U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended December 31, 1995.
Commission file number 0-11476
HEALTHWATCH, INC.,
Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2445 Cades Way, Vista California 92083
(Address of Principal Executive Offices)
(619) 598-4333
(Issuer's Telephone Number, Including Area Code)
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Number of registrant's common shares outstanding at January 31, 1996: 8,508,678.
Traditional Small Business Issuer (check one) Yes _X_ No ____
PART 1. FINANCIAL INFORMATION
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1995
------------ ------------
Current assets:
<S> <C> <C>
Cash $ 135,928 $ 742,981
Accounts receivable, net 152,747 285,956
Inventory (Note 4) 1,072,252 927,201
Other current assets 32,321 104,587
------------ ------------
Total current assets 1,393,248 2,060,725
Property and equipment, net 96,259 138,769
Intangible assets, net 1,292,645 1,416,072
Other assets 140,373 138,553
------------ ------------
Total assets $ 2,922,525 $ 3,754,119
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 5) $ 154,036 $ 481,438
Accrued compensation and payroll taxes 211,221 214,978
Other accrued expenses - related parties (Note 5) 22,132 149,399
Other accrued expenses - unrelated parties (Note 5) 150,795 348,815
Note payable - related party -0- 160,000
Notes payable - unrelated parties -0- 125,000
Deferred revenue 138,669 177,506
Current portion of long-term debt 1,818 3,948
------------ ------------
Total current liabilities 678,671 1,661,084
Debentures payable - related parties 40,000 40,000
Debentures payable - unrelated parties 540,000 540,000
------------ ------------
Total liabilities 1,258,671 2,241,084
------------ ------------
Shareholders' equity:
Cumulative preferred stock, $.01 par value; 10,000,000 shares 600,000 -0-
authorized, 400,000 and none issued and outstanding,
respectively. (Note 6)
Common stock, $.01 par value; 100,000,000 shares authorized, 11,917,768 11,492,407
8,392,694 and 5,040,423 issued and outstanding, respectively
(Notes 5,6 &7)
Accumulated deficit (10,791,853) (9,942,423)
Equity adjustment from foreign currency translation (62,061) (36,949)
------------ ------------
Total shareholders' equity 1,663,854 1,513.035
------------ ------------
Total liabilities and shareholders' equity $ 2,922,525 $ 3,754,119
============ ============
</TABLE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 418,683 $ 957,907 $ 996,718 $ 1,963,625
Product cost of sales 359,654 672,494 759,237 1,437,789
----------- ----------- ----------- -----------
Gross profit 59,029 285,413 237,481 525,836
Operating costs and expenses:
Selling, general and administrative 329,585 517,586 666,380 1,056,119
Depreciation and amortization 87,198 93,640 174,398 187,281
Research and development 109,890 145,391 197,809 257,898
----------- ----------- ----------- -----------
Total operating costs and expenses 526,673 756,617 1,038,587 1,501,298
----------- ----------- ----------- -----------
Loss from continuing operations (467,644) (471,204) (801,106) (975,462)
Other income (expense):
Interest income 3,803 1,737 7,200 4,052
Interest expense (17,275) (16,318) (35,624) -0-
Miscellaneous (Note 5) 880 -0- 10,102 (33,229)
----------- ----------- ----------- -----------
Total other income (expense) (12,592) (14,581) (18,322) (29,177)
----------- ----------- ----------- -----------
Net loss $ (480,236) $ (485,785) $ (819,428) $(1,004,639)
=========== =========== =========== ===========
Net loss per share (Note 3) $ (0.06) $ (0.17) $ (0.10) $ (0.38)
=========== =========== =========== ===========
Weighted average number of shares outstanding 8,096,717 2,777,953 7,842,432 2,656,731
=========== =========== =========== ===========
</TABLE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (480,236) $ (485,785) $ (819,428) $(1,004,639)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Stock issued as payment of expenses 34,929 73,350 97,436 146,700
Depreciation and amortization 89,198 93,640 174,398 187,281
Gain on Extinguishment of Debt (880) -0- (10,102) -0-
Decrease (increase) in assets:
Accounts receivable 44,714 394,247 133,209 426,373
Inventory (69,665) (73,875) (145,051) (95,451)
Other current assets 27,850 (32,353) 102,266 17,599
Other assets (5,066) 4,884 (1,820) 10,656
Increase (decrease) in liabilities:
Accounts payable 34,107 (31,438) (94,766) (73,880)
Accrued expense - related parties 16,771 -0- 4,946 -0-
Accrued expenses - unrelated parties (126,032) (20,128) (219,378) (25,732)
Deferred revenue (38,457) (19,023) (38,837) (23,023)
----------- ----------- ----------- -----------
Net cash used in operating activities (474,767) (96,481) (817,127) (434,096)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (8,461) -0- (8,461) -0-
Payments received on note receivable -0- 28,263 -0- 55,948
Net cash provided by investing activities (8,461) 28,263 (8,461) 55,948
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable -0- -0- (285,000) (10,000)
Repayment of long-term debt (1,077) (1,975) (2,130) (5,839)
Net proceeds (costs) of issuance of common 129,829 -0- 530,777 (13,164)
stock
Payments received on stock subscriptions -0- 120,000 -0- 495,000
----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities 128,752 118,025 243,647 465,997
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash (15,090) (40,851) (25,112) (39,007)
----------- ----------- ----------- -----------
Increase (decrease) in cash (369,566) 8,956 (607,053) 48,842
Cash - beginning of period 505,494 89,820 742,981 49,934
----------- ----------- ----------- -----------
Cash - end of period $ 135,928 $ 98,776 $ 135,928 $ 98,776
=========== =========== =========== ===========
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three months and Six months ended December 31, 1995 and 1994
(Unaudited)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of December 31, 1995, the results of operations and its
cash flows for the three months and six months ended December 31, 1995 and 1994.
