SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
JUNE 30, 1999 0-11476
HEALTHWATCH, INC. *
(Exact name of registrant 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) (Zip Code)
Registrant's telephone number, including area code:
(770) 641-5555
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [___].
Registrant's revenues for fiscal year ended June 30, 1999: $1,220,803.
Aggregate market value of voting stock held by non-affiliates of registrant
as of October 1, 1999: Approximately $2,038,210 based on 4,498,170 shares with
an average bid and ask price of $0.45312.
Number of shares outstanding as of October 1, 1999: 5,046,211 shares of
Common Stock, $.01 par value.
Documents incorporated by reference: None.
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* Registrant intends to ask stockholders at its next Annual Meeting of
Stockholders to approve a change in Registrant's name to MERAD Technologies
Corporation.
<PAGE>
PART I
Item 1. BUSINESS.
INTRODUCTION
HealthWatch, Inc., d/b/a MERAD Technologies Corporation, is still 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. The Company acquired Paul Harrison
Enterprises, Inc. ("PHE") on October 1, 1998. PHE owned the MERAD Technology, a
sophisticated software application utility. MERAD 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. See a description of MERAD below. The
acquisition of PHE also increased the Company's ownership of the common stock of
HALIS, Inc. ("HALIS"), a health care IT company, from approximately 5% to 18% of
HALIS' outstanding shares of common stock. Subsequent acquisitions of additional
HALIS stock has increased the Company's interest to slightly greater than 21% of
the outstanding shares thereby allowing the Company to account for HALIS using
the equity method of accounting.
Prior to the PHE acquisition, the Company was primarily in the medical
products business. Certain of the Company's products contained 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.
References herein to "HealthWatch" or the "Company" include
HealthWatch and its consolidated subsidiaries and their predecessors unless the
context indicates otherwise. HealthWatch was incorporated in the state of
Minnesota in 1983. Except for historical information contained in this report
and in the documents incorporated by reference, the matters discussed herein and
therein contain forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially from those suggested in the
forward-looking statements, including, without limitation, the effect of
economic conditions, product demand, competitive products and other risks
detailed herein and in the Company's other filings with the Securities and
Exchange Commission.
BACKGROUND
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 during FYE 1998, pursuant to
which the Company and HALIS agreed to share sales prospects and the Company was
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 healthcare
models and information technology, HALIS has developed the HALIS Healthcare
Enterprise System ("HES"), 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. See
Business of HALIS below.
In addition to the agreement with HALIS, the Company entered into an
agreement with Paul Harrison Enterprises, Inc., pursuant to which PHE's MERAD
subsidiary would develop proprietary software technology to be used by the
Company. At that time, Paul W. Harrison, Chairman of the Board, Chief Executive
<PAGE>
Officer and President of HALIS and Chief Executive Officer of PHE and Larry
Fisher, a Director and Executive Vice President, Chief Administrative Officer
and Secretary of HALIS, joined the Company's Board of Directors.
In connection with these transactions, PHE, Mr. Fisher and two
non-affiliated shareholders of HALIS exchanged 1,100,000 of their shares of
HALIS common stock for 880,000 shares of the Company's Common Stock and PHE was
granted an option to exchange an additional 400,000 shares of HALIS common stock
for an additional 320,000 shares of HealthWatch Common Stock, the exchange ratio
being based on the market value for each company's common stock at the time that
the transaction was negotiated, and HALIS invested $125,000 in the Company in
consideration for which HALIS acquired 83,334 shares of the Company's Common
Stock. In furtherance of the business collaboration with HALIS, the PHE option
was exercised by PHE and its assigns and PHE exchanged an additional 1,262,000
shares of HALIS common stock for 378,000 shares of HealthWatch Common Stock.
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 fiscal 1998
was increasingly on the development of its IT business. In an effort to gain
direct control over these efforts, the Company acquired PHE on October 1, 1998
through a merger of PHE into MERAD Software, Inc., a wholly owned subsidiary of
the Company.
At the time of the merger, PHE held 6,177,010 shares of common stock
in HALIS and owned the MERAD technology. As a result of its acquisition of PHE
and the MERAD technology, the Company has diverted its attention away from the
expansion of its medical device business, and has decided to use the newly
acquired MERAD technology to develop expanded applications in the healthcare and
other industries. Accordingly, the use of this technology to expand the
Company's medical device business is uncertain. As a result of the merger, the
Company increased its ownership interest in HALIS to 8,939,010 shares of HALIS'
common stock as of October 1, 1998, representing approximately 19% of HALIS'
outstanding shares. In January 1999, the Company converted outstanding debt owed
by HALIS to the Company into 1,824,645 additional shares of common stock of
HALIS, bringing the number of HALIS shares held by the Company to 10,763,655,
representing approximately 21% of HALIS' outstanding shares. The Company is now
the single largest shareholder of HALIS and due to the size of its holdings, now
accounts for its investment under the equity method of accounting (i.e., it
recognizes its proportionate amount of HALIS' income or loss each month).
During fiscal year ended June 30, 1999, the Company continued to
emphasize the IT business by acting as a reseller of the HALIS Enterprise
Systems while putting development of new products using the MERAD technology on
hold. However, as a result of its limited resources and a general reluctance on
the part of customers to accept new and innovative software technology due to
concerns surrounding the entering of the year 2000, the Company has not been
successful in integrating the HALIS products into its customer base. The Company
will continue its efforts to be a reseller of the HALIS software to the extent
possible and hopes to grow this business through a combination of licensing
partners (which may have the resources to assist in the distribution of the
HALIS products), selected strategic acquisitions (if possible the hope is to
identify system integration firms in need of software products to distribute)
and internal sales of its software and services to its existing customer base.
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. However, due to the limited
resources available to the Company, the Company does not expect to move forward
in this regard in the near term. In recognition of the 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.
MERAD/BUSINESS DEVELOPMENT STRATEGY
MERAD is an Internet software application utility that uses artificial
intelligence and a database approach to specify, store, process, and manage
software applications as flexible database programs rather than hard coded rigid
programming code. This improved approach allows programs to be compressed at up
to a 100:1 efficiency, which requires far less Internet bandwidth or computing
power to process the program instructions. In addition to the additional
<PAGE>
processing speed, a program utilizing the MERAD technology will be easier to
maintain and support because changes are made to a database table verses parsing
through millions of lines of rigid computer code. The Company believes that
MERAD's ability to efficiently replace applications program code with end-user
database applications represents a significant competitive advantage for the
Company's products. The HALIS Enterprise System was designed and build using the
MERAD technology.
The MERAD technology can potentially handle the 83 standard industry
classifications (SIC codes), by using its unique generic processing algorithms
to handle a significant portion of the software code which is common to many
information processing programs and by making rapid, low cost changes to
complete the balance of the coding required to meet a particular company's or an
industry's needs. The MERAD software utility utilizes an open systems approach
by incorporating industry standard technology tools, and can be run on the
Internet as well as on local networks or single computers. Utilizing the MERAD
technology, the Company can standardize and regularly update software
applications or industry specific information content. The Company expects to
also offer complementary technology to capture and integrate digital information
and provide IT services.
The Company's plan is to initially focus on three or four of the major
information intensive industries that have similar needs and SIC codes (e.g.
healthcare, insurance, financial services, and real estate). The Company's first
industry focus is healthcare. The healthcare industry is expected to spend over
$20 billion annually on information technology over the next five years. The
Company intends to cross-sell the new HALIS Healthcare Enterprise System into
the Company's established base of over 1000 healthcare customers.
The Company also intends to market information systems in other
industries with its more generic Business Enterprise System (the "BES"). The BES
can be sold to any industry with consulting made available for special needs,
ranging from advising customers on how to customize content for their specific
requirements, to providing technology expertise and customizations. The Company
intends to use the Internet to distribute and support its IT products.
