Company:
1. Registered Products may be returned to the Company once to be
refurbished/replaced by the Company. Distributor will be required to
pay only the cost of delivering the Products to the Company and the
Company's cost of delivering the refurbished/replaced Products to
Distributor.
2. Products to be put into Distributor's inventory for resale, shall be
replaced with new units.
3. Products to be used for demonstration units or as loaners shall be
refurbished or replaced as determined by the Company.
4. The maximum number of Distributor's Products which may be included
in this program during the period from the date of this Agreement until
June 30, 1997 and in any twelve (12)-month period thereafter shall be
limited to the number of units equal to twenty-five (25) percent of the
number of units of the Products purchased by Distributor prior to June
30, 1997.
EXHIBIT E
PRICE OF PRODUCTS
Product Price to Distributor (1) Suggested Retail Price
- ------- ------------------------ ----------------------
PACER Model 100 (2)
Swing Lok
Power Supply
Battery Pack
- --------------------
(1) F.O.B. Company warehouse. Payment terms are two (2) percent discount if
paid in full within ten (10) days of date of invoice; net thirty (30)
days from date of invoice. Distributor shall have the right to inspect
all Products and to reject Products which are defective or damaged.
Defective Products rejected by Distributor shall be returned to the
Company at the Company's expense, provided that Distributor has
received prior authorization for the return from the Company.
Distributor shall immediately notify the Company with respect to any
invoice questions or discrepancies.
(2) Includes one (1) Swing Lok and Power Supply.
EXHIBIT F
WARRANTY
HEALTHWATCH, INC.
EXHIBIT 11 - COMPUTATION OF INCOME (LOSS) PER SHARE
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loss from continuing operations $(1,976,713) $(1,830,454)
Extraordinary item 7,974 61,603
----------- -----------
Net loss $(1,968,739) $(1,768,851)
=========== ===========
Weighted average shares outstanding before
exercise of stock options and warrants and repurchases 1,075,666 402,310
Increase in weighted average shares outstanding due
to exercise of stock options and warrants 99,768 --
Decrease in weighted average shares outstanding due
to repurchase under treasury stock method -- -- *
----------- -----------
Total weighted average shares outstanding 1,175,434 402,310
=========== ===========
Income (loss) per share:
Continuing operations $ (1.68) $ (4.55)
Extraordinary items .01 .15
----------- -----------
Net loss per share $ (1.67) $ (4.40)
=========== ===========
</TABLE>
* Not included in calculation as effect would be anti-dilutive.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our report dated August 16, 1996, except for
Note 20 which is dated May , 1996, accompanying the consolidated financial
statements of HealthWatch, Inc. as of June 30, 1996 and 1995, included in the
Company's Registration Statement on Form SB-2 and to the reference made to our
firm under the caption "Experts" in the aforementioned Registration Statement
expected to be filed by HealthWatch, Inc. on or about July 26, 1996.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
July , 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 79,083
<SECURITIES> 0
<RECEIVABLES> 241,110
<ALLOWANCES> 11,567
<INVENTORY> 818,935
<CURRENT-ASSETS> 1,259,263
<PP&E> 888,317
<DEPRECIATION> (816,231)
<TOTAL-ASSETS> 2,618,552
<CURRENT-LIABILITIES> 954,705
<BONDS> 580,000
0
14,000
<COMMON> 113,720
<OTHER-SE> 956,127
<TOTAL-LIABILITY-AND-EQUITY> 2,618,552
<SALES> 2,041,464
<TOTAL-REVENUES> 2,041,464
<CGS> 1,603,454
<TOTAL-COSTS> 1,603,454
<OTHER-EXPENSES> 2,356,557
<LOSS-PROVISION> 11,567
<INTEREST-EXPENSE> 66,196
<INCOME-PRETAX> (1,976,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,918,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 7,974
<CHANGES> 0
<NET-INCOME> (1,968,739)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
