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
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September 30, 1999 0-11476
HEALTHWATCH, INC.
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Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9040 Roswell Road, Suite 470, Atlanta, GA 30350
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(Address of Principal Executive Offices)
(770) 641-5555
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(Issuer's Telephone Number, Including Area Code)
N/A
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(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
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Number of registrant's common shares outstanding at October 31, 1999:
5,777,230
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Transitional Small Business Disclosure Format (check one)
Yes No X
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HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1999
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
Current Assets
Cash $ 20,598
Accounts Receivable, net of allowance for
doubtful accounts of $19,911 30,010
Inventory 81,225
Receivables - related party 55,022
Other Current Assets 3,733
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Total current assets 190,589
Marketable equity securities - related party 1,673,569
Property and equipment, net 18,345
Intangible assets, net 1,289,077
Other assets 30,610
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Total Assets $ 3,202,189
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 138,895
Accrued compensation and payroll taxes 181,476
Other accrued expenses - related parties 236,342
Other accrued expenses - unrelated parties 515,350
Deferred revenue 32,919
Current portion of debentures payable
- related parties 15,000
Current portion of debentures payable
- unrelated parties 465,000
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Total liabilities 1,584,983
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Shareholders' Equity
Cumulative preferred stock, 5,000,000 shares authorized,
par value $.01 per share;
- 6% Series A, $1.00 stated value, 568,000
shares issued and outstanding 5,680
- Series P, $10.00 stated value, 334,432 shares
issued and outstanding 3,344
Common stock, $.01 par value; 50,000,000 shares
authorized, 5,023,588 issued and outstanding 50,236
Additional paid-in capital 21,973,672
Accumulated deficit (20,415,725)
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Total shareholders' equity 1,617,207
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Total liabilities and shareholders' equity $ 3,202,189
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The accompanying notes are an integral part of these statements.
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HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Three Months Ended September 30,
1999 1998
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Product sales $ 151,703 $ 365,609
Product cost of sales 82,551 266,573
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Gross profit 69,152 99,036
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Operating costs and expenses:
Selling, general and administrative 263,590 329,806
Depreciation and amortization 85,210 66,996
Research and development 37,190 36,220
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Total operating costs and expenses 385,990 433,022
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Loss from continuing operations (316,838) (333,986)
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Other income (expense):
Unrealized loss on marketable equity
securities - related party -- (336,272)
Equity in earnings of subsidiary (96,102) --
Interest expense (16,458) (16,596)
Miscellaneous -- 2,316
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Total other income (expense) (112,560) (350,552)
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Net loss $ (429,398) $ (684,538)
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Net loss per share $ (0.10) $ (0.25)
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Weighted average number of shares
outstanding 4,179,956 2,783,121
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The accompanying notes are an integral part of these statements.
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STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (429,398) $ (684,538)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 85,210 66,996
Unrealized loss on marketable equity securities - 336,272
Provision for bad debt (6,399) -
Equity in earnings of subsidiary 96,102 -
Issuance of stock for services 50,002 -
Decrease (increase) in assets:
Accounts receivable 74,297 (37,353)
Inventory 2,639 759
Other current assets 6,198 (33,945)
Other assets 3,400 (151,275)
Increase (decrease) in liabilities:
Accounts payable 2,172 (46,576)
Accrued expenses - related parties 17,992 (85,016)
Accrued expenses - unrelated parties (53,094) (141,057)
Deferred revenue 4,389 9,744
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Net cash used in operating activities (146,490) (766,039)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment - (1,590)
Decrease in note receivable - related party 95,342 -
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Net cash provided by (used in) investing activities 95,342 (1,590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) of issuance of common stock 50,000 -
Effect of exchange rate changes on cash - -
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Net cash provided by financing activities 50,000 -
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Increase (decrease) in cash (1,148) (767,629)
Cash - beginning of period 21,746 854,290
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Cash - end of period $ 20,598 $ 86,661
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The accompanying notes are an integral part of these statements.
</TABLE>
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HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of September 30, 1999, and
it's results of operations and cash flows for the three months and nine months
then ended have been included. However, operating results for the interim
periods noted are not necessarily indicative of the results that may be expected
for the year ending June 30, 2000. 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, 1999.
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 has refocused the Company into an information technology company. The
Company, now d/b/a MERAD Technologies Corporation, has changed 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.