If the resources are available, the Company hopes to selectively
acquire other companies to help build critical mass and to obtain additional
customer base and distribution in each focused industry, into which the Company
can further cross-sell its software products. The acquired companies will
primarily be service-based companies that need new or replacement software and
information technology solutions, and companies such as system integrators, that
can provide IT services to help implement additional systems requirements after
software installation.
It is important to note, however, that due to the limited resources
available to the Company during fiscal year ended 1999, the Company was unable
to deploy its intended business strategy to any measurable degree. As the
Company heads into calendar year 2000, it is hoped that potential customer's
fears of the Year 2000 concern will subside and that the efforts undertaken
during fiscal 1999 will enable the Company to make a positive impact on the
Company's finances during fiscal year 2000. Obviously no guaranty of success can
be made and it is clear that the Company will need an infusion of cash during
fiscal 1999 in order for it to make any significant in roads in its business
plan. The Company's auditors have given the Company a going concern opinion for
the last two years indicating that there is a substantial doubt about the
Company's ability to continue as a going concern.
THE COMPANY'S MEDICAL DEVICE BUSINESS
Historically the Company, through its Life Sciences division, was in
the business of manufacturing and selling medical devises and the related
supplies, and providing technical support for its products. See a description of
those products below. Since fiscal 1998 the Company has been refocusing its
direction on the information technology segment of its business as disclosed
above, and sold its Cambridge Medical Equipment subsidiary to an unrelated third
party in the third quarter of fiscal 1998. The following is a description of the
medical products that the Company has historically sold:
Peripheral Vascular Products. Vascular disease diagnosis and
--------------------------------
management has historically been done by vascular surgeons. With the aging of
the U.S. population, a greater awareness of vascular disease in general, and
better surgical and medical management options, more medical specialists are
becoming involved in the diagnosis and treatment of vascular disease. The
<PAGE>
capability and sophistication of the equipment needed to diagnose peripheral
vascular disease varies greatly from the needs of the primary-care physician who
may only be attempting to determine whether or not a patient has symptoms of
peripheral vascular disease to the needs of the vascular laboratory which may be
trying to establish the exact location and severity of the disease.
HealthWatch historically marketed two products under the "Life
Sciences" brand name. First, the Modular Vascular Lab (MVL), a
computer-controlled instrument which, through the use of various plug-in
modules, can perform a wide range of vascular diagnostic studies. During fiscal
1998, the Company re-designed the MVL so that it could be run with Microsoft
Windows based software. The Company began shipping the re-designed version of
the MVL during the third quarter of fiscal 1998.
The MVL produces detailed color reports and is easily operated with a
remote hand controller which allows the vascular technician to concentrate on
the patient rather than on operation of the MVL. The modular concept permits the
customer to purchase only the diagnostic testing modalities desired and to add
new modalities at any time.
There is currently an installed base of over 350 MVL'S. The price for
a basic system, was approximately $25,000.
The second product was the Pulse Volume Recorder (PVR-IV) with
calibrated PVR (records height and width of wave length, volume of air in cuff
and pressure), bi-directional Doppler (measures blood velocity using
ultrasound), photoplethysmograph (measures blood flow using an infrared sensing
device) and optional ocular pneumo-plethysmograph (measures pressure changes in
certain arteries). The basic unit is used to diagnose blood vessel disease in
both the upper and lower extremities. There is an installed base of over 2,500
PVR'S, of which over 1,000 are PVR-IV's. The PVR-IV was priced at $15,000. The
PVR is suitable for busy vascular labs, where high patient volume is a major
consideration, foreign markets, smaller U.S. hospitals, and physician offices
which cannot cost-justify the MVL.
While the Company has reorganized to focus its business more on its
information technology software business, it intends to maintain its more than
1,000 customer relationships that have purchased its PVR and MVL products. The
PVR active product has been replaced to a large extent by the MVL products,
which requires upgrades, as well as service and supply contracts. Although the
Company has stopped manufacturing and selling new MVL or PVR units, it still
continues to provide supplies and technical services to the Life Sciences
customer base.
IV Product. The Pacer, the Company's only IV product, a controller,
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which was approved for marketing by the FDA in April 1994, was introduced and
initial marketing efforts commenced in fiscal 1997. Due to the Company's lack of
working capital and the difficulty it encountered in marketing a single IV
product in a market increasingly dominated by large entrenched healthcare
companies offering a complete line of IV products, often on a "bundled" basis
whereby healthcare institutions contract for all of their IV products from one
or a limited number of vendors, the Company discontinued its sales efforts with
respect to the Pacer during fiscal 1998.
Cardiology Products. HealthWatch's cardiology products included the
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Cambridge lines of ECG and cardiac stress test systems which included
proprietary systems developed by Cambridge and systems manufactured by other
companies. During fiscal 1998, the Company discontinued sales of its Cambridge
ECG equipment and sold its wholly-owned subsidiary, Cambridge Medical
Equipments, Ltd. recognizing a loss on the transaction in fiscal 1998. The
Company's decision to discontinue the Cambridge business was based on the
determination that the market opportunity available to the Company did not
justify the investment that would have been required for the Company to continue
to offer this product line. In addition, the Company determined that its limited
working capital made it difficult for management to oversee the Cambridge
Medical Equipments, Ltd. operations which are located in England.
Supplies And Technical Services. In addition to the sale of medical
----------------------------------
instruments, HealthWatch sells disposable supplies, such as ECG recording paper
and electrodes and electrasound gels and cuffs, to purchasers of its cardiology
and peripheral vascular equipment and provides technical service/maintenance for
<PAGE>
such equipment. During fiscal 1999 and 1998 sales of supplies and revenues from
service and maintenance activities accounted for approximately 62% and 65%,
respectively, of HealthWatch's revenues from its medical products business
segment.
RESEARCH AND DEVELOPMENT
During the years ended June 30, 1999 and 1998, the Company spent 286,921 and
$231,169 respectively, on research and development activities. During fiscal
1999, the Company's research and development activity was primarily related to
enhancements of the MERAD Technology and providing technical support to HALIS
under the business collaboration agreement. During fiscal 1998, the Company
incurred research and development expenses for design and software work related
to its enhanced MVL product and to expand its product and service offerings to
include the monitoring, capturing and management of medical information.
PROPRIETARY INFORMATION
The Company seeks protection of its proprietary interest in software
products and trade secrets. The Company historically has not relied on patents
to protect the proprietary aspects of its products. HealthWatch maintains
nondisclosure and confidentiality agreements with its employees. While the
enforceability of such agreements cannot be assured, the Company believes that
they provide a deterrent to the use of information which may be proprietary to
the Company.
COMPETITION
There are many companies that offer products and services which compete
with the Company's current and planned products and services. Many of the
Company's competitors have substantially greater financial and marketing
resources than the Company.
The information technology software industry is highly competitive and
subject to continuing change in the manner in which products and services are
marketed and vendors are selected by customers. The primary competitive factors
are scope and quality of products and service and support capabilities. Due to
Year 2000 concerns many customers have been delaying their commitments to large
scale software acquisitions. Many of the Company's competitors have experienced
the same reluctance from potential customers. The Company believes that once we
pass into calendar 2000 customer support of its products will increase.
GOVERNMENT REGULATION
The medical devices that were manufactured and marketed by the Company
are subject to regulation by the Federal Food and Drug Administration (the
"FDA") and, in some instances, by state and foreign authorities. Pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FFDCA") and the regulations
promulgated thereunder, the FDA regulates the clinical testing, manufacture,
packaging, labeling, distribution and promotion of medical devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
regulations) and Class II devices are subject to general and special controls
(for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices).
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with Good Manufacturing Procedure ("GMP") regulations which impose
<PAGE>
certain process, procedure and documentation requirements upon the Company with
respect to manufacturing and quality assurance activities. The Company believes
that its manufacturing and quality control procedures substantially conform to
the requirements of FDA regulations.
