U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended September 30, 1997.
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)
(760) 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 November 14, 1997:
10,466,449.
Traditional Small Business Issuer (check one) Yes _X_ No ____
<PAGE>
PART 1. FINANCIAL INFORMATION
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------ ------------
ASSETS 1997 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 51,694 $ 44,634
Accounts receivable, net of allowance for doubtful
accounts of $23,093 and $21,125, respectively 135,610 289,817
Inventory (Note 4) 622,867 676,467
Other current assets 43,760 46,827
------------ ------------
Total current assets 853,931 1,057,745
Property and equipment, net 55,833 64,329
Intangible assets, net 860,668 922,392
Other assets 42,090 44,283
------------ ------------
Total assets $ 1,812,522 $ 2,088,749
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 227,699 $ 266,932
Accrued compensation and payroll taxes 222,720 229,685
Other accrued expenses - related parties 17,360 44,318
Other accrued expenses - unrelated parties 303,965 275,248
Deferred revenue 112,711 65,255
Current portion of debentures payable -
related parties (Note 5) 30,000 30,000
Current portion of debentures payable -
unrelated parties (Note 5) 550,000 550,000
------------ ------------
Total liabilities $ 1,464,455 $ 1,461,438
------------ ------------
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares authorized,
20,834 and 0 shares issued and outstanding,
respectively (Note 6) 1,458 -0-
Common stock, $.07 par value; 14,285,715 shares authorized,
3,828,115 and 3,510,089 issued and outstanding,
respectively (Notes 7, 8, and 9) 267,968 245,706
Additonal paid-in capital 14,828,930 14,584,414
Accumulated deficit (14,703,790) (14,152,922)
Equity adjustment from foreign currency translation (46,499) (49,887)
------------ ------------
Total shareholders' equity 348,067 627,311
------------ ------------
Total liabilities and shareholders' equity $ 1,812,522 $ 2,088,749
============ ============
</TABLE>
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
Product sales $ 367,425 $ 510,222
Product cost of sales 347,780 423,373
----------- -----------
Gross profit 19,645 86,849
Operating costs and expenses:
Selling, general and administrative 441,512 390,832
Depreciation and amortization 70,207 87,198
Research and development 42,624 100,961
----------- -----------
Total operating costs and expenses 554,343 578,991
----------- -----------
Loss from continuing operations (534,698) (492,142)
Other income (expense):
Interest expense (16,170) (16,585)
Total other income (expense) (16,170) (16,585)
----------- -----------
Net loss $ (550,868) $ (508,727)
=========== ===========
Net loss per share $ (.14) $ (.28)
----------- -----------
Weighted average number of shares outstanding 3,828,115 1,844,600
=========== ===========
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(550,868) $(508,727)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Common Stock issued as payment of expenses 57,000 28,476
Depreciation and amortization 70,207 87,198
Decrease (increase) in assets:
Accounts receivable 154,207 41,654
Inventory 53,600 44,150
Other current assets 3,067 (27,941)
Other assets 2,206 2,261
Increase (decrease) in liabilities:
Accounts payable (39,233) (19,661)
Accrued expense - related parties (26,958) (15,388)
Accrued expenses - unrelated parties 21,752 (5,074)
Deferred revenue 47,456 (30,549)
--------- ---------
Net cash used in operating activities (207,564) (403,601)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) of issuance of stock 211,236 246,191
Payments received on stock subscriptions -0- 104,568
--------- ---------
Net cash provided by (used in) financing activities 211,236 350,759
--------- ---------
Effect of exchange rate changes on cash 3,388 (360)
--------- ---------
Increase (decrease) in cash 7,060 (53,202)
Cash - beginning of period 44,634 79,083
--------- ---------
Cash - end of period $ 51,694 $ 25,881
========= =========
</TABLE>
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of September 30, 1997, and it's results of operations and
cash flows for the three months ended September 30, 1997 and 1996. 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, 1997.
