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 Commission file number
September 30, 1998 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
Incorporation or Organization) Identification No.)
9040 Roswell Road, Suite 470, Atlanta, GA 30350
-----------------------------------------------
(Address of Principal Executive Offices)
(770) 641-5555
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
2445 Cades Way, Vista, CA 92083
- ----------------------------------------------------------------------------
(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 1, 1998:
2,020,121
Transitional Small Business Disclosure Format (check one)
Yes No X
---- ----
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
ASSETS 1998
----------------
Current assets
Cash $ 88,661
Accounts Receivable, net of allowance for doubtful
accounts of $23,675 221,768
Inventory 371,514
Other Current Assets 57,658
------------
Total current assets 737,601
Marketable equity securities - related party 430,872
Property and equipment, net 27,099
Intangible assets, net 613,841
Other assets 160,526
------------
Total assets $ 1,969,939
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 269,191
Accrued compensation and payroll taxes 245,471
Other accrued expenses - related parties 117,826
Other accrued expenses - unrelated parties 302,827
Deferred revenue 46,708
Current portion of debentures payable
- related parties 15,000
Current portion of debentures payable
- unrelated parties 515,000
------------
Total liabilities $ 1,512,023
------------
Shareholders' equity:
Cumulative preferred stock, $.01 par value;
5,000,000 shares authorized 1,145,000 shares
issued and outstanding 11,450
Common stock, $.01 par value; 50,000,000 shares
authorized, 2,909,121 issued and outstanding 29,091
Additional paid-in capital 19,339,309
Accumulated deficit (18,921,934)
------------
Total shareholders' equity 457,916
------------
Total liabilities and shareholders' equity $ 1,969,939
============
The accompanying notes are an integral part of these statements.
-2-<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
(UNAUDITED)
THREE MONTHS
------------------------------
1998 1997
------------ -------------
Product sales $ 365,609 $ 367,425
Product cost of sales 266,573 347,780
---------- ----------
Gross profit 99,036 19,645
---------- ----------
Operating costs and expenses:
Selling, general and administrative 329,806 441,512
Depreciation and amortization 66,996 70,207
Research and development 36,220 42,624
---------- ----------
Total operating costs and expenses 433,022 554,343
---------- ----------
Loss from continuing operations (333,986) (534,698)
---------- ----------
Other income (expense):
Unrealized loss on marketable equity
securities - related party (336,272) -0-
Interest expense (16,596) (16,170)
Miscellaneous 2,316 -0-
---------- ----------
Total other income (expense) (350,552) (16,170)
---------- ----------
Net loss $ (684,538) $ (550,868)
========== ==========
Net loss per share $ (0.25) $ (0.72)
========== ==========
Weighted average number of shares
outstanding 2,783,121 765,623
========== ==========
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
----------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (684,538) $ (550,868)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Common stock issued as payment of expenses -0- 57,000
Depreciation and amortization 66,996 70,207
Unrealized loss on marketable equity securities 336,272 -0-
Decrease (increase) in assets:
Accounts receivable (37,353) 154,207
Inventory 759 53,600
Other current assets (33,945) 3,067
Other assets 151,275) 2,206
Increase (decrease) in liabilities:
Accounts Payable (46,576) (39,233)
Accrued expenses - related parties (85,066) (26,958)
Accrued expenses - unrelated parties (91,057) 21,752
Deferred revenue 9,744 47,456
Debentures payable (50,000) -0-
----------- ----------
Net cash used in operating activities $ (766,039) $ (207,564)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (1,590) -0-
---------- ----------
Net cash provided by investing activities (1,590) -0-
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) of issuance of common stock -0- 211,236
Effect of exchange rate changes on cash -0- 3,388
---------- ----------
Increase (decrease) in cash (767,629) 7,060
Cash - beginning of period 854,290 44,634
---------- ----------
Cash - end of period $ 86,661 $ 51,694
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements reflect all
adjustments that, in the opinion of management, are necessary for a
fair presentation of the Company's financial position as of September
30, 1998, and it's results of operations and cash flows for the three-
months then ended. 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,
1998.
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 with
its historical lines of business and is refocusing the Company into an
information technology company. The Company, now d/b/a MERAD
Technologies Corporation, is in the process of changing from a company
primarily involved in the manufacture and marketing of medical
products to a company primarily involved in the software information
technology ("IT") business, and will be seeking the approval of its
shareholders for a name change at its next annual meeting.
Certain of the Company's medical products contain both hardware
and software components. While the hardware components are classified
more as a device, the completed medical equipment including software,
include an IT component as the equipment analyzes information and
reports diagnostic results to users. This IT software ran on
device-oriented hardware regulated by the Federal Food and Drug
Administration ("FDA") whereas the Company's new software will run on
computer-oriented hardware that does not fall under FDA regulations.
Based on the foregoing and the Company's determination that the IT
business offered significantly greater opportunities for the Company
than did its existing medical products business, the Company's focus
during the second half of fiscal 1998 was increasingly on the
development of its IT business.
On October 1, 1998, as part of the transformation, the Company
acquired Paul Harrison Enterprises, Inc. ("PHE"). PHE owned the MERAD
technology, a sophisticated software application utility (the "MERAD
Technology") that utilizes an advanced multi-media object and
relational database which creates knowledge objects that can be used
and reused in a virtually unlimited number of combinations to provide
efficient applications that can be accessed and processed in both an
Internet and Intranet environment. Previously, during fiscal 1998,
the Company had obtained a license from MERAD Corporation ("MERAD"), a
subsidiary of PHE, for use of the MERAD Technology and retained MERAD
to develop proprietary software technology which will be used to
expand the Company's product offerings to include products and
services specially focused on monitoring, capturing and managing
-5-
<PAGE>
medical information at the point of care. The acquisition of PHE,
which is a significant shareholder of HALIS, Inc. ("HALIS") also
increased the Company's ownership of the common stock of HALIS, a
health care IT company, to 19% of HALIS' outstanding shares of common
stock.
In the acquisition, the Shareholders of PHE received 334,443
shares of the Company's Series P Preferred Stock, stated value $10.00
per share (the "Preferred Stock"). Subject to prior approval by the
Company's shareholders, the Preferred Stock will be convertible into
3,344,320 shares of the Company's common stock. The Preferred Stock
is non-voting. In addition to the issuance of the Preferred Stock,
the PHE shareholders will be paid additional consideration based on
the percentage of the revenues that the Company receives in connection
with the sale of software developed utilizing the MERAD Technology, up
to a maximum of $7 million, and options for approximately 625,000
shares of the Company's common stock with an exercise price of $.96
per share will be issued in exchange for previously outstanding
options of PHE.
During fiscal 1999, the Company intends to continue to emphasize
the IT business and expects to grow this business through a
combination of licensing partners, selected strategic acquisitions and
internal sales of its software and services. The Company also expects
to continue to expand its collaborative efforts with HALIS and to
increase its efforts to market the HALIS Healthcare Enterprise System
(the "HALIS HES") product to the Company's customer base (see
discussion below). The HALIS HES software, which is owned by HALIS,
was developed utilizing the MERAD Technology. The Company also will
explore the possibility of developing information systems utilizing
the MERAD Technology for other information-intensive industries such
as financial services, insurance and real estate. In recognition of
this change in the Company's business focus, the Company will ask its
stockholders at its next Annual Meeting of Stockholders to approve a
change in the Company's name to MERAD Technologies Corporation.
NET INCOME (LOSS) PER SHARE
The net income (loss) per share was 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%.
INVENTORY
Inventory consisted of the following at September 30, 1998 and
June 30, 1998:
9/30/98 6/30/98
----------- ------------
Raw materials $ 264,269 $ 159,655
Work in process 33,895 75,316
Finished goods 73,350 137,302
-------- --------
$ 371,514 $ 372,273
======== ========
-6-<PAGE>
DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%,
payable quarterly. The debentures matured on March 1, 1998, and are
currently in default. The debentures could be converted, at the
option of the holder, at a conversion rate of one share of the
Company's common stock for every $70.00 of debentures, plus interest,
converted. During the three-month period ended September 30, 1998,
the Company has repaid $50,000 of the debentures due and owing.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Pursuant to agreements entered into during fiscal 1998, the
Company issued an aggregate of 488,400 shares during the three-month
period ended September 30, 1998 to PHE (prior to its acquisition by
the Company) in exchange for 1,400,000 shares of HALIS common stock
owned by PHE. During the three-month period ended September 30, 1998,
the Company has recorded an additional unrealized loss on marketable
equity securities of $336,272, relating to a decrease in the market
value of the HALIS common shares held by the Company. Although the
Company does not hold the HALIS shares for trading purposes,
management has deemed that the decline in value of the HALIS common
shares to be "other-than-temporary". To be consistent with the way it
has handled a decline in the value of the HALIS shares previously, the
Company has reflected the unrealized loss as a separate component in
its statement of operations.
HALIS BUSINESS COLLABORATION.
During fiscal 1997, the Company determined to expand its business
to include health care information software products and services.
The decision was based on the Company's desire to improve margins for
its medical products, particularly its Life Sciences peripheral
vascular diagnostic products, and to expand its product and service
offerings in order to increase revenues and to return the Company to
profitability. In this connection, the Company entered into a business
collaboration agreement with HALIS, pursuant to which the Company and
HALIS share sales prospects and the Company is to develop an
integration database engine designed to monitor, capture and manage
medical information at the point of care.
HALIS, based in Atlanta, Georgia, supplies information technology
and services focused on the healthcare industry. Utilizing advanced
health care models and information technology, HALIS has developed the
HALIS HES software utilizing the MERAD Technology, a single system
which integrates all of the major functions needed by clinics,
hospitals, healthcare practices, payors, long-term care facilities,
laboratories, pharmacies and home healthcare facilities. As a result
of the Company's acquisition of PHE, the Company now owns
approximately 19% of HALIS' common stock making it the largest single
shareholder of HALIS.
-7-<PAGE>
On July 14, 1998, the Company entered into a letter of intent
(the "1998 Letter of Intent") with HALIS to merge the two companies.
However as a result of the volatility of the stock price of the HALIS
shares, the consummation of the merger is presently uncertain.
Pursuant to the 1998 Letter of Intent, the Company agreed to loan
HALIS up to a total of $250,000 pursuant to a 6% debenture maturing in
February 2000 (see Exhibit 10.8). As of September 30, 1998, the
Company has advanced $150,000 to HALIS under the debenture.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FINANCIAL CONDITION
During the second half of fiscal 1998, the management of the
Company determined that the software information technology (IT)
business offered significantly greater opportunities for the Company
than did its existing medical products business. Accordingly, the
Company's focus during fiscal 1998 was increasingly on the development
of its IT business. In an effort to gain direct control over its
efforts to develop the IT business, the Company acquired PHE on
October 1, 1998. As a result of the PHE acquisition, the Company
obtained ownership of the MERAD Technology and increased its ownership
of HALIS common stock to approximately 19% of HALIS' outstanding
shares of common stock.
During fiscal 1999, the Company intends to continue to emphasize
the IT business and expects to grow this business through a
combination of licensing partners, selected strategic acquisitions and
internal sales of its software and services. In this connection, the
Company expects to continue to expand its collaborative efforts with
HALIS and to expand its efforts to market the HALIS HES software to
the Company's customer base. The Company also intends to explore the
possibility of developing information systems utilizing the MERAD
Technology for other information intensive industries such as
financial services, insurance and real estate, and is in the process
of utilizing the MERAD Technology to build a general business
application.
Due to the recent change in the focus of the Company's core
business, the past operating results may not be necessarily indicative
of future operating results for, or future financial condition of, the
Company on a going forward basis. Management believes that with the
new focus of the Company and the strategic plans it is putting into
place, operating margins of the Company will begin to improve.
The Company has incurred significant operating losses during the
past several years and at September 30, 1998 had a retained earnings
deficit of $18,921,934. The Company will require additional debt or
equity capital to sustain operations and to continue its business
development efforts as it refocuses its medical products business and
steps up efforts to sell the HALIS HES software. Additionally, as a
result of its acquisition of PHE, the Company will start to collect
royalties from HALIS equal to 10% of any revenues generated by HALIS
from products utilizing the MERAD Technology. While the Company is
-8-<PAGE>
taking steps to improve its financial condtion, shareholders should
note that the report of the Company's independent public accountants
for the years ended June 30, 1998 and 1997, contained a paragraph
noting substantial doubt regarding the Company's ability to continue
as a going concern.
Total assets at September 30, 1998 were $1,969,939, a decrease of
$499,057 from total assets of $2,468,996 at June 30, 1998. This
difference is the net effect primarily consisting of a decrease in
cash of approximately $760,000 and an increase in other assets of
approximately $150,000 and marketable securities of approximately
$112,000. The other assets increase represents a use of cash relating
to loans made to HALIS during the quarter. The marketable securities
increase relates to the new HALIS common stock acquired during the
latest exchange of shares with the shareholders of HALIS. The
remaining decrease in cash assets is attributable to working capital
needs that were not offset by sufficient new revenues.
Total liabilities at September 30, 1998 were $1,512,023, a
decrease of approximately $263,000 from total liabilities of
$1,774,978 at June 30, 1998. This difference is primarily due to the
payment of $50,000 on the Company's debentures and the payment of
payables and accrued expenses.
Stockholders' equity decreased by $236,102 from June 30, 1998 to
September 30, 1998, due to a net loss of approximately $684,000 during
the quarter, which was primarily offset by approximately $448,000
attributable to the effect of an increase in the number of shares
outstanding by 488,400 (the shares issued in the stock exchange with
HALIS' shareholders).
RESULTS OF OPERATIONS
Revenues for the three-month period ending September 30, 1998
were almost identical to the comparable three-month period for the
prior year. However, a review of the make-up of these revenues
indicates a shift of the Company's revenues from its Pacer product to
its MVL product and a movement away from revenues generated from a
former subsidiary based in the United Kingdom (which was sold last
fiscal year). The Company had only nominal revenues from the Pacer
product during the current quarter because a previously announced
upgrade of the product has not occurred.
Cost of goods sold decreased by approximately $81,000 for the
three-month period ended September 30, 1998 compared to the comparable
three-month period of the prior year. This represents a shift in
revenues during the quarter to the Company's MVL product that has a
higher profit margin than the Pacer product with a low margin, which
accounted for a more significant portion of the sales generated during
the three-month period in the prior year. Further, costs were reduced
as wages, facility allocation and inventory obsolescence have been
reduced during the current period as a result of the sale of the
United Kingdom subsidiary.
Total operating costs decreased by approximately $120,000 for the
three-month period ending September 30, 1998 compared to the
-9-
<PAGE>
comparable period of the prior year, and was primarily reflected in
the decrease in selling, general and administrative expenses resulting
from the downsizing of the Company from the previous year.
The net loss for the quarter was approximately $684,000, an
increase of approximately $134,000 over the comparable period of the
prior year. The net effect of the items represented above was a
decrease in the loss from operations by approximately $200,000 over
the comparable period of the prior year. However, The remaining
difference of approximately $336,000 was attributable to the recording
of an unrealized loss on the HALIS shares of common stock held by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had approximately $310,000 in
cash and accounts receivable, a decrease of approximately $729,000
from June 30, 1998. Cash reserves for the Company continue to be
inadequate. The Company continues to monitor its cash situation very
closely. While the downsizing of the Company has reduced its cash
requirements, if the Company is unable to increase revenues or contain
costs further, the Company may not be able to continue to generate
sufficient cash flow from its operations to meet its obligations
without seeking debt financing or additional capital.
The Company has a significant investment in HALIS and considers
its investment in HALIS to be a long-term investment. However, 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 8,939,010 shares of HALIS common stock
owned by the Company represents approximately 19% of the total
outstanding shares of HALIS common stock, due to the fact that the
Company may be considered an affiliate of HALIS, the Company's ability
to sell its HALIS shares could be adversely affected by the
requirement of Rule 144 promulgated by the Securities and Exchange
Commission, which could limit the number of HALIS shares that could be
sold in any three-month period. 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.
YEAR 2000
Software applications that use only two digits to identify a year
in the date field may cause fatal errors in the processing of data
(the "Year 2000 Concern"). The Company acknowledges that the failure
of its software to recognize the proper date codes could cause
substantial harm to the Company and its customers. However, the HALIS
HES software developed by HALIS and being marketed by the Company was
developed with the Year 2000 Concern in mind and has been designed to
be Year 2000 compliant. This means that HALIS has indicated, and the
Company believes, that the HALIS HES software being marketed to
customers will accept and recognize date codes for the Year 2000 and
beyond, and process that information recognizing the correct year in
the date field. Further, the MERAD Technology was also designed to be
-10-<PAGE>
Year 2000 compliant. The Company does not believe that the failure of
any of the software that it utilizes in its operations from
third-party vendors to be Year 2000 compliant will have a material
effect on the Company. Nonetheless, the Company will be undertaking a
review of its business systems to make a determination whether this
belief is sound and justified and will query those vendors whose
systems the Company employs to determine their Year 2000 readiness.
The Company believes that even if the software it utilizes from
vendors is not Year 2000 compliant, there are sufficient alternatives
available that the Company can resolve any issues by the fourth
quarter of fiscal 1999 without incurring any material amounts to
resolve any Year 2000 Concerns.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended,
and is subject to the safe harbors created by those sections. These
forward-looking statements are subject to significant risks and
uncertainties, including those identified in the section of this Form
10-QSB entitled "Factors That May Affect Future Operating Results,"
which may cause actual results to differ materially from those
discussed in such forward-looking statements. The forward-looking
statements within this Form 10-QSB are identified by words such as
"believes," "anticipates," "expects," "intends," "may," "will" and
other similar expressions. However, these words are not the exclusive
means of identifying such statements. In addition, any statements
which refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The
Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of
this Form 10-QSB with the Securities and Exchange Commission ("SEC").
Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's
other reports filed with the SEC that attempt to advise interested
parties of the risks and factors that may affect the Company's
business.
RECENT OPERATING LOSSES. The Company has incurred losses from
operations in each of its last five fiscal years. There can be no
assurance that the Company will be able to operate at a profit in the
future. The Company may not be able to finance current working
capital requirements from operations.
NEED FOR ADDITIONAL FINANCING. The Company estimates that it
needs approximately $600,000 of additional debt or equity capital to
complete development and introduction of its new information software
technology and to sustain its operations during the next twelve
months. In addition, the Company will need to obtain approximately
$530,000 of additional capital to pay its outstanding Secured
Convertible Debentures, which are past due. There can be no assurance
that the Company will be able to obtain such financing, or if
obtained, that it will be sufficient or on terms and conditions
-11-<PAGE>
acceptable to the Company. If such funds are obtained through the
issuance of additional equity securities of the Company, there can be
no assurance that such shares will be issued at prices or on terms
equal to or greater than the offering price or terms of this offering.
Any such future equity financing could be dilutive to shareholders of
the Company.
UNCERTAINTY OF MARKET ACCEPTANCE; RELIANCE ON A LIMITED NUMBER OF
PRODUCTS. The Company's new software information technology is under
development and there can be no assurance that this product will be
successfully developed and introduced to the marketplace. Achieving
market acceptance for the Company's products will require substantial
marketing efforts and expenditures to inform potential customers of
the distinctive characteristics and benefits of these products. Since
the Company has limited financial and other resources to undertake
extensive independent marketing activities, there can be no assurance
that the Company will be able to market its products successfully.
TECHNOLOGICAL CHANGE; PROPRIETARY TECHNOLOGY. Future advances in
the healthcare information systems industry could lead to new
technologies, products or services that are competitive with the
products and services offered by the Company. The Company' success
will depend, in part, on its ability to be responsive to technological
developments and challenges. Such technological advances could also
lower the cost of such products and services or otherwise result in
competitive pricing pressures, which could have an adverse effect on
the Company. To remain competitive in the evolving healthcare
information systems marketplace; the Company must develop new products
on a timely basis. The failure to develop competitive products or to
introduce new products on a timely basis could have an adverse effect
on the Company's future financial performance.
PROTECTION OF PROPRIETARY INFORMATION. The Company does not have
any patents or registered copyrights and does not anticipate obtaining
any patents or registered copyrights in the near future. The Company
treats its software and related technical data as confidential and
relies on internal nondisclosure safeguards, including confidentiality
agreements with employees, and on laws protecting trade secrets, to
protect what it regards as proprietary information. Competitors and
customers may nevertheless be able to copy certain functional aspects
of the Company's products.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the
Company's common stock may be subject to significant fluctuations in
response to the Company's operating results and other factors. In
addition, the stock market has from time to time experienced extreme
price and volume fluctuations, particularly in the high technology
sector, which have often been unrelated to the operating performance
of particular companies. Such fluctuations and factors such as
announcements of technological innovations or new products by the
Company or its competitors or third parties, as well as market
conditions in the computer software or hardware industries and
healthcare reform measures, may have a significant effect on the
market price of the Company's common stock.
-12-<PAGE>
FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company's future
product sales are expected to be derived primarily from the sale of
software systems and related services in the healthcare industry, the
market for which is still developing. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays
in the closing of sales near the end of the quarter could cause
quarterly revenues and, to a greater degree, operating and net income
to fall substantially short of anticipated levels. The Company's
total revenues and net income levels could also be adversely affected
by cancellations or delays of orders, interruptions or delays in the
supply of key components, changes in customer base or product mix,
seasonal patterns of capital spending by customers, delays in purchase
decisions due to new product announcements by the Company or its
competitors, increased competition and reductions in average selling
prices.
LIMITATIONS ON BROKER/DEALER SALES OF COMPANY COMMON STOCK;
APPLICABILITY OF PENNY STOCK RULES. The Company's common stock is
currently traded on the Nasdaq Small Cap Market. To remain listed on
the Nasdaq Small Cap Market, the Company must, among other things,
maintain a minimum tangible net worth of $2 million and a minimum bid
price of $1.00 per share. As of the date of this Memorandum, the
Company's tangible net worth was in excess of $2 million, however the
bid price for its stock was less than $1.00 per share. There can be
no assurance that the Company's revised business strategy will be
successful and that its shares of common stock will continue to be
listed on the Nasdaq Small Cap Market. In the event that the
Company's common stock was delisted from the Nasdaq Small Cap Market,
the application of the "Penny Stock Rules" under the Securities and
Exchange Act of 1934, as amended, would make it more difficult for
broker/dealers to sell the Company's common stock and purchasers of
the Shares offered hereby may have difficulty in selling their Shares
in the future in the secondary trading market.
CONTROL BY PAUL W. HARRISON. Paul Harrison, the Chairman of the
Board of Directors of the Company, exercises effective control over
the Company and beneficially owns approximately 2.7% of the Company's
common stock and approximately 37% of the Series P Preferred Stock.
Mr. Harrison is also critical to the development of the HALIS HES
software owned by HALIS and is the creator of the MERAD Technology.
As a result of such concentration of ownership and importance to the
Company, Mr. Harrison has the ability to exert significant influence
on the policies and affairs of the Company and corporate actions
requiring shareholder approval, including the election of the members
of the Board of Directors.
COMPETITION. There are many companies that produce equipment
which competes with the Company's current and proposed products. Most
of the Company's competitors have substantially greater financial and
marketing resources than the Company. 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
-13-<PAGE>
increase sales and market share. Competition could require that the
Company commit significantly greater resources to the introduction of
its products than would otherwise be required.
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to previously executed agreements, during the three-
month period ended September 30, 1998, the Company completed a
stock exchange with PHE (a shareholder of HALIS) whereby the Company
issued 488,400 shares of common stock to PHE in exchange for 1,400,000
shares of HALIS common stock. The Company plans to hold the shares of
HALIS stock indefinitely. On October 1, 1998, the Company completed
the acquisition of PHE. The Shareholders of PHE received 334,443
shares of the Company's Series P Preferred Stock, stated value $10.00
per share, and other consideration in the merger. PHE was merged into
MERAD Software, Inc., a Nevada corporation, and a wholly-owned
subsidiary of the Company. At the time of the merger, PHE held
6,177,010 shares of HALIS common stock. 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 March 1, 1998, $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 no further extension of the maturity date was obtained by
the Company. During the three-month period ended September 30, 1998,
$50,000 in fair value of the debentures were paid to the holders
thereof. As of September 30, 1998, $530,000 of the debentures remain
outstanding and due. The debentures are convertible by the holders
thereof into shares of common stock of the Company at the rate of $70
of the outstanding debentures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with or incorporated
by reference into this report:
3.1 Articles of Incorporation, as amended, of the Company <F1>
3.2 Bylaws, as amended, of the Company <F2>
4.1 Specimen form of the Company's Common Stock certificate
<F2>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 <F3>
4.3 Form of Incentive Stock Option Agreement <F3>
4.4 Form of Non-statutory Stock Option Agreement <F3>
4.5 HealthWatch, Inc. Stock Option Plan of 1993 <F4>
4.6 HealthWatch, Inc. Stock Option Plan of 1995 <F5>
-14-<PAGE>
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan
<F5>
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) <F6>
4.9 Subscription and Purchase Agreement between HealthWatch,
Inc. and HALIS, Inc. <F7>
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock
of HealthWatch, Inc. <F10>
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch,
Inc. <F10>
10.1 Business Collaboration Agreement dated as of October 10,
1997 between the Company and HALIS, Inc. <F8>.
10.2 License and Software Development Agreement dated as of
October 10, 1997 between the Company and MERAD Corporation
<F8>.
10.3 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison
<F8>.
10.4 Consulting Agreement dated as of October 10, 1997 between
the Company and Larry Fisher <F8>.
10.5 Agreement and Plan of Merger dated as of September 30, 1998
among HealthWatch, Inc., MERAD Software, Inc. and Paul
Harrison Enterprises, Inc. <F9>.
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc.
dated July 14, 1998 <F10>
27.1 Financial Data Schedule (for SEC use only).
99.1 Proforma Condensed Consolidated Balance Sheet and Statement
of Operations - filed herewith
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter
ended September 30, 1998.
None
- ---------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, File No. 0-11476).
<F2> Incorporated herein by reference to Registration Statement, Form
S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement, Form
S-2 (File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1994 (File No.
0-11476).
<F5> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1996 (File No.
0-11476).
-15-<PAGE>
<F6> Incorporated herein by reference to Registration Statement, Form
SB-2 (File No. 33-73462).
<F7> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1997 (File No.
0-11476).
<F8> Incorporated herein by reference to the Company's Quarterly
Report, Form 10-QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's Current
Report, Form 8-K, dated October 1, 1998.
<F10> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1998 (File No.
0-11476).
</FN>
-16-<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed by the undersigned, thereunto duly authorized.
Date: December 1, 1998
HealthWatch, Inc.
By /s/ Paul W. Harrison
---------------------------------
Paul W. Harrison
(President and Chief Executive
Officer)
By /s/ Annette Agner
---------------------------------
Annette Agner
(Chief Accounting Officer)
-17-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- --------- -----------
3.1 Articles of Incorporation, as amended, of the Company <F1>
3.2 Bylaws, as amended, of the Company <F2>
4.1 Specimen form of the Company's Common Stock certificate <F2>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 <F3>
4.3 Form of Incentive Stock Option Agreement <F3>
4.4 Form of Non-statutory Stock Option Agreement <F3>
4.5 HealthWatch, Inc. Stock Option Plan of 1993 <F4>
4.6 HealthWatch, Inc. Stock Option Plan of 1995 <F5>
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan
<F5>
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) <F6>
4.9 Subscription and Purchase Agreement between HealthWatch, Inc.
and HALIS, Inc. <F7>
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock of
HealthWatch, Inc. <F10>
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch,
Inc. <F10>
10.1 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. <F8>.
10.2 License and Software Development Agreement dated as of October
10, 1997 between the Company and MERAD Corporation <F8>.
10.3 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison
<F8>.
10.4 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher <F8>.
10.5 Agreement and Plan of Merger dated as of September 30, 1998
among HealthWatch, Inc., MERAD Software, Inc. and Paul
Harrison Enterprises, Inc. <F9>.
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc.
dated July 14, 1998 <F10>.
27.1 Financial Data Schedule (for SEC use only).
99.1 Proforma Condensed Consolidated Balance Sheet and Statement of
Operations - filed herewith
- ---------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, File No. 0-11476).
<F2> Incorporated herein by reference to Registration Statement, Form
S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement, Form
S-2 (File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1994 (File No.
0-11476).
<F5> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1996 (File No.
0-11476).
<F6> Incorporated herein by reference to Registration Statement, Form
SB-2 (File No. 33-73462).
<F7> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1997 (File No.
0-11476).
<F8> Incorporated herein by reference to the Company's Quarterly
Report, Form 10-QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's Current
Report, Form 8-K, dated October 1, 1998.
<F10> Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1998 (File No.
0-11476).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the financial
statements of HealthWatch, Inc. for the three-month period ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000725627
<NAME> HEALTHWATCH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 88,661
<SECURITIES> 430,872
<RECEIVABLES> 245,443
<ALLOWANCES> 23,675
<INVENTORY> 371,514
<CURRENT-ASSETS> 737,601
<PP&E> 633,979
<DEPRECIATION> 606,880
<TOTAL-ASSETS> 1,969,939
<CURRENT-LIABILITIES> 1,512,023
<BONDS> 530,000
0
11,450
<COMMON> 29,091
<OTHER-SE> 417,375
<TOTAL-LIABILITY-AND-EQUITY> 1,969,939
<SALES> 365,609
<TOTAL-REVENUES> 365,609
<CGS> 266,573
<TOTAL-COSTS> 266,573
<OTHER-EXPENSES> 783,574
<LOSS-PROVISION> 3,091
<INTEREST-EXPENSE> 16,596
<INCOME-PRETAX> (684,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (333,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (684,538)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
Summarized below is the unaudited condensed and proforma
consolidated balance sheet and statement of operations as of September
30, 1998 as if the acquisition of Paul Harrison Enterprises, Inc. had
taken place at June 30, 1998. It was assumed that the 334,443 of
preferred shares issued in connection with this acquisition were
outstanding at the beginning of the proforma period.
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Balance Sheet at September 30, 1998 (Unaudited)
----------------------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ----------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Current assets $ 737,601 $ 107,881 $ -- $ (70,000)<F4> $ 775,482
Marketable equity (710,720)<F3>
securities - related party 430,872 510,400 -- 1,134,732 <F2> 1,365,284
Technology and other
intangible assets 801,466 237,014 -- 914,612 <F2> 1,953,092
Investment in subsidiary -- -- 2,560,000<F1> (2,560,000)<F2> --
----------- ----------- ----------- ----------- -----------
Total assets $ 1,969,939 $ 855,295 $2,560,000 $(1,291,376) $ 4,093,858
=========== =========== =========== =========== ===========
Current liabilities $ 1,512,023 $ 441,277 -- $ (70,000)<F4> $ 1,883,300
Long-term debt -- -- -- -- --
(710,720)<F3>
Shareholders' equity 457,916 414,018 2,560,000<F1> (510,656)<F2> 2,210,558
----------- ----------- ----------- ----------- -----------
Total liabilities and
equity $ 1,969,939 $ 855,295 $2,560,000 $(1,291,376) $ 4,093,858
=========== =========== =========== =========== ===========
</TABLE>
- --------------
[FN]
<F1> To reflect the acquisition of Paul Harrison Enterprises, Inc. (PHE) on
HealthWatch, Inc. consolidated as if the acquisition had occurred on
June 30, 1998.
<F2> To record net assets purchased at fair market value and eliminate the
intercompany investment and PHE's equity.
<F3> To retire HealthWatch, Inc.'s common stock purchased as art of the
acquisition of PHE.
<F4> To eliminate intercompany balances as of September 30, 1998.
</FN>
-1-
<PAGE>
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations
for the Three-Month Period Ended September 30, 1998 (Unaudited)
---------------------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ----------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Sales $ 365,609 $ -- $ -- $ -- $ 365,609
Cost of sales 266,573 -- -- -- 266,573
----------- ----------- ----------- ----------- -----------
Gross profit 99,036 -- -- -- 99,036
Operating expenses 433,022 43,937 -- 23,452<F1> 500,411
----------- ----------- ----------- ----------- -----------
Income (Loss) from operations (333,986) (43,937) -- (23,452) (401,375)
Other income (expense) (350,552) 117,024 -- -- (233,528)
----------- ----------- ----------- ----------- -----------
Net Income (loss) $ (684,538) $ 73,087 $ -- $ (23,452) $ (634,903)
=========== =========== =========== =========== ===========
Net loss per share $ (.25) $ (.23)
=========== ===========
Weighted average
number of shares
outstanding 2,783,121 2,783,121
=========== ===========
</TABLE>
- ----------------
[FN]
(F1> To record amortization of technology and other intangible assets.
</FN>
-2-