In addition, the Medical Device Reporting regulation obligates the
Company to inform the FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to a death or serious injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.
EMPLOYEES
At October 1, 1999, the Company had 9 employees.
RISK FACTORS - FACTORS AFFECTING FUTURE RESULTS
In addition to the factors set forth elsewhere herein, investors should
consider the following risk factors regarding HealthWatch:
WORKING CAPITAL REQUIREMENT; NEED FOR ADDITIONAL FINANCING. The Company
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will require additional capital to finance its ongoing operations and planned
growth. The Company's cash position is at a critically low level. There can be
no assurance that the Company will be able to obtain such financing if and when
needed, or that if obtained, it will be sufficient or on terms and conditions
acceptable to the Company. Any such future equity financing could be dilutive to
the Company's shareholders. In its report accompanying the audited financial
statements for the years ended June 30, 1999, and 1998, the Company's auditors
expressed substantial doubt about the Company's ability to continue as a going
concern.
HALIS INVESTMENT. As part of HealthWatch's decision to expand its
-----------------
business into information technology, the Company entered into a joint venture
and co-marketing arrangement with HALIS and has made a significant investment in
HALIS through the acquisition of PHE and the exchange with certain HALIS
shareholders of shares of the Company's common stock for a portion of their
shares of HALIS common stock. As a result of these purchases, HealthWatch owns
10,763,655 shares of HALIS' common stock (approximately 21% of HALIS'
outstanding shares of common stock) which had a market value of approximately
$1,345,456 at October 1, 1999. The Company is currently carrying this investment
on its books at $1,769,671. The Company's investment in HALIS was made for the
long term in connection with the Company's decision to expand its product
<PAGE>
offerings to include healthcare information technology products. Accordingly,
the Company has decided that it should not write down the HALIS investment as it
concluded that the decline in the value of the HALIS shares was only
"temporary." There can be no assurance that the Company's HALIS investment will
not need to be written down in the future.
HALIS' common stock is traded on the OTC Bulletin Board, under the
symbol "HLIS." The Company's ability to sell its shares of HALIS could be
adversely affected by the limited trading volume for HALIS' stock and by the
requirement that the Company sell its HALIS shares in accordance with Rule 144
promulgated by the Commission, since Paul W. Harrison, a member of the Company's
Board of Directors, is also Chairman of the Board of Directors of HALIS. Rule
144 could limit the amount of HALIS' shares which HealthWatch could sell during
any three-month period to approximately 550,000 shares. Further, there is no
assurance that a public market for HALIS' securities will continue to be made or
that the Company will be able to avail itself of a public trading market for the
HALIS common stock in the future. Moreover, sales and potential sales of
substantial amounts of HALIS' common stock in the public market could adversely
effect the prevailing market prices for the HALIS common stock and impair the
Company's ability to raise additional capital through the sale of the HALIS
common stock. While the Company intends its investment in HALIS to be for the
long-term, the Company will need to raise significant additional working capital
to fund its operations and it may, therefore, be necessary for the Company to
sell the HALIS shares to raise required working capital if the Company is unable
to raise working capital from other sources.
NEW BUSINESS VENTURES; UNPROVEN PRODUCTS. In October 1998, the Company
-----------------------------------------
acquired PHE. A major factor in the Company's decision to acquire PHE was the
desire to own the MERAD software technology in order to further expand its
business to include information technology software. This business represents
significant new business venture for the Company, and the Company's ability to
successfully develop this business is subject to all of the risks inherent in
the establishment of a new business. The Company had not previously been engaged
in the information technology business.
ACQUISITIONS AND INTEGRATION. An important element of the Company's
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business strategy for fiscal 1999 was to expand through acquisitions. Due to
limited resources, the Company did not make any additional acquisitions other
than the acquisition of PHE. The Company's future success may be dependent upon
its ability to finance acquisitions and effectively integrate acquired
businesses with the Company's operations during fiscal 2000. Although the
Company believes that it will be able to affect such integration, there can be
no assurance that the Company will be able to affect any such acquisitions, or
that such acquisitions will be successfully integrated or that they will
otherwise be successful.
DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES. In
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general, the information technology and medical products industries are subject
to rapid and significant technological changes and frequent introduction of new
competitive products. To respond to these expected changes and to improve or
sustain the marketability of its products, the Company will be required to
commit substantial investments in product improvement and development in order
to periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the
marketplace.
LENGTH OF SALES CYCLE; LIMITED SALES AND MARKETING EXPERIENCE. The
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decision to purchase enterprise information software is often an enterprise-wide
decision and may require the Company to engage in a lengthy
evaluation/purchase-sales cycle. The sales cycle can range from three to nine
months or more. The sales cycle may also be subject to a prospective customer's
budgetary constraints and internal acceptance reviews, over which the Company
has little or no control. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the Company
is unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. If a larger order is delayed or lost to a
competitor, the Company's revenues for that quarter could be materially
diminished. The Company has experienced a delay in customer's willingness to
<PAGE>
commit to a purchase of its software products because of concerns with the
software handling the four year date code commonly known as the Year 2000
concern. Although the Company's products are Year 2000 compliant, there has been
a general slow down in the information technology sector until this contingency
passes.
The Company has limited experience in the areas of sales, marketing and
distribution. The Company's sales and marketing staff will require additional
personnel in the future. There can be no assurance that the Company will be able
to build an adequate sales and marketing staff, that establishing such a sales
and marketing staff will be cost-effective, or that the Company's sales and
marketing efforts will be successful.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. The Company
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historically has relied upon a combination of copyright, trade secret and
nondisclosure and other contractual provisions to protect its proprietary
rights. Notwithstanding the Company's efforts to protect its proprietary rights,
it may be possible for competitors of the Company to imitate the Company's
products or develop independently competing products. Disputes regarding the
Company's intellectual property could force the Company into expensive and
protracted litigation or costly agreements with third parties. An adverse
determination in a judicial or administrative proceeding or failure to reach an
agreement with a third party regarding intellectual property rights could
prevent the Company from manufacturing and selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company's success
---------------------------------------------
depends to a significant degree upon the personal efforts and ability of its
Chief Executive Officer, Paul W. Harrison. The loss of the services of Mr.
Harrison would have a materially adverse effect on the Company. The Company does
not maintain key man life insurance on any of its executives. Additionally, due
to limited resources, the Company has reduced its executive staff to a bear
minimum.
As the Company progresses into fiscal 2000, it will be necessary for
the Company to obtain resources that will allow it to retain the services of
competent individuals to supplement its executive ranks. The Company's future
operating results also depend in significant part upon its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will retain its key managerial or technical personnel or attract
such personnel in the future. The Company has at times experienced difficulty
recruiting qualified personnel, and there can be no assurance that the Company
will not experience such difficulties in the future. If the Company is unable to
hire and retain qualified personnel in the future, such inability could have a
material adverse effect on the Company's business, operating results and
financial condition.
NASDAQ LISTING REQUIREMENTS; LIMITATIONS ON BROKER-DEALER SALES OF
COMPANY AND HALIS COMMON STOCK; APPLICABILITY OF "PENNY STOCK RULES". The
- --------------------------------------------------------------------------
Company's stock is currently listed on the Nasdaq Small Cap Market. Two
requirements to remain listed are that the Company's stock price maintain a
closing bid of $1.00 or greater for a certain period of time and that the
Company's tangible net worth equal or exceed $2,000,000. As of June 30, 1999 the
Company's tangible net worth was below $2,000,000. Additionally, the Company's
stock price has fallen below the necessary price maintenance level. As a result
the Company has been warned by Nasdaq that it will be delisted if the Company's
closing bid price does not equal or exceed $1.00 per share for at least ten
consecutive trading days ending on or before December 23, 1999. Additionally,
there is no guaranty that the Company will be able to improve its financial
condition in order to exceed the required minimum tangible net worth during
fiscal 2000 even if the minimum price maintenance levels are achieved.