On October 1, 1998, as part of the transformation, the Company acquired Paul
Harrison Enterprises, Inc. ("PHE"). PHE owned the MERAD technology, a
sophisticated virtual 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 was to be used to expand
the Company's product offerings to include products and services specially
focused on monitoring, capturing and managing medical information at the point
of care. Due to its limited resources, the Company has not proceeded to develop
software that would be used in conjunction with its medical devices. In light of
the Company's refined emphasis on utilizing the newly acquired MERAD Technology
to develop expanded applications in the healthcare and other industries, the
Company has decided not to expand the Company's medical device business. The
acquisition of PHE, which is a significant shareholder of HALIS, Inc. ("HALIS"),
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also increased the Company's ownership of the common stock of HALIS, a
healthcare IT company, at that time to approximately 19% of HALIS' outstanding
shares of common stock. On January 29, 1999, the Company acquired an additional
1,824,645 shares of HALIS' common stock by converting $157,741 owed by HALIS to
the Company pursuant to a debenture, bringing its interest in the HALIS common
stock to approximately 21.9%, and now accounts for its investment in HALIS on
the equity method of accounting.
In the PHE acquisition, the Shareholders of PHE received 334,432 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. Paul W. Harrison, Chairman, President and Chief Executive Officer
of the Company, received 125,088 of the Series P Preferred Stock and Brian L.
Schleicher, the former Interim Chief Financial Officer and Chief Administrative
Officer of the Company received 7,812 of the Series P Preferred Stock. All of
the Preferred Stock is non-voting. The Series P Preferred Stock has a cumulative
dividend feature of 12%, which adjusts to a maximum of 24% if the shares are not
granted the right to convert by certain target dates. As of February 1, 1999,
the Series P Preferred Stock accrued a dividend at the rate of 18% per annum,
which was increased to 24% on August 1, 1999. See designation of the Series P
Preferred Stock incorporated by reference from the Company's annual report on
Form 10-KSB for the year ended June 30, 1998. In addition to the issuance of the
Series P Preferred Stock, the PHE shareholders shall 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 certain PHE shareholders received
options for approximately 625,000 shares of the Company's common stock with an
exercise price of $.96 per share in exchange for previously outstanding options
of PHE. Of the outstanding options issued in the PHE acquisition, 583,333 were
issued to Paul W. Harrison. During fiscal 1999, and the three-month period ended
September 30, 1999, the PHE Shareholders, as a group, earned $92,772 and $,051,
respectively, as additional consideration, 50% of which will be paid in cash and
the balance to be paid in common stock of the Company.
During fiscal 2000, the Company intends to continue to emphasize the IT business
and provide IT services and support to its customers and to HALIS, its
affiliate. Additionally, the Company is in the process of identifying strategic
acquisition candidates in the systems integration and support area that will
enhance the Company's ability to provide these services. However, due to its
depressed stock price, the Company has found it difficult to proceed with any
acquisitions. 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 and its derivatives to the Company's
customer base (see discussion below). The HALIS HES software, which is owned by
HALIS, was developed utilizing the MERAD Technology. As a result of acquiring
the MERAD Technology in the PHE acquisition, the Company earns a royalty equal
to 10% of the gross revenues generated by HALIS on sales of the HALIS HES and
any derivative products or services associated therewith. The Company earned
$8,102 in royalties during the three-month period ended September 30, 1999. The
Company also will explore the possibility of developing its own information
systems utilizing the MERAD Technology for other information-intensive
industries such as financial services, insurance and real estate; however, due
to the limited financial resources of the Company, expansion into other lines of
business is uncertain. 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.
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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 and warrants.
INVENTORY
Inventory consisted of the following at September 30, 1999 and June 30, 1999:
9/30/99 6/30/99
Raw materials $ 81,225 $ 59,000
Work in process -- --
Finished goods -- 24,864
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$ 81,225 $ 83,864
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 as to the
payment of principal and past due interest. 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
fiscal 1999, the Company repaid $100,000 of the principal amount of the
debentures due and owing. During the three-month period ended September 30,
1999, the Company did not pay any principal or interest on the debentures. As of
September 30, 1999, $142,524 in accrued but unpaid interest is outstanding on
the debentures. The Company will attempt to reach an agreement with the holders
of the debentures prior to the end of the current fiscal year in an effort to
resolve the amounts outstanding or otherwise bring the debentures out of their
default status.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES
Pursuant to agreements entered into during fiscal 1998, the Company issued to
PHE an aggregate of 488,400 shares of common stock during the three-month period
ended September 30, 1998 (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 December 31, 1998, the Company issued the 334,432 shares of Series
P Preferred Stock, and retired 888,400 shares of common stock, (which was all of
the Company's common stock owned by PHE at the date of acquisition). All shares
were retired at the price of $.80/share, which represented the discounted
approximate trading price at the date of acquisition. Management has determined
the fair market value of the shares of Series P Preferred Stock issued to be
$2,560,000 based on the approximate trading price for the Company's common stock
(into which they would be converted if approved by the Company's shareholders)
at the date of the transaction, discounted to factor in the reduction in value
stemming from the non-marketable restrictions of the preferred shares issued.
During the three-month period ended September 30, 1999, the PHE shareholders
earned $8,102 of additional consideration based on software sales made during
the quarter utilizing the MERAD Technology. The Company accounted for the
acquisition under the purchase method of accounting whereby the assets and
liabilities of PHE were recorded at their fair market value as of the date of
the acquisition. As a result, the HALIS stock owned by PHE was stepped up to its
fair value of $868,488. The $900,164 excess purchase price over fair market
value of the net
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tangible assets acquired has been identified as technology acquired (the MERAD
Technology) and is being amortized over a ten-year period.
During fiscal 1999, the Company received 1,824,645 of common stock of HALIS in
exchange for a 6% convertible debenture and subsequent advances totaling
$157,741. The conversion brought the Company's total investment in HALIS to
21.9% of HALIS outstanding common stock. As a result of this stock acquisition,
the Company converted its accounting for this long-term investment to the equity
method. Under generally accepted accounting principles, the change is considered
a change in accounting principle and requires the Company to recalculate and
restate the carrying value of its investment as if the investment was accounted
for under the equity method as of the date of its initial acquisition.
INVESTMENT IN HALIS COMMON STOCK; HALIS BUSINESS COLLABORATION
As of September 30, 1999, the Company held 10,763,655 shares of the common stock
of HALIS, representing approximately 21.0% of the total outstanding shares. The
Company does not hold the HALIS shares for trading purposes, but rather holds
them for long-term investment purposes. During fiscal 1999, the Company acquired
an additional 1,824,645 shares of HALIS common stock increasing its ownership
interest in HALIS to its present holdings. Consequently, until this additional
acquisition, the Company reflected its interest in HALIS at cost but now is
required by generally accepted accounting principles to account for its
investment in HALIS on the equity method of accounting, thereby reflecting its
portion of HALIS' earnings or losses in the Company's income statement with a
corollary adjustment to its investment account. Additionally, the Company was
required to recalculate and restate the carrying value of its investment as if
the investment was accounted for under the equity method as of the date of its
initial acquisition. The Company's change in method to the equity method is
considered a change in accounting principle. The cumulative effect of changing
to the new accounting principle on the amount of retained earnings at the
beginning of the fiscal year is required to be reported in net income of the
period of change. Due to the Company's determination that a decline in market
value at June 30, 1998 was other than temporary, and the related unrealized loss
of $1,824,605 was included in net income for the year ended June 30, 1998, the
Company did not restate the value of the shares held at June 30, 1998 above the
fair market value at that date of $318,708. Hence, there is no cumulative effect
of an accounting change reported in the Company's statement of operations.
Subsequent increases in the carrying value of the investment related to
additional shares being acquired in October 1998 and January 1999 as disclosed
above. Other increases and decreases to the investment relate to the Company
recording its pro-rata share of HALIS net income or loss for each of the
quarters ended September 1998, December 1998 and March 1999. The Company's share
of HALIS' net loss for the three-month period ended September 30, 1999 was
($96,102).
Due to the accounting change taking place in the third quarter of fiscal 1999,
the Company was required to restate its operating results for each of the
interim periods since the close of its prior fiscal year. The change was to
decrease the net loss for the quarter ended September 30, 1998 by $319,287,
decrease the net loss for the quarter ended December 31, 1998 by $112,898, and
decrease the net loss for the quarter ended March 31, 1999 by $7,808. The change
in net income at the time of the change to the equity method was an increase of
$432,185. The increase is the result of recording the Company's share of HALIS'
net income of $103,721 and the reversal of a $336,272 write down of the
investment to fair market value during the quarter ended September 30, 1998.
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The carrying value of the investment at September 30, 1999 is $1,673,569. Based
on the closing bid price of the HALIS shares on September 30, 1999, the shares
had a fair market value of approximately $1,345,457.
The calculated value exceeds the Company's carrying value by $328,112. In
management's opinion, this decline is temporary in nature, and therefore, no
adjustment is necessary to the carrying value as a result of the use of the
equity method of accounting. Additionally the carrying value of the HALIS
investment under the equity method exceeded the 21% equity in the underlying
assets of HALIS at the date of conversion to the equity method by $1,845,329.
This excess is being amortized on the straightline method over 10 years, or
$184,533 per year.
During fiscal 1997, the Company determined to expand its business to include
healthcare 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 marketing the HALIS HES software
to its client base of approximately 1,200 customers that have previously bought
the Company's diagnostic equipment. There are no assurances that the Company
will be successful in its attempts to sell the HALIS HES software to its
customer base.
HALIS, based in Atlanta, Georgia, supplies information technology and services
focused on the healthcare industry. Utilizing advanced healthcare 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.
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 10.6). As of December 31, 1998,
the Company had advanced $100,000 to HALIS under the debenture. Subsequently,
the Company advanced an additional $57,741 to HALIS. On January 29, 1999 the
Company exercised its conversion rights in the debenture, and converted the
outstanding amounts due to the Company into 1,824,645 shares of HALIS common
stock.
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 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. 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
without incurring any material amounts to resolve any Year 2000 Concerns.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During fiscal 2000, the Company continued efforts to develop proprietary
technology utilizing MERAD and to market as a reseller HALIS' healthcare
enterprise system to the Company's customers. In this connection, the Company
expects to continue to expand its collaborative efforts with HALIS and to expand
its efforts to market the HALIS healthcare enterprise system 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.
The Company has incurred significant operating losses during the past several
years and at June 30, 1999 had an accumulated deficit of $19,986,327. The
Company will require additional debt or equity capital to sustain operations and
to continue its business development efforts. The report of the Company's
independent public accountants for the years ended June 30, 1999 and 1998,
contained a paragraph noting substantial doubt regarding the Company's ability
to continue as a going concern.
Total assets at September 30, 1999 were $3,202,189, representing a decrease of
$345,783 from June 30, 1999. The amortization of intangible assets and the
decline in the equity method investment in HALIS account for $68,605 and
$96,102, respectively of this decline. Also, amounts due from HALIS decreased by
$95,342 with repayments by HALIS to the Company.
Current liabilities decreased by $58,886 from $1,643,869 at June 30, 1999 to
$1,584,983 at September 30, 1999. The decrease is primarily attributable to the
issuance of common stock for other accrued expenses - services of $42,500. The
debentures payable balance at September 30, 1999 remained unchanged from the
June 30, 1999 balance, and additional interest accrued on the debentures during
the period of $12,000 which is included in other accrued expenses.
Shareholders' equity decreased from $1,904,103 at June 30, 1999 to $1,617,207 at
September 30, 1999, a decrease of $286,896. The decrease is attributable to a
net loss for the period of $429,397. This net loss is offset by the issuance of
100,000 shares of common stock valued at $42,500 for prior services, the
issuance of 89,468 shares of common stock valued at $50,000 current period
services and proceeds of $50,000 from the issuance of 142,858 shares of common
stock.
RESULTS OF OPERATIONS
Revenues declined by $213,906, or 58.5%, during the three-month period ended
September 30, 1999 compared to the similar period in 1998. The Company's
continued shift from a products driven supplier company to a software
information technology company largely represents the revenues decline. The
Company recognized $8,100 in royalties from HALIS with respect to its 10%
royalty from HALIS' gross revenues associated with its Healthcare Enterprise
System, and these royalties are included in product sales.
Gross profit was 45.6% for the three-month period ended September 30, 1999 as
compared to 27.1% for the same 1998 period. This increase in gross profit is due
primarily to reduced manufacturing overhead expenses and the mature nature of
the Company's remaining product lines supported.
Selling, general and administrative expenses as a percent of sales were 173.8%
for the three-month period ended September 30, 1999, compared with 90.2% for the
similar 1998 period. This increase was due primarily to lower sales level of
products. The selling, general and administrative expenses decreased by $66,216
for the three-month period ended September 30, 1999 from the comparable 1998
period due to the reduction in corporate overhead and salaries and related
benefits. Depreciation and amortization increased by $18,214 for the three-month
period ended September 30, 1999 as compared to the same 1998 period, resulting
from the additional amortization associated with the Company's fiscal 1999
acquisition of the MERAD technology and related current period amortization.
Research and development costs remained consistent for the three months ended
September 30, 1999 as compared with the same 1998 period. The Company needs to
raise additional sources of capital to expand its research and development
efforts with its recently acquired MERAD technology.
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During fiscal 1999, the Company changed its method of accounting for its
investment in HALIS to the equity method from the available-for-sale fair value
method because it acquired additional interests bringing its ownership interest
in HALIS to approximately 21%. For the three-month period ended September 30,
1999, the Company recognized a loss from its equity method interest in HALIS of
$96,102. For the same 1998 period, the Company determined a permanent decline in
its available-for-sale fair value investment in HALIS of $336,272.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $50,608 of cash and accounts receivable.
During the three-month period ended September 30, 1999, operating activities
consumed $146,490 of cash as compared to $766,039 for the same 1998 period. As
discussed in the previous section, the primary reason was the conversion of the
HALIS investment from available-for-sale to the equity method and issuance of
common stock for services. Due to the Company's operating losses, it has been
required to raise additional equity capital to fund its operations. Capital
expenditures during this period have been limited to routine capital purchases.
Since the beginning of fiscal 2000, the Company has raised $50,000 through the
sale of 142,858 shares of its common stock. During fiscal 2000, the Company's
preferred shareholders, Series A, converted 577,000 preferred shares into
1,405,585 shares of common stock in accordance to the preferred stock, Series A,
conversion feature.
The Company's 10% Convertible Secured Debentures in the principal amount of
$480,000 were due and payable on March 1, 1998. The Company believes it needs to
raise in excess of $1,000,000 of working capital in addition to that already
raised and committed in fiscal 2000 to sustain operations during the next twelve
months and to pay the Debentures.
The Company continues to monitor its cash situation very closely. Due to the
down-sizing of the Company and shift from a product supplier to a software
information technology company, its cash needs are not as acute as they were
during the prior year. However, the Company has been unsuccessful in expanding
its customer base and royalty stream from its recently acquired MERAD technology
during the current period. If the Company is unable to increase its customer
base and royalty stream from its MERAD technology during fiscal 2000, the
Company will not be able to continue to generate sufficient positive cash flow
to meet its obligations without seeking additional capital infusion.
The Company is considering additional private placements of its securities for
these requirements. There can be no assurance that the Company will be able to
raise additional debt or equity capital or, if able to raise additional capital,
the price at which such capital would be available.
The Company 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
10,763,655 shares of HALIS common stock owned by the Company represents
approximately 21% 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 Securities
and Exchange Commission which could limit the number of HALIS shares which could
be sold in any three-month period to approximately 536,000 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.
-11-
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three-month period ended September 30, 1999, the Company issued a
total of 1,405,581 shares of common stock upon conversion of 577,000 shares of
the Series A Preferred Stock. During the three-month period ended September 30,
1999, the Company issued 332,326 shares of common stock, 189,468 of which was in
lieu of services, and 142,858 in a private placement of securities. 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 the Company
obtained no further extension of the maturity date. During fiscal 1999, $100,000
in fair value of the debentures was paid to the holders thereof. As of September
30, 1999, $480,000 of the debentures remain outstanding and due, plus
approximately $_______ in accrued but unpaid interest. 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 1996 <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>
-12-
<PAGE>
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).
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during
the quarter ended September 30, 1999.
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 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 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).
-13-
<PAGE>
<F8> Incorporated herein by reference to the Company's Quarterly Report Form
10QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's 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>
-14-
<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, 1999 HealthWatch, Inc.
By: /s/ Paul W. Harrison
----------------------------------------
Paul W. Harrison
(Chairman, President and Chief Executive
Officer)
(Principal Financial Officer)
-15-
<PAGE>
EXHIBIT INDEX
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 1996 <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).
- ------------
[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 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 SB-2 (File No.
33-73462).
-16-
<PAGE>
<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
10QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's 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>
-17-
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,598
<SECURITIES> 1,673,569
<RECEIVABLES> 104,943
<ALLOWANCES> 19,911
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<CURRENT-ASSETS> 190,589
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0
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<OTHER-SE> 1,557,947
<TOTAL-LIABILITY-AND-EQUITY> 3,202,189
<SALES> 151,703
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