Note 2: Management's Operating Plans
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to the
Company's ability to continue in existence. Management's plans in this regard,
include expanding its products and services to include medical equipment and
services for monitoring, capturing and managing medical information. This
business is expected to include both the development and sale of application
processing systems such as registration, medical records and billing systems and
the acquisition of healthcare system integrators in major metropolitan areas
throughout the United States. The Company expects to begin marketing its new
systems integration product during fiscal 1998.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1997 and 1996 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at September 30, 1997 and June 30, 1997:
9/30/97 6/30/97
-------- --------
Raw materials $429,039 $508,147
Work in process 113,297 83,551
Finished goods 80,531 84,769
-------- --------
$622,867 $676,467
-------- --------
Note 5: Debentures Payable
Debentures payable accrue interest at an annual rate of 10%, payable quarterly.
The maturity date for debentures with an aggregate value of $555,000, originally
scheduled to mature September 1, 1997, along with $38,730 of accrued interest
payable at September 30, 1997, have been extended to March 1, 1998.
Note 6: Preferred Stock
On August 20, 1997, the Company and HALIS, Inc., a publicly traded Georgia
corporation ("HALIS"), executed a letter of intent and a subscription and
purchase agreement in contemplation of a merger of the two companies. Pursuant
to these agreements, HALIS agreed to purchase up to 50,000 shares of HealthWatch
series H preferred stock for a price of $6 per share. Pursuant to this
agreement, HALIS purchased 20,834 shares of such series H preferred stock for an
aggregate purchase price of $125,000. Subsequently, HealthWatch and HALIS agreed
to
<PAGE>
abandon the proposed merger between the two companies, and instead pursue a
joint venture and co-marketing agreement.
Note 7: Supplemental schedule of non-cash operating, investing and financing
activities.
The Company issued an aggregate of 100,000 shares valued at $57,000 for
consulting services during the three months ended September 30, 1997.
Note 8: Common Stock
During the three months ended September 30, 1997, the Company issued an
aggregate of 189,111 shares of Common Stock for $90,433 as the result of option
and warrant exercises. The Company issued an additional 28,915 shares as the
result of warrant exercises that were subscribed for prior to the end of fiscal
1997.
Note 9: Subsequent Events
During October 1997, the Company completed negotiations regarding a
series of transactions with HALIS; two officers and directors of HALIS; MERAD
Corporation, a Georgia corporation ("MERAD"), which is a wholly-owned subsidiary
of Paul Harrison Enterprises, Inc. ("PHE"), an affiliate of HALIS; and several
shareholders of HALIS. These transactions followed the execution during August
1997, by HealthWatch and HALIS of a letter of intent which contemplated a merger
of the two companies.
HALIS and HealthWatch had originally planned to merge. Following
discussions, HALIS and HealthWatch determined that it would be preferable for
the two companies to adopt a shared business development strategy, but for
HealthWatch to remain a separate company. To implement this strategy,
HealthWatch and HALIS have agreed to enter into a joint venture and co-marketing
arrangement whereby HealthWatch and HALIS will share sales prospects and
HealthWatch will develop technology and an integration database engine designed
to monitor, capture and manage medical information at the point of care.
In addition, the Company is to obtain a license from MERAD to certain
artificial intelligence computer software and a multimedia database utility, and
will retain MERAD to develop proprietary software technology which will be used
to expand HealthWatch's product offerings to include products and services
specifically focused on monitoring, capturing and managing medical information
at the point of care. Further, Paul Harrison, Chairman of the Board, Chief
Executive Officer and President of HALIS, has joined the HealthWatch Board of
Directors; and Larry Fisher, a Director and Executive Vice-President, Chief
Administrative Officer and Secretary of HALIS has agreed to join the HealthWatch
Board of Directors.
PHE, Mr. Fisher and two non-affiliated shareholders of HALIS have
exchanged 1,100,000 of their shares of HALIS common stock for 4,400,000 shares
of the Company's common stock, the exchange ratio being based on the market
value for each company's common stock at the time that the transaction was
negotiated; and HALIS and private investors have acquired an aggregate of
2,163,334 shares of the Company's common stock for an aggregate purchase price
of $649,000.
Set forth below is a proforma balance sheet for the Company as of
September 30, 1997, adjusted to reflect the Company's investment in HALIS common
stock (based on the market value for the Company's and HALIS' commonstock at
time of agreement to exchange shares), the sale of the Company's securities (an
aggregate of 1,746,667 shares for $524,000) and the conversion of preferred
stock, all of which occurred subsequent to September 30, 1997.
<PAGE>
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1997 (unaudited)
ASSETS
Actual As Adjusted
------------ ------------
Current Assets
Cash and marketable securities $ 51,694 $ 2,500,694
Accounts Receivable, net
of allowance for doubtful
accounts of $23,093 135,610 135,610
Inventory 622,867 622,867
Other current assets 43,760 43,760
------------ ------------
Total current assets 853,931 3,302,931
Property and equipment, net 55,833 55,833
Intangible assets, net 860,668 860,668
Other assets 42,090 42,090
------------ ------------
Total Assets $ 1,812,522 $ 4,261,522
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 1,464,455 $ 1,464,455
Shareholders' equity
Common Stock, $.07 par
value 3,510,089 and 10,391,449
shares, respectively 267,968 727,401
Additional paid-in-capital 14,828,930 16,819,955
Accumulated deficit (14,828,930) (14,828,930)
Equity adjustment from foreign
currency translation (46,499) (46,499)
------------ ------------
Total Shareholders' Equity 348,067 2,797,067
------------ ------------
Total Liabilities and
Shareholders' Equity $ 1,812,522 $ 4,261,522
============ ============
<PAGE>
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 changed in
health-care administration in the United Sates and efforts by health-care
organizations to reduce their operating costs and the cost of health-care in
general. 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. The Company is seeking to sell its Cambridge service and supply business
and expects to discontinue offering the Cambridge line of products. During the
quarter ended March 31, 1997, the Company reported the first sales of the Pacer,
its new IV product. During October 1997, the Company initiated efforts to expand
its product and service offerings to include the monitoring, capturing and
management of medical information. An important element of HealthWatch's
business strategy for fiscal 1998 is to expand through acquisitions.
RESULTS OF OPERATIONS
Revenues declined 28% during the first quarter of fiscal 1998, compared to the
similar period in fiscal 1997, due primarily to a decline in product sales. The
Company believes that product sales were depressed largely due to the
unavailability of its enhanced MVL product during the three months ended
September 30, 1997. At September 30, 1997, the Company had three MVL systems on
backorder. The Company anticipates that shipments of the enhanced MVL product
will commence during the second quarter of fiscal 1998.
Gross margin was 5.3% in the first quarter of fiscal 1998, compared to 17.0% for
the similar 1997 period. The lower gross margin in 1998 was due primarily to the
decreased sales revenues during the period.
Selling, general and administrative expenses as a percent of sales were 120% in
the first quarter of 1998, compared with 77% in the prior year. This increase
was due primarily to the lower sales level. The planned expenditures associated
with the reduction in the Company's number of employees contributed, as well, to
increased sales, general and administrative expenses during this period.
<PAGE>
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $187,304 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. Since the
beginning of fiscal 1998, the Company has raised and obtained commitments for
$739,433 through the sale of 2,341,334 shares of its common stock, including
shares issuable upon conversion of securities convertible into common stock. In
addition, the Company is acquiring 1,100,000 shares of the common stock of
HALIS, Inc. in exchange for 4,400,000 shares of the Company's common stock. This
investment was made in connection with the Company's decision to expand its
product and service offerings to focus on the monitoring, capturing and
management of medical information and the development of a joint venture and
co-marketing arrangement with HALIS. While the HALIS common stock was acquired
for investment purposes, the shares are marketable and could be sold if required
to provide working capital to the Company.
Since the beginning of the fourth quarter of fiscal 1997, the Company
has reduced its number of employees by approximately 19, in order to reduce
operating expenses. The Company's 10% Convertible Secured Debentures in the
principal amount of $580,000 were due and payable on September 1, 1997. The
Company has obtained extensions of the due date for the payment of $555,000
principal amount of such Debentures to March 1, 1998. The Company believes it
should raise approximately $1,100,000 of working capital in addition to that
already raised and committed in fiscal 1998 to sustain operations during the
next twelve months and to pay the Debentures when due. While not required to
sustain operations, the Company believes it should raise an additional $600,000
- - $1,000,000 of such capital to better fund product development, potential
business acquisitions, sales and marketing expenses and for general working
capital purposes during the next twelve months.
In the event that the Company is unable to raise additional capital, it
may be required to sell shares of the HALIS common stock. The HALIS common stock
is traded in the over-the-counter market on the NASDAQ Bulletin Board. While the
1,100,000 shares of HALIS common stock owned by the Company represents less than
3% of the total outstanding shares of HALIS' common stock, the Company's ability
to sell its HALIS shares could be adversely affected by the limited trading
volume for HALIS' stock and the requirement that the Company sell its HALIS
shares in accordance with Rule 144 promulgated by the Commission which could
limit the number of HALIS shares which could be sold in any three-month period
to approximately 400,000 shares. There can be no assurance as to the price the
Company could receive for the HALIS common stock if it were required to sell the
stock to raise additional working capital.
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 risks 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" in the Company's Annual Report, Form 10-KSB, for the fiscal
year ended June 30, 1997.
<PAGE>
PART II. OTHER INFORMATION
Items 1, 4 and 5.
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Since June 30, 1997, the Company has completed negotiations regarding a
series of transactions with HALIS; two officers and directors of HALIS; MERAD
Corporation; and several shareholders of HALIS. In connection with these
transactions, HALIS agreed to convert 20,834 shares of the Company's Series H
Preferred Stock which HALIS had acquired during August and September 1997 for an
aggregate purchase price of $125,000 into 416,667 shares of the Company's common
stock; the Company exchanged 4,400,000 shares of its common stock for 1,100,000
shares of the common stock of HALIS owned by certain shareholders of HALIS; and
certain private investors purchased 1,846,667 shares of the Company's common
stock for an aggregate consideration of $559,000. No underwriters were involved
in any of the foregoing transactions. The Company issued the securities without
registration under the Securities Act of 1933, as amended, in reliance upon an
exemption from the registration requirements of such Act contained in Section
4(2) thereof. All of the foregoing securities were acquired for investment
purposes.
Item 3. Defaults upon Senior Securities
On September 1, 1997, $580,000 principal amount of the Company's 10%
Secured Convertible Debentures ("Debentures") were due and payable. The Company
was unable to pay the Debentures in accordance with their terms and as of the
date of this report, holders who own an aggregate of $555,000 principal amount
of such Debentures have agreed to extend the due date therefor to March 1, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--Financial Data Schedule, Exhibit 27.
(b) Reports on Form 8-K. The Company was not required to file any
reports on Form 8-K during the quarter ended September 30, 1997.
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: November 19, 1997
HealthWatch, Inc.
BY /s/Daniel J. Kelly
Daniel J. Kelly
(President & Chief Executive Officer)
BY /s/ Annette Agner
Annette Agner
(Chief Accounting Officer)
GP:435307 v1
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 51,694
<SECURITIES> 0
<RECEIVABLES> 158,703
<ALLOWANCES> (23,093)
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<CURRENT-LIABILITIES> 1,464,455
<BONDS> 580,000
0
1,458
<COMMON> 267,968
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<TOTAL-REVENUES> 367,425
<CGS> 347,780
<TOTAL-COSTS> 347,780
<OTHER-EXPENSES> 554,343
<LOSS-PROVISION> 23,093
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