This report should be read in conjunction with the Company's Financial
Statements and Notes thereto contained in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1995.
Note 2: Management's Operating Plans
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to their
ability to continue in existence. Management's plans in this regard, include the
completion of development of the Company's new proprietary product to be used in
the intravenous ("IV") drug infusion industry. The Company's new IV product, the
"Pacer", has received FDA approval. The Company commenced the first hospital
evaluation of this product in November, 1995. Management believes the product's
profitability will contribute greatly toward the future operations of the
Company. In the event that this new product is not commercially successful,
management plans to trim general and administrative expenses, liquidate any
excess inventory, and sell or discontinue any non-performing operating lines in
order to focus full attention and all resources on its remaining products.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1995 and 1994 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at December 31, 1995 and June 30, 1995:
12/31/95 6/30/95
-------- -------
Raw materials $ 643,351 $ 655,960
Work in process 300,231 135,235
Finished goods 128,670 136,006
----------- -----------
$ 1,072,252 $ 927,201
=========== ===========
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the six months ended December 31, 1995.
The Company has $10,102 of accounts payable forgiven resulting in a gain from
the extinguishment of debt. The Company issued an aggregate of 747,528 shares of
its Common Stock in payment of trade accounts payable of $351,338. The Company
has issued an additional 100,000 shares valued at $40,400 in exchange for
services. The Company issued 285,000 shares of the Company's common stock valued
at $97,400 in payment of shares granted as a bonus in fiscal 1994 and 1995 and
11,500 shares valued at $5,405 in payment of shares granted as a bonus in fiscal
1996. As of December 31, 1995, the Company declared a preferred dividend of
$15,000.
Note 6: Convertible/Redeemable Preferred Stock:
In May 1995 as settlement of a dispute with certain common stockholders, the
Company contractually committed to convert 400,000 shares of the Company's
common stock into 400,000 shares of the Company's Series A 10% cumulative
preferred stock. During the quarter ended December 31, 1995, these stockholders
were paid $60,000 of cumulative dividends which were accrued from October 1994
through September 1995. Additional accrued dividends aggregating $15,000 are
included in accrued liabilities - unrelated parties at December 31, 1995.
The preferred stock will initially be convertible into shares of common stock at
a conversion price of $1.50. If the Company does not redeem the preferred stock,
one-half of the preferred stock becomes convertible at a reduced conversion
price on March 12, 1996 and the balance becomes convertible at a reduced
conversion price on August 12, 1996. In both cases, the reduced conversion price
is the lesser of $1.00 per share or 50% of the market value for the common
stock, provided that the conversion price shall not be less than $.25 per share
or, if less, the lowest price at which HealthWatch has sold its common stock
prior to the conversion.
Note 7: Common Stock
During the six months ended December 31, 1995, the Company issued an aggregate
of 635,000 shares of common stock valued at $179,000 as the result of warrants
exercised at prices ranging from $.25 to $.30 per share of common stock.
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
In recent years, the markets in which the Company participates have experienced
significant changes and a period of uncertainty due to proposed changes in
health-care administration in the United States and efforts by health-care
organizations to reduce their operating costs and the cost of health-care in
general. As a result, the Company has focused its products in the hospital
marketplace in anticipation of lower sales directly to physicians. The Company
believes that the major changes which have been introduced to the health-care
industry will place greater emphasis on lower-cost products. While medical
standards for safety and effectiveness are expected to remain strong, costs are
expected to be deciding factor on health-care purchases.
Results of Operations
Revenues declined 42.5% and 56.3% during the 1996 first and second quarter,
respectively, compared to the 1995 periods, primarily due to a decline in
product sales. The Company believes that product sales continue to be depressed
as a result of the Company's lack of adequate working capital which has
adversely affected its level of sales as the Company has not been able to
support both the development of its new IV product and selling efforts and
enhancements to its existing products. In addition, the Company believes that
uncertainty in the medical community regarding the reimbursement effects of
health-care reforms; consolidations of hospital and other health-care
institutions resulting in fewer customers for the Company's diagnostic products
and delays in making purchase commitments by institutions engaged in merger or
consolidation discussions; and competitive pressure on product prices also
contribute to depressed sales.
Completion of the Company's first IV product was delayed by the Company's
decision to redesign the layout for this product in order to be able to use a
different microprocessor chip that is more readily available to the Company. The
decision to incorporate a different microprocessor chip was necessitated by the
Company's inability to obtain the original microprocessor chip in accordance
with previous commitments from the distributor for this chip and because the
distributor was unwilling to provide adequate assurance regarding future
deliveries of the chip. The Company expects to begin limited shipments of its
new IV controller product in the third quarter of fiscal 1996.
Cost of products sold were 46.5% and 47.2% lower in the three and six month
periods ended December 31, 1995, respectively, compared to the similar fiscal
1995 periods, due primarily to lower sales and to reduced operating costs. Gross
margins were 14.1% and 23.8% in the three and six month periods ended December
31,1995, respectively, compared to 29.8% and 26.8% for the similar fiscal 1995
periods. The lower gross margins in the three and six month fiscal 1996 periods
were primarily due to the decreased sales revenues during the second quarter.
Selling, general and administrative expenses as a percent of sales were 78.7%
and 66.9% in the three and six month periods ended December 31, 1995,
respectively, compared to 54.0% and 53.8% in the prior year periods. These
increases were due primarily to the lower sales level and to planned
expenditures associated with the introduction of the new IV product.
Research and development expenses decreased 23.3% in the fiscal 1996 periods
compared to the fiscal 1995 periods as development efforts on the Company's IV
controller have declined as the Company's efforts with the new IV product shift
to production of the initial units.
Liquidity and Capital Resources
At December 31, 1995, the Company had $288,675 of cash and accounts receivable.
Due to the Company's operating losses, it has been required to raise additional
debt and equity capital to fund its operations. Capital expenditures during this
period have been limited to routine capital purchases. In August 1995, the
Company completed the sale of 1,040,987 Units of its securities, at a purchase
price of $1.00 per Unit. Each Unit consisted of four shares of Common Stock and
two redeemable Common Stock Purchase Warrants. During the first and second
quarters of fiscal 1996, the Company also issued an aggregate of 847,528 shares
of its Common Stock in payment of trade accounts payable and for services.
The Company believes it needs to raise approximately $600,000 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 $600,000 - $1,400,000 of such capital to better fund the sales and
marketing expenses for the roll-out of the new IV product, to continue the
development of additional IV products and for general working capital purposes
during the next twelve months.
In the event that the Company is unable to raise additional capital, it will be
required to defer shipment of the initial IV products and/or to sell certain
assets or enter into joint ventures with or grant licenses to other companies
with respect to one or more of its products in order to sustain operations.
There can be no assurance that the Company could, if it were required to do so
to sustain operations, sell any such assets or enter into any such joint venture
or grant any such license, if at all, on terms acceptable to the Company. If the
Company is unable to obtain additional working capital, it will be necessary for
the Company to attempt to further reduce operating expenses and/or curtail
certain of its operations and product development activities.
PART II. OTHER INFORMATION
Items 1 through 6.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibits - None
The Company was not required to file a report on form 8-K during the quarter
ended December 31, 1995.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: February 13, 1996
HealthWatch, Inc.
BY /s/ Lindley S. Branson
Lindley S. Branson
(President & Chief
Executive Officer)
BY /s/ Annette Agner
Annette Agner
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 135,928
<SECURITIES> 0
<RECEIVABLES> 180,660
<ALLOWANCES> (21,913)
<INVENTORY> 1,072,252
<CURRENT-ASSETS> 1,393,248
<PP&E> 884,432
<DEPRECIATION> (788,173)
<TOTAL-ASSETS> 2,922,525
<CURRENT-LIABILITIES> 678,671
<BONDS> 580,000
0
600,000
<COMMON> 11,917,768
<OTHER-SE> (10,853,914)
<TOTAL-LIABILITY-AND-EQUITY> 2,922,525
<SALES> 996,718
<TOTAL-REVENUES> 996,718
<CGS> 759,257
<TOTAL-COSTS> 759,257
<OTHER-EXPENSES> 1,038,587
<LOSS-PROVISION> (16,467)
<INTEREST-EXPENSE> 35,624
<INCOME-PRETAX> (819,428)
<INCOME-TAX> 0
<INCOME-CONTINUING> (819,428)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (819,428)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