Accordingly, if immediate actions are not taken to meet the necessary
requirements, there is a significant risk that the Company's stock will be
delisted during fiscal 2000. The Company is taking actions and using its best
efforts to meet the needed requirements to maintain its listing.
Federal regulations under the Securities and Exchange Act of 1934, as
amended, (the "Exchange Act") regulate the trading of so-called "penny stocks"
(the "Penny Stock Rules"), which are generally defined as any security not
listed on a national securities exchange or Nasdaq, priced at less than $5.00
per share and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on Nasdaq which are priced at
less than $5.00 are deemed penny stocks for the limited purpose of Section
15(b)(6) of the Exchange Act. Therefore, during the time in which the Common
Stock is quoted on the Nasdaq SmallCap Market and is priced below $5.00 per
share, trading of the Common Stock is subject to the provisions of Section
<PAGE>
15(b)(6) of the Exchange Act which make it unlawful for any broker-dealer to
participate in a distribution of any penny stock without the consent of the
Commission if, in the exercise of reasonable care, the broker-dealer is aware of
or should have been aware of the participation of a previously sanctioned
person. In such event, it may be more difficult for broker-dealers to sell the
Company's Common Stock and purchasers of the shares of Common Stock may have
difficulty in selling their shares in the future in the secondary trading
market.
In the event that the Company's Common Stock is delisted from the
Nasdaq Small Cap Market and the Company fails other relevant criteria, trading
of the Common Stock would be subject to the full range of the Penny Stock Rules.
HALIS' common stock is currently traded on the OTC Bulletin Board and is subject
to the Penny Stock Rules. Under these rules, broker-dealers must take certain
steps prior to selling a "penny stock," which steps include: (i) obtaining
financial and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, delisting from the Nasdaq SmallCap Market and the application of
the comprehensive Penny Stock Rules may make it more difficult for
broker-dealers to sell the Company's Common Stock and purchasers of the shares
of Common Stock may have difficulty in selling their shares in the future in the
secondary trading market.
BUSINESS OF HALIS
HALIS is a supplier of information technology and services, focusing on
the healthcare industry. Utilizing advanced healthcare models and information
technology, including the MERAD technology, HALIS has developed the HALIS
Healthcare Enterprise System ("HES"), a single system for the healthcare
industry. This Healthcare Enterprise System integrates all of the major
functions needed by clinics, hospitals, practices, payers, long-term care
facilities, laboratories, pharmacies and home healthcare facilities, the eight
major markets into which HALIS competes. HALIS is currently building out the
specific features required by each of these eight markets. Subsets of or all of
the Healthcare Enterprise System can be used by each of these markets and can be
combined to provide a complete solution for Integrated Healthcare Delivery
Networks. These Networks are being formed by hospitals, clinics, payers,
practice management companies, individual practices, and other entities which
are involved in the delivery and management of healthcare services. HALIS'
systems business is targeted to healthcare industry participants such as
physician practices, HMO's, home healthcare providers and hospitals. HALIS
expects to capitalize on the healthcare industry's demand for more software
variety, updates, convenience, lower pricing, and better support services.
The Company has entered into a business collaboration agreement with
HALIS pursuant to which the Company is able to market the HALIS HES product to
the Company's customer base. Under this agreement, the Company has agreed to
split any revenue from the sale of the HALIS HES products with HALIS on a 50/50
basis. MERAD software, the Company's wholly-owned subsidiary in turn, would be
entitled to 10% of any amounts paid or payable to HALIS thereunder. From time to
time, the Company has obtained the services of HALIS to assist it in developing
the Company's healthcare information technology business. Additionally, the
Company and HALIS have shared resources and personnel and have allocated such
costs between the two companies on a reasonable basis. The Company and HALIS
have entered into a letter of intent pursuant to which they have indicated their
intent to merge the two companies. As of the date of this report, it is
uncertain whether or not the merger will occur. However, the Company expects to
work closely with HALIS in connection with the development of the Company's
healthcare IT business. The HALIS HES product was developed utilizing the MERAD
technology which was acquired by the Company in connection with the acquisition
of PHE. Sales by HALIS which are based on the MERAD technology are subject to
license fees payable to the Company equal to 10% of HALIS' revenues for such
sales.
HALIS is subject to certain informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed rates
by writing to the Securities and Exchange Commission, Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding HALIS at http://www.sec.gov.
<PAGE>
HEALTHWATCH KEY EMPLOYEES; DIRECTORS
The directors and executive officers of HealthWatch are as follows:
Director
Name Since Age Positions With The Company
---- ----- --- --------------------------
Paul W. Harrison 1997 44 Chairman, Chief Executive
Officer and Director
Richard T. Case 1997 50 Director
Sanford L. Schwartz 1983 49 Director
Paul W. Harrison has extensive experience in the United States and
-----------------
internationally managing information technology companies. He has been the
Chairman and CEO of the Company since June 1998, and Chairman & CEO of the
Company's affiliate, HALIS, Inc., since November 1996. Mr. Harrison was the
President and Managing Member of AUBIS, LLC from February 1995 to December 1997,
which owned two information system companies that were merged into HALIS in
November 1996. Mr. Harrison was an executive with and advisor to HBO & Company,
a leading healthcare information systems company, from June 1993 until December
1994. Prior to HBOC, Mr. Harrison was the CEO of BIVEN, Inc. from April 1991 to
June 1993, which sold software and other technology-related assets to HBOC in
June 1993.
Richard T. Case has been President of Benchmark Associates, a business
---------------
consulting firm since 1985. Mr. Case was President of Polymedica Industries,
Inc., a medical products company from May 1990 to July 1992. Mr. Case also
served as a Director of the Company from 1990 to 1994.
Sanford L. Schwartz has been a consultant with Creative Business
---------------------
Strategies, Inc., a business/development consulting firm, since July 1992. He
served as Chief Executive Officer of the Company from June 1983 to September
1993. Mr. Schwartz is a director of Renaissance Entertainment Corporation.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and objectives
of HealthWatch and HALIS for future operations. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. HealthWatch plans and objectives are based on the assumption
that their respective businesses will be successful, that competitive conditions
within the healthcare industry will not change materially or adversely and that
there will be no material adverse change in either company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of HealthWatch or HALIS.
Although the Company believes that the assumptions underlying the
forward-looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
Item 2. PROPERTIES.
The Company's corporate headquarters is located at 9040 Roswell Road,
Suite 470, Atlanta, Georgia, where it shares office space with HALIS, Inc. as
part of its business collaboration agreement with HALIS. Additionally, the
Company leases office and warehouse space in Vista, California, under a lease
that commenced January 1, 1999 and continues for a three year term with total
rents of $49,200. These payments escalate at a rate of 4% each year.
<PAGE>
Item 3. LEGAL PROCEEDINGS.
The Company is presently involved in three legal proceedings or
administrative hearings that are considered routine litigation that is
incidental to its business. None of the proceedings individually are material
and adequate reserves have been accrued in the Company's financial statements to
cover any amounts allegedly owed to third parties thereunder.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The number of record holders of the Company's Common Stock on
October 1,1999 was 785. The high and low sale prices as reported on the Nasdaq
Small Cap Market are shown in the table below (adjusted to reflect the
one-for-five reverse stock split effective February 1998). These quotations
represent prices between dealers, and do not include retail markups, markdowns
or commissions.
QUARTER ENDED HIGH LOW
------------- ---- ---
1997
----
September 30 $6.093 $1.718
December 31 4.844 1.250
1998
----
March 31 2.655 0.938
June 30 1.250 0.625
September 30 1.625 0.625
December 31 1.031 0.375
1999
----
March 31 1.312 0.375
June 30 2.218 0.875
September 30 1.031 0.406
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition. The
Company's 6% Series A Preferred Stock and Series P Preferred Stock restrict the
Company's ability to pay dividends on the Common Stock until all dividends on
the Preferred Stock has been paid.
During June 1998, the Company sold to a limited number of private
investors pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, 1,145,000 shares of its 6% Series A Preferred Stock,
stated value $1.00 per share (the "Series A Preferred"). The Series A Preferred
Stock is convertible into Common Stock of the Company at the lesser of $.52 per
share or 70% of the price of the Company's Common Stock at the time of
conversion. Alexander Wescott & Co., Inc. served as placement agent for the
offering and was paid expenses and commissions of $151,850 and was granted a
warrant representing the right to acquire 1,145,000 shares of the Company's
Common Stock at a purchase price of $1.20 per share for placing the Preferred
Stock. The shares of Common Stock issuable upon conversion of the Preferred
Stock have not been registered under the Securities Act of 1933. As of
October 1, 1999 (but subsequent to the year-ended June 30, 1999), 567,000
shares of the Series A Preferred Stock had been converted into 1,384,438 shares
of common stock.
<PAGE>
During the three-month period ended September 30, 1998, the Company
completed a stock exchange with PHE whereby the Company issued 448,400 shares of
common stock to PHE in exchange for 1,400,000 shares of HALIS common stock.
Pursuant to previously executed agreements, during the three-month
period ended December 31, 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. As a result of the acquisition of PHE,
888,400 shares of the Company's common stock was cancelled and retired.
During the three-month period ended March 31, 1999, the Company issued
a total of 1,000,804 shares of common stock for an aggregate purchase price of
$425,000 pursuant to private placement of its securities, and an equal number of
warrants at exercise prices ranging from $0.49 to $0.86 per share expiring two
years after their issuance.
During the three-month period ended June 30, 1999, the Company issued a
total of 209,152 shares of common stock for an aggregate purchase price of
$200,000 pursuant to private placement of its securities, and 100,000 warrants
at an exercise price of $1.59 per share expiring two years after their issuance.
During the year ended June 30, 1999, a total of 55,000 options were
exercised for a total of $36,300.
On September 30, 1999 Sanford Schwartz, a director of the Company, was
issued 89,468 shares of common stock in lieu of consulting fees owed to him or
his affiliated company for services provided to the Company. Also on
September 30, 1999, 50,000 shares of common stock was issued to Richard Case, a
director of the Company, in lieu of fees due to Mr. Case for consulting services
provided to the Company.
The Company issued all of the securities noted above 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.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and its subsidiaries contained elsewhere
herein.
GENERAL
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. To implement this change, the Company
entered into various agreements during fiscal 1998 with HALIS, Inc., a
healthcare information technology company, and Paul Harrison Enterprises, Inc.,
an affiliate of HALIS and the owner of certain software development technology
known as MERAD.
During fiscal 1998, the Company began efforts to develop proprietary
technology utilizing MERAD and to market HALIS' healthcare enterprise system to
the Company's customers. In addition, the Company sold its Cambridge Medical
Equipment, Ltd. subsidiary located in England, terminated sales of its Cambridge
product line and initiated efforts to sell the Pacer, its new IV product. The
decision to terminate the Cambridge business was made in fiscal 1997, based on
declining sales of these products and the Company's conclusion that the
prospects for this product line did not justify the additional investment that
would be required to maintain this product line. The decision to seek a buyer
for the Pacer product followed efforts begun in late fiscal 1997 to establish
distribution channels for this product. While these efforts were initially
favorable, the Company did not have the resources required to sustain the sales
and marketing effort needed to market this product in a market dominated by
large international companies with a wide range of IV equipment and disposable
products. As a consequence, the Company discontinued its efforts to distribute
the PACER and focused its efforts on the development of its information
technology line of the business and maintaining the supplies and technical
support operations for its medical products.
<PAGE>
Based on the foregoing developments and the Company's determination
that the software information technology (IT) business offered significantly
greater opportunities for the Company than did its existing medical products
business, the Company's focus during fiscal 1998 was increasingly on the
development of its IT business. During fiscal 1999, the Company continued to
emphasize the IT business and is attempting to grow this business through a
combination of licensing partners, selected strategic acquisitions and internal
sales of its software and services. 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 from approximately
5% to 18% of HALIS' outstanding shares of common stock. The Company has
subsequently increased its interest in HALIS to approximately 21% of HALIS'
outstanding common stock.
The Company expects to continue to expand its collaborative efforts
with HALIS during fiscal 2000 and to expand its efforts to market the HALIS
healthcare enterprise system to the Company's customer base. The Company also
intends to develop information systems utilizing the MERAD technology for other
information intensive industries such as financial services, insurance and real
estate, however, due to its limited resources these efforts will be deferred
until late 2000 or early 2001.
The Company has incurred significant operating losses during the past
several years and at June 30, 1999 had a retained earnings 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.
FINANCIAL CONDITION
Total assets of the Company increased $1,078,976 during the year ended
June 30, 1999 due primarily to the acquisition of PHE. As a result of the PHE
acquisition the Company's assets increased $1,194,042 relating to the HALIS
stock owned by PHE and $922,036 relating to the MERAD technology. These
increases were offset by decreases in cash, accounts receivable, and inventory
of $832,544, $86,507, and $288,409, respectively. Cash was utilized in
operations and to repay debt of the Company, receivables have been reduced
reflecting the discontinuance of the sale of medical products, and inventory has
been reduced to write-down the carrying cost to market as a result of the
discontinuance of the sale of medical products. Additionally, the Company has
been amortizing intangible assets related to its Life Sciences division over 10
years, which resulted in a decrease of $239,898. The investment in HALIS
increased due to a stock swap of 488,400 shares with former HALIS shareholders
and a subsequent increase in the carrying value due to a change in accounting
for the long-term investment from the cost to the equity method. Lastly,
receivables from HALIS increased by $150,364 mainly reflecting royalty payments
due from HALIS on sales of software containing the MERAD technology and shared
operating costs that have not yet been reimbursed by HALIS.
Total liabilities decreased by $131,109 during the year ended June 30,
1999. This net decrease is composed of decreases in accounts payable and accrued
compensation and payroll taxes of $179,043 and $83,792 and increases in other
accrued liabilities of $240,160. Additionally, the Company paid $100,000 of the
debentures payable - unrelated parties that were outstanding at the beginning of
the year.
Total stockholders' equity increased $1,210,085 during the year ended
June 30, 1999 due primarily to the acquisition of PHE, which resulted in a net
increase of $1,854,820. Other additions were the result of private placement
funds due to the sale of common shares of the Company of $625,000, the exercise
<PAGE>
of stock options by former employees of $36,300, and the issuance of common
shares to PHE prior to its acquisition, in exchange for shares in HALIS, valued
at approximately $448,000. Decreases were the result of a net loss for the year
of $1,748,931.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
- ---------------------
Revenues for the 1999 fiscal year decreased 11.7% compared to the
similar period in 1998. The decrease is the result of 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). Additionally, during the fourth quarter of fiscal
year 1999, MVL sales were minimal and almost all of the revenues generated were
the result of supplies, service and repair work.
Cost of products sold were 31% lower in fiscal 1999 due to operational
improvements and decreased equipment sales. The gross margin was 22.9% in 1999
compared to 1.8% for 1998. The higher gross margins in 1999 were due primarily
to maturation of the MVL product and lower costs associated with it, an
increased percentage of revenues from supplies, service and repair work, and the
reduction of costs associated with downsizing the Company.
Selling, general and administrative expenses as a percent of sales were
108.3% for the 1999 period compared to 115.8% for 1998. The decrease in the 1999
period is due primarily to the downsizing of the Company. Research and
development expenses increased 24.1% in 1999 due primarily to a change in the
business focus to service and providing technical support to HALIS under the
business collaboration agreement.
Depreciation and amortization increased 19.4% for 1999 period compared
to a 3.7% decrease for 1998. The increase is almost entirely due to additional
amortization expense related to the Company's acquisition of PHE.
Equity loss of $23,702 during 1999 is the result of the Company
changing its method of accounting for its long-term investment in HALIS to the
equity method during 1999, as required by generally accepted accounting
principles. The $23,702 represents the Company's pro-rata share of the income of
HALIS for the Company's fiscal year less a $62,674 charge for the excess
carrying value of the investment over its underlying net asset value. The
unrealized loss on marketable equity securities - related party of $1,824,605 in
1998 was a one time write down of the investment in HALIS under FAS 115 that was
deemed to be other than temporary.
Primarily due to a shift in products from the Pacer to MVL, an
increased focus on service and repair work, and the downsizing of the Company,
which resulted in increased margins and decreased overhead, respectively, the
Company was able to reduce its net loss from $4,084,474 or $2.45 per share for
fiscal 1998 to $1,748,941 or $0.65 per share for fiscal 1999. Exclusive of the
one-time write down on marketable equity securities in 1998, the net loss was
reduced by $510,938, or 23%.
The Company has discontinued the sale of its medical products (i.e.,
the MVL and Pacer) and will continue to focus on the sale of the HES software to
its customer base and the supplies and technical support offered to it customer
base relating to its medical products in service. As a result of the
<PAGE>
restructuring during 1999, the Company has improved its financial condition and
is poised to take advantage of the market acceptance of the HES product that is
anticipated to take place during fiscal 2000.
1998 COMPARED TO 1997
- ---------------------
Revenues for the 1998 period decreased 33.8% compared to the similar
period in 1997. The decreased revenues were primarily due to a lower level of
sales of the Company's MVL system pending the upgrade of this product which was
completed in the third quarter of fiscal 1998, the sale of Cambridge Medical
Equipments, Ltd., the discontinuance of the Cambridge product line and the
continued inability of the Company to establish a market for its new Pacer
product. In addition, the Company's sales and marketing efforts have been
limited due to its lack of adequate working capital.
Costs of products sold were 26.1% lower in 1998 due primarily to
decreased equipment sales. The gross margin was 1.8% in 1998 compared to 12% for
1997. The lower gross margins in 1998 were due primarily to increased costs of
parts and materials and lower initial selling prices in connection with the
introduction of the upgraded MVL product and to the generally lower revenues.
Selling, general and administrative expenses as a percent of sales were
115.8% for the 1998 period compared to 79.3% for 1997. The increase in the 1998
period was due primarily to lower revenues and an increase in restructuring
costs. Research and development expenses decreased 45.5% in 1998 due primarily
to Reduction in the development cost for the Company's Pacer product and related
tooling.
The Company recorded a loss of $102,885 in connection with the sale of
its Cambridge Medical Equipments, Ltd. subsidiary. Interest expense increased
6.5% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $119,654 of cash and accounts
receivable. 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 very limited. During fiscal 1999, the Company raised
$661,300 of additional working capital through the issuance of its securities.
The Company's 10% Convertible Secured Debentures in the principal amount of
$480,000 were past due as of June 30, 1999. The Company believes it needs to
raise or generate through new business additional working capital to sustain
operations during the next twelve months and to pay the Debentures.
Until such time as the Company is successful in making significant
sales of the HES products into its customer base, or that the Company earns
royalties because HALIS has successfully started to deploy its products, the
Company's operations will continue to be financed, in large part, from outside
sources. There can be no assurance that the Company will be able to obtain such
financing if and when needed, or that if obtained, it will be sufficient or on
terms and conditions acceptable to the Company.
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 OTC Bulletin Board. The
Company's ability to sell its HALIS shares could be adversely affected by the
limited trading volume for HALIS' stock and the requirement that the Company
sell its HALIS shares in accordance with Rule 144 promulgated by the Commission
which could limit the number of HALIS shares which could be sold in any
<PAGE>
three-month period to approximately 550,000 shares. There can be no assurance as
to the price that the Company could receive for the HALIS common stock if it
were required to sell the stock to raise additional working capital.
YEAR 2000 COMPLIANCE
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. Nonetheless, the Company has
undertaken a review of its business systems to make a determination whether this
belief is sound and justified and has queried those vendors whose systems the
Company employs that may be material to its operations 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 expeditiously without incurring any
material amounts to resolve any Year 2000 Concerns.
Item 7. FINANCIAL STATEMENTS.
The following financial statements and reports of the Company's
independent auditors are at the end of this report beginning at Page F-1:
(1) Report of Independent Public Accountants - Tauber & Balser, P.C.
(2) Consolidated Balance Sheet - June 30, 1999
(3) Consolidated Statements of Operations For The Years Ended
June 30, 1999 and 1998
(4) Consolidated Statements of Cash Flows For The Years Ended
June 30, 1999 and 1998
(5) Consolidated Statements of Stockholders' Equity (Deficit) For
The Years Ended June 30, 1999 and 1998
(6) Notes to Consolidated Financial Statements
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 4, 1999, the Company dismissed its independent auditors,
Silverman Olson Thorvilson & Kaufman LTD ("Silverman Olson"), and on the same
date authorized the engagement of Tauber & Balser, P.C. ("Tauber & Balser") as
its independent auditors for the fiscal year ended June 30, 1999. The Company
formally engaged Tauber & Balser on June 4, 1999. The Board of Directors of the
Company approved each of these actions. Because the Company recently relocated
its corporate headquarters to Atlanta, Georgia, the Board of Directors concluded
that it would be more economical to use a regional firm based in Atlanta, such
as Tauber & Balser, to perform its audit for the current fiscal year. Tauber &
Balser also acts as independent auditors for HALIS, Inc., an affiliate of the
Company, and in which the Company owns in excess of 20 percent of its
outstanding common stock.
Silverman Olson audited the financial statements for the Company for
the fiscal year ended June 30, 1998. The report of Silverman Olson on the
financial statements of the Company for the fiscal years ended June 30, 1998
contained an additional paragraph which modified each of the reports to
emphasize that Silverman Olson believed there was substantial doubt about the
Company's ability to continue as a going concern. Except as set forth in the
preceding sentence, the reports on those audits did not contain any adverse
opinions or a disclaimer of opinions, nor was it qualified as to uncertainty,
audit scope, and accounting principles.
<PAGE>
In connection with the audit of the fiscal year ended June 30, 1998 and
through the period ended June 4, 1999 there were no disagreements with Silverman
Olson on any matter of accounting principle or practice, financial statement
disclosure, or audit procedure or scope. Additionally, Silverman Olson did not
advise the Company that (i) the internal controls necessary for the Company to
develop reliable financial statements did not exist; (ii) information had come
to its attention that led it to no longer be able to rely on management's
representations, or that made it unwilling to be associated with the financial
statements prepared by management; (iii) there existed a need to expand
significantly the scope of its audit, or that information had come to the
attention of Silverman Olson during the fiscal periods, which, if further
investigated, may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (b) cause Silverman
Olson to be unwilling to rely on management's representations or be associated
with the Company's financial statements, and due to the dismissal of Silverman
Olsen, did not so expand the scope of its audit or conduct such further
investigation; or (iv) information had come to the attention of Silverman Olson
that it concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying financial statements, or (b)
the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to the satisfaction of
Silverman Olson would prevent it from rendering an unqualified audit report on
those financial statements), and due to the dismissal of Silverman Olson, the
issue has not been resolved to the satisfaction of Silverman Olson prior to its
dismissal.
Further, during the fiscal year ended June 30, 1999, neither the
Company or any of its representatives sought the advice of Tauber & Balser, P.C.
regarding the application of accounting principles to a specific completed or
contemplated transaction or the type of audit opinion that might be rendered on
the Company's financial statements, which advice was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of HealthWatch are as follows:
Director
Name Since Age Positions With The Company
---- ----- --- --------------------------
Paul W. Harrison 1997 44 Chief Executive Officer and
Director
Richard T. Case 1997 50 Director
Sanford L. Schwartz 1983 49 Director
<PAGE>
Paul W. Harrison has extensive experience in the United States and
-----------------
internationally managing information technology companies. He has been the
Chairman & CEO of HALIS, Inc. since November 1996, and a significant owner in
PHE, a privately-held information technology management company. Mr. Harrison
was the President and Managing Member of AUBIS, LLC from February 1995 to
December 1997, which owned two information system companies that were merged
into HALIS in November 1996. Mr. Harrison was an executive with and advisor to
HBO & Company, a leading healthcare information systems company, from June 1993
until December 1994. Prior to his involvement in HBOC, Mr. Harrison was the CEO
of BIVEN, Inc. from April 1991 to June 1993, which sold all of its software and
other technology-related assets to HBOC in June 1993.
Richard T. Case has been President of Benchmark Associates, a business
----------------
consulting firm since 1985. Mr. Case was President of Polymedica Industries,
Inc., a medical products company from May 1990 to July 1992. Mr. Case also
served as a Director of the Company from 1990 to 1994.
Sanford L. Schwartz has been a consultant with Creative Business
---------------------
Strategies, Inc., a business/development consulting firm, from July 1992 until
1999, and is presently a consultant with CBSI, LLC. He served as Chief Executive
Officer of the Company from June 1983 to September 1993. Mr. Schwartz is a
director of Renaissance Entertainment Corporation.
RECENT CHANGES IN MANAGEMENT
- ----------------------------
In September 1998 Brian L. Schleicher was elected by the Board to
serve as the chief financial officer of the Company on an interim basis. Mr.
Schleicher also serves as the Company's general counsel. Effective as of August
15, 1999, Mr. Schleicher resigned his position as chief financial officer but
remains the general counsel to the Company.
Larry Fisher served as a director of the Company from 1997 until his
resignation effective June 1999. At the time of his resignation, Mr. Fisher and
the Company did not have any disagreement relating to the Company's Operations,
policies or practices.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the fiscal year
ended June 30, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were filed as required.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has a policy
requiring all Section 16 reporting persons to report monthly to the Chief
Executive Officer of the Company as to whether any transactions in the Company's
Common Stock occurred during the previous month.
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
COMPENSATION
The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1999, 1998, and 1997, respectively, to the Company's
Presidents and Chief Executive Officers and Chairman of the Board of Directors.
No officer or director of the Company received compensation of $100,000 or more
in fiscal 1997.
<TABLE>
<CAPTION>
Name and Principal Fiscal Options Restricted
Position Year Salary Bonus (No. of Shares) Stock Awards
-------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Paul W. Harrison 1999 $12,500 <F3> -- -- --
Chairman, President 1998 -- -- 250,000 shs. <F1> --
and CEO <F1> 1997 -- -- -- --
Daniel J. Kelly 1999 -- -- -- --
Former President 1998 $132,500 $13,200 120,000 shs.<F2> --
and CEO <F1> 1997 $80,770 -- 120,000 shs. --
- ------------
<FN>
<F1> Mr. Harrison replaced Mr. Kelly as President and CEO of the Company
effective June 1, 1998. Mr. Harrison was granted 150,000 options in
October 1997 and 100,000 options in May 1998.
<F2> Represents repricing of options originally granted during fiscal year
1997.
<F3> Mr. Harrison entered a consulting arrangement in February 1999 whereby
he was to receive a monthly fee of $12,500 per month effective as of
January 1, 1999. As of June 30, 1999 Mr. Harrison received only $12,500
of this amount.
</FN>
</TABLE>
STOCK BASED COMPENSATION
- ------------------------
The Company has a 1989 Incentive Stock Option Plan and 1993 and 1995
Stock Option Plans (the "Plans") for its key employees directors and consultants
to purchase shares of the Company's Common Stock. The Plans provide that the
purchase price of the shares covered by incentive stock options may not be less
than the fair market value of the shares on the date the option was granted.
Non-statutory stock options granted can be granted at exercise prices of 85% or
more of the fair market value of the Company's Common Stock on the date of
grant. To date, all options granted under the Plans have been at exercise prices
equal to the fair market value of the Common Stock on the date the Company
agreed to grant the options.
As part of the acquisition of Paul Harrison Enterprises, Inc. by the
Company on October 2, 1998, the Company agreed to assume 600,000 options for PHE
outstanding at the time of the merger, and converted such options into 625,000
non-statutory stock options of the Company. Paul W. Harrison holds 583,333 of
these options which have an exercise price of $.96 per share exercisable on or
before December 31, 2003.
The Company has, from time to time, also provided non-statutory stock
options outside of the Plans to directors, officers and consultants and has
awarded stock grants to officers, directors, employees and consultants in
consideration for services. These non-statutory options generally have had a
term of three to seven years and have had exercise prices equal to the fair
market value of the Company's Common Stock on the date the options were granted.
As of October 1, 1999, the Company had an aggregate of 720,982 shares reserved
for issuance pursuant to outstanding stock options under the Plans and other
stock option grants, and an additional 1,195,000 shares reserved for outstanding
warrants (exclusive of the 625,000 shares issuable to the former PHE option
holders).
<PAGE>
DIRECTORS' REPORT. On August 25, 1997 and May 27, 1998, the Board of
Directors unanimously approved repricing all outstanding stock options held by
current employees and directors of the Company (a total of 348,714 and 445,380
shares, respectively), including 120,000 and 40,000 shares, respectively,
subject to options held by Daniel J. Kelly to $0.66 per share. It was the Board
of Directors' opinion that the repricing of these options was appropriate in
view of the Company's inability to provide adequate cash compensation,
particularly to its officers and directors, due to the Company's lack of working
capital.
The following table shows option grants during fiscal 1999 to the named
executive officers of the Company. Reference is also made to the information
included above under "Compensation."
<TABLE>
<CAPTION>
Options Granted Percent of Total Exercise Expiration
Name in Fiscal 1999 Options Granted Price Date
- -------------------- -------------------- --------------------- -------------- --------------
<S> <C> <C> <C> <C>
Paul W. Harrison 583,333 <F1> 93.3% $0.96 0/15/03
<FN>
<F1> These shares were issued pursuant to the acquisition of Paul Harrison
Enterprises, Inc. in replacement of options then outstanding to Mr.
Harrison by PHE.
</FN>
</TABLE>
The following table shows the number of options exercised during
fiscal 1999 and the 1999 fiscal year-end value of the options held at the end of
the fiscal year by the named executive officer.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options in-the-money Options
Shares Acquired on at June 30, 1999 at June 30, 1999
Name Exercise of Options Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Paul W. Harrison None 799,999/33,334 shs. <F2> $-0-/$-0-
Daniel J. Kelly 40,000 <F1> None $-0-/$-0-
<FN>
<F1> On March 29, 1999, Mr. Kelly exercised all 40,000 options for shares
in the Company at an exercise price of $0.66 per share. An additional
80,000 options have been cancelled during the year.
<F2> Mr. Harrison also holds 72,727 warrants exercisable at a price of
$0.45 per share, 75,472 warrants exercisable at a price of $0.86 per
share, and 16,666 warrants exercisable at a price of $1.72 per share.
All of these warrants are immediately exercisable.
</FN>
</TABLE>
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of October 1, 1999, the shares of
Common Stock and percentage of total shares owned by the shareholders known to
beneficially own 5% of the Company's outstanding shares of Common Stock, each
director and nominee for election to the Board of Directors of the Company and
as to all executive officers and directors as a group. All persons indicated
have (unless indicated to the contrary) sole or shared with spouse voting and
dispositive power over such shares.
<TABLE>
<CAPTION>
Name and Address of Beneficial
Owner, Name of Director or Title
Nominee or Identity of Group of Class Amount Beneficially Owned Percentage
- ---------------------------- --------- ------------------------- ----------
<S> <C> <C> <C>
Paul W. Harrison Common 1,464,094 <F1><F2> 29.0%
9040 Roswell Road Series P Preferred 125,088.4 37.4%
Suite 470
Atlanta, Georgia 30350
Larry Fisher Common 266,666 <F1> 5.28%
9040 Roswell Road
Suite 470
Atlanta, Georgia 30350
Richard T. Case Common 86,134 <F1> 1.7%
Sanford L. Schwartz Common 138,368 <F1><F3> 2.7%
All Officers, Directors and Nominees 1,688,596 <F1><F2><F3> 33.4%
as a Group (5 persons)
- --------------------
<FN>
<F1> Includes for the following persons the number of shares set forth
opposite their name which are issuable within 60 days of the record
date upon exercise of outstanding stock purchase options or warrants or
conversion of outstanding debentures: Harrison--1,113,063 shares;
Fisher--126,666 shares; Case--35,334 shares; Schwartz--48,334 shares;
and all officers and directors as a group--832,879 shares.
<F2> Includes 83,333 shares owned by HALIS, Inc. ("HALIS"), of which Mr.
Harrison is the Chairman of the Board of Directors and Chief Executive
Officer and a major shareholder. Does not include 125,088.4 shares of
Series P Preferred Stock which, subject to approval of the Company's
shareholders, would be convertible into 1,250,884 shares of the
Company's Common Stock.
<F3> Includes shares owned by Creative Business Strategies, Inc. ("CBS") and
CBSI, LLC ("CBSI). Mr. Schwartz is an officer, director and principal
shareholder of CBS and a member and manager of CBSI.
</FN>
</TABLE>
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August 1997, the Company has entered into a number of
transactions with HALIS, Inc., an Atlanta, Georgia, publicly-traded company (OTC
Bulletin Board Symbol: "HLIS"), and a number of its affiliates and shareholders.
HALIS supplies information technology and services focused on the healthcare
industry and has developed the HALIS Health Care Enterprise System ("HES"), a
single system which integrates all of the major functions needed by clinics,
hospitals, healthcare practices, payers, long-term care facilities,
laboratories, pharmacies and home healthcare facilities. The HES was developed
by HALIS utilizing the MERAD technology, an advanced virtual software and
information media utility developed by Paul W. Harrison and owned by Paul
Harrison Enterprises, Inc., a Georgia corporation ("PHE"), that was controlled
by Paul W. Harrison prior to its acquisition by the Company on October 2, 1998.
PHE was also a significant shareholder of HALIS.
During the first quarter of fiscal year 1998 and prior to its
acquisition by the Company, PHE, Mr. Fisher and two non-affiliated shareholders
of HALIS exchanged 1,100,000 of their shares of HALIS common stock for 880,000
shares of the Company's Common Stock, and PHE was granted an option to acquire
320,000 additional shares of the Company's Common Stock in exchange for 400,000
additional shares of HALIS common stock. The exchange ratio was based upon the
market value for each company's common stock at the time that the transaction
was negotiated. Additionally, the agreements provided that HALIS was to acquire
83,333 shares of the Company's Common Stock for a purchase price of $125,000.
During February 1998, the option was exercised by PHE and its assigns and PHE
exchanged an additional 1,262,000 shares of HALIS common stock for 378,000
shares of HealthWatch Common Stock. The exchange ratio for the shares exchanged
in February was based on the market value for each company's common stock at the
time that the exchange was negotiated. As a result of these transactions, at
September 30, 1998 PHE held 888,400 shares of the Company's common stock. As a
result of the acquisition of PHE by the Company on October 2, 1998, these shares
became treasury shares and are deemed cancelled and not outstanding.
These transactions followed the execution by the Company and HALIS
during August 1997 of a letter of intent which contemplated a merger of the
Company and HALIS. The two companies have not consummated the merger due to the
relative volatility in each company's stock price and certain accounting issues
that may affect the Company's ability to maintain the $2,000,000 minimum net
worth required by The Nasdaq Stock Market, Inc. for the Company to maintain its
listing on Nasdaq. While consummation of the merger has not been ruled out by
each company's respective Board of Directors, the Company is presently uncertain
if it will proceed with the merger.
In October 1997, the Company entered into a software license and
development agreement with MERAD, Corporation (MERAD), a company owned by Paul
Harrison Enterprises (PHE), an entity controlled by an officer/director of
HealthWatch. Pursuant to the agreement, HealthWatch was to license certain
computer architecture, concepts, algorithms and processes from MERAD which the
Company originally planned to integrate into line of noninvasive vascular
diagnostic equipment. In addition, MERAD was to develop healthcare software for
the Company. In exchange for these licenses and services, the Company agreed to
pay MERAD a development fee of $15,000 per month during the period January 1998
through January 2000. In addition, HealthWatch was to pay MERAD a fee based on a
variable rate of gross software revenues as follows:
Rate Gross Aggregate Software Revenues
---- ---------------------------------
5.0% $0 to $5,000,000
2.5% $5,000,001 to $10,000,000
1.0% In excess of $10,000,000
During 1998, the Company had incurred $90,000 of development fees, of
which $90,000 remained unpaid at June 30, 1998 and was included in other accrued
liabilities - related parties as of such date. No software revenue was earned
during 1998 and accordingly, no variable rate license fees were incurred. This
agreement was effectively cancelled effective June 30, 1999 as a result of the
acquisition of PHE by the Company, and no additional amounts were accrued during
fiscal 1999.
<PAGE>
Following the initial merger discussions, the Company and HALIS
determined that it would be preferable for the two companies, at that time, to
adopt a shared business development strategy. To implement this strategy, the
Company and HALIS entered into a business collaboration agreement whereby the
Company and HALIS share sales prospects and the Company acts as a reseller of
the HES software. Additionally, the Company obtained a non-exclusive license
from PHE to the MERAD technology, and retained PHE to develop proprietary
software technology which originally was contemplated to be used to expand the
Company's product offerings to include products and services specifically
focused on monitoring, capturing and managing medical information at the point
of care. Due to the Company's limited resources, the Company has not proceeded
to develop software that would be used in conjunction with its medical devices.
During October 1998, the Company agreed to acquire PHE and caused its
newly created wholly owned subsidiary MERAD Software, Inc., a Nevada
corporation, to merge with PHE. In the merger, 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. The Company plans to ask its shareholders to grant
this right at its next annual meeting of shareholders. 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, Chief Financial Officer
and Chief Administrative Officer of the Company from September 1998 through
August 15, 1999 received 7,812 of the Series P Preferred Stock. All of the
Preferred Stock is non-voting, except in certain circumstances. 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 dividend rate
was adjusted to 18% per annum. Dividends shall only be payable if declared by
the Company's Board of Directors. No dividends have been declared during fiscal
year ended June 30, 1999 and through the date hereof. 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, the PHE
Shareholders, as a group, earned $94,437 as additional consideration, 50% of
which will be paid in cash and the balance to be paid in common stock of the
Company. None of this amount has been paid as of year-end.
At the time of the merger, PHE held 6,177,010 shares of common stock
in HALIS and owned the MERAD technology. As a result of its acquisition of PHE
and the MERAD technology, the Company has diverted its attention away from the
expansion of its medical device business, and has decided to use the newly
acquired MERAD technology to develop expