U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended March 31, 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)
(619) 598-4333
(Issuer's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes___X___ No_____
Number of registrant's common shares outstanding at
May 12, 1997: 3,110,670.
Traditional Small Business Issuer (check one)
Yes___X___ No_____
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, June 30,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 272,929 $ 79,083
Accounts receivable, net of allowance for doubtful
accounts of $11,057 and $11,567, respectively 285,006 229,543
Inventory (Note 4) 790,609 818,935
Subscription receivable -0- 104,568
Other current assets (Note 5) 57,041 27,134
------------ ------------
Total current assets 1,405,585 1,259,263
Property and equipment, net (Note 5) 138,802 72,086
Intangible assets, net 984,090 1,169,232
Other assets 49,203 117,971
------------ ------------
Total assets $ 2,577,680 $ 2,618,552
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 160,421 $ 215,804
Accrued compensation and payroll taxes 230,889 235,241
Other accrued expenses - related parties 5,001 34,154
Other accrued expenses - unrelated parties 215,185 298,304
Deferred revenue 145,584 171,202
Debentures payable - related parties 15,000 -0-
Debentures payable - unrelated parties 565,000 -0-
------------ ------------
Total current liabilities 1,337,080 954,705
Debentures payable - related parties -0- 15,000
Debentures payable - unrelated parties -0- 565,000
------------ ------------
Total liabilities 1,337,080 1,534,705
------------ ------------
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares
authorized, 100,000 and 200,000 shares issued and out-
standing, respectively (Note 6) 7,000 14,000
Common stock, $.07 par value; 14,285,714 shares authorized,
3,096,173 and 1,624,581 issued and outstanding,
respectively (Notes 5 & 7) 216,732 113,720
Additional paid-in capital 14,487,209 12,958,348
Accumulated deficit (13,429,421) (11,963,662)
Equity adjustment from foreign currency translation (40,920) (38,559)
------------ ------------
Total shareholders' equity 1,240,600 1,083,847
------------ ------------
Total liabilities and shareholders' equity $ 2,577,680 $ 2,618,552
============ ============
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH , INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales 614,878 $ 535,115 $ 1,611,658 $ 1,531,833
Product cost of sales 485,290 414,225 1,333,024 1,173,462
----------- ----------- ----------- -----------
Gross profit 129,588 120,890 278,634 358,371
Operating costs and expenses:
Selling, general and administrative 460,803 363,866 1,208,509 1,030,246
Depreciation and amortization 74,037 87,198 219,640 261,596
Research and development 77,280 65,391 267,426 263,200
----------- ----------- ----------- -----------
Total operating costs and expenses 612,120 516,455 1,695,575 1,555,042
----------- ----------- ----------- -----------
Loss from continuing operations (482,532) (395,565) (1,416,941) (1,196,671)
Other income (expense):
Interest income -0- 798 -0- 7,998
Interest expense (15,091) (15,132) (48,818) (50,756)
Miscellaneous -0- -0- -0- 10,102
----------- ----------- ----------- -----------
Total operating costs and expenses (15,091) (14,334) (48,818) (32,656)
----------- ----------- ----------- -----------
Net loss $ (497,623) $ (409,899) $(1,465,759) $(1,229,327)
=========== =========== =========== ===========
Net loss per share $ (0.17) $ (0.32) $(0.66 ) $ (1.05)
=========== =========== =========== ===========
Weighted average number of shares outstanding
2,919,176 1,268,918 2,237,659 1,169,871
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH , INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (497,623) $ (409,899) $(1,465,759) $(1,229,327)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Stock issued as payment of expenses 37,605 42,689 155,544 140,125
Depreciation and amortization 74,037 87,198 219,640 261,596
Gain on extinguishment of debt -0- -0- -0- (10,102)
Decrease (increase) in assets:
Accounts receivable (100,323) (59,703) (55,463) 73,506
Inventory (6,710) 86,502 28,326 (58,549)
Other current assets 231 2,662 (16,782) 104,928
Other assets (7,442) 4,553 (2,899) 2,733
Increase (decrease) in liabilities:
Accounts payable 10,753 28,678 (55,383) (66,088)
Accrued expenses - related 18,387 4,872 (33,505) 9,818
Accrued expenses - unrelated 55,706 42,883 31,481 (176,495)
Deferred revenue 2,413 (17,064) (25,618) (55,901)
--------------------------------------------------------------
Net cash used in operating activities (412,966) (1,220,418) (1,003,756) (186,629)
--------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (19,771) -0- (29,547) (8,461)
Increase in intangible assets
--------------------------------------------------------------
Net cash provided by (used in) investing activities (19,771) -0- (29,547) (8,461)
--------------------------------------------------------------
Cash flows from financing activities:
Proceeds (repayment) of note payable -0- -0- -0- (285,000)
Repayment of long-term debt -0- (1,100) -0- (3,230)
Net costs of issuance of common stock 19,504 170,350 291,604 701,127
Payments received on stock subscriptions 600,000 -0- 1,154,568 -0-
--------------------------------------------------------------
Net cash provided by (used in) financing activities 619,504 169,250 1,446,172 412,897
--------------------------------------------------------------
Effect of exchange rate changes on cash (6,161) (2,698) (2,361) (27,810)
--------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 180,606 (20,077) 193,846 (627,130)
Cash and cash equivalents-beginning of period 92,323 135,928 79,083 742,981
--------------------------------------------------------------
Cash and cash equivalents-end of period $ 272,929 $ 115,851 $ 272,929 $ 115,851
==============================================================
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 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 March 31, 1997, and it's results of operations and cash
flows for the three months and nine months ended March 31, 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, 1996.
Note 2: Management's Operating Plans
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to the
Company's ability to continue in existence. Management's plans in this regard,
include the completion of development of the Company's new proprietary product
to be used in the intravenous ("IV") drug infusion industry.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1996 and 1995 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at March 31, 1997 and June 30, 1996:
03/31/97 6/30/96
-------- -------
Raw materials $592,956 $728,852
Work in process 158,122 81,894
Finished goods 39,531 8,189
-------- --------
$790,609 $818,935
-------- --------
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the three months and nine months ended March 31, 1997.
The Company issued an aggregate of 9,000 shares and 86,581 shares valued at
$24,480 and $283,269, respectively, during the three and nine month periods
ended March 31, 1997, respectively. Of this amount, 30,000 shares valued at
$114,600 were included in accrued liabilities - unrelated parties as of June 30,
1996, 15,000 shares valued at $52,500 were issued in exchange for certain
investment banking services of which $13,125 remains in prepaid expense as of
March 31, 1997, 35,781 shares valued at $104,569 were issued for other
consulting services and 5,800 shares valued at $11,600 were issued as employee
stock bonuses. Other assets with a fair market value of $71,667 were placed in
service as equipment during the quarter ended March 31, 1997.
Note 6: Preferred Stock/Warrants
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. In June
1996, 200,000 shares of Preferred Stock were converted to 171,428 shares of
Common Stock in accordance with the conversion option. In August 1996, 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. Accrued and
unpaid dividends of $7,500 at June 30, 1996 were paid in August 1996.
On November 14, 1996, the Company agreed to issue an aggregate of 500,000 Units
of its securities, for a purchase price of $2.25 per Unit ($1,125,000 in the
aggregate). Each Unit consisted of one share of Series B Preferred Stock and
three Warrants, each Warrant representing the right to acquire one share of the
Company's Common Stock at $2.00 per share. Each share of Preferred Stock is
convertible into three shares of the Company's Common Stock. During the three
and nine months ended March 31, 1997, the Company issued 266,666 and 466,666
Units, respectively. As of March 31, 1997, 366,666 shares of Series B
Convertible Preferred Stock had been converted into 1,100,000 shares of the
Company's Common Stock. Subsequent to the end of the third quarter of fiscal
1997, the remaining 33,334 Units were issued.
Note 7: Common Stock
During the three months and nine months ended March 31, 1997, the Company issued
an aggregate of 16,428 shares and 127,238 shares of Common Stock for $30,000 and
$302,100, respectively, as the result of option and warrant exercises.
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In recent years, the markets in which the Company participates have
experienced significant changes and a period of uncertainty due to proposed
changes in health-care administration in the United States and efforts by
health-care organizations to reduce their operating costs and the cost of
health-care in general. As a result, the Company has focused its products in the
hospital marketplace in anticipation of lower sales directly to physicians. The
Company believes that the major changes which have been introduced to the
health-care industry will place greater emphasis on lower-cost products. While
medical standards for safety and effectiveness are expected to remain strong,
costs are expected to be a deciding factor on health-care purchases.
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. During the quarter ended March 31, 1997, the
Company reported the first sales of the Pacer, its new IV product.
RESULTS OF OPERATIONS
Revenues for the 1997 periods increased 15% and 5% for the 1997 quarter
and 9-month periods, respectively, compared to the similar periods in 1996. The
increased revenues were primarily due to sales of the Company's first IV
product, the Pacer. 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.
Gross margins were 21% and 17% for the 1997 quarter and 9-month
periods, respectively, compared to 23% and 23% for the similar 1996 periods. The
lower gross margins in 1997 were due primarily to increased cost of parts and
materials and increased salary expenses.
Selling, general and administrative expenses as a percent of sales were
75% for the 1997 quarter and 9-month periods compared to 68% and 67%,
respectively, for the similar 1996 periods. The increase in the 1997 periods was
due primarily to planned expenditures associated with the introduction of the
new IV product, increased promotional expenses, and increased salary expenses.
The decrease in net loss per share in the 1997 periods is due to the increase in
the number of outstanding shares.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had $557,935 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. During the
first 9-months of fiscal 1997, the Company raised $1,352,100 of additional
working capital primarily through the issuance of 466,666 Units of its
securities as described in Note 6 to the financial statements.
The Company believes that with the proceeds from the sale of the
466,666 Units during the first 9-months of fiscal 1997, and the subsequent sale
of an aggregate of 33,334 additional Units, it has sufficient working capital to
fund operations through the balance of fiscal 1997. However, the Company
believes that it should raise approximately $800,000 of additional capital to
better fund the sales and marketing expenses for the rollout 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 addition, the Company
will either have to raise an additional $580,000 to pay certain debentures which
are due and payable in September 1997, or enter into agreements with the holders
of such securities to extend the due date thereof or to convert the debentures
into shares of the Company's common stock at a reduced conversion rate (current
conversion rate is $14.00 per share).
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-Risk Factors" in the Company's Annual Report, Form 10-KSB, for
the fiscal year ended June 30, 1996.
PART II. OTHER INFORMATION
Items 1 and 3 through 5. Not applicable.
Item 2. During the second and third quarters of fiscal 1997, the Company sold in
private transactions an aggregate of 466,666 Units of its securities. For
further information regarding these sales, see Note 6 of Notes to financial
statements.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
Exhibit 27 - Financial Data Schedule
The Company was not required to file a report on form 8-K during the quarter
ended March 31, 1997.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: May 14, 1997
HealthWatch, Inc.
BY /s/ Daniel J. Kelly
------------------------------------
Daniel J. Kelly
(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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 272,929
<SECURITIES> 0
<RECEIVABLES> 296,063
<ALLOWANCES> (11,057)
<INVENTORY> 790,609
<CURRENT-ASSETS> 1,405,585
<PP&E> 989,536
<DEPRECIATION> (850,734)
<TOTAL-ASSETS> 2,577,680
<CURRENT-LIABILITIES> 1,337,080
<BONDS> 0
0
7,000
<COMMON> 216,732
<OTHER-SE> (13,470,341)
<TOTAL-LIABILITY-AND-EQUITY> 2,577,680
<SALES> 1,611,658
<TOTAL-REVENUES> 1,611,658
<CGS> 1,333,024
<TOTAL-COSTS> 1,333,024
<OTHER-EXPENSES> 1,695,575
<LOSS-PROVISION> (623)
<INTEREST-EXPENSE> 48,818
<INCOME-PRETAX> (1,465,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,465,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,465,759)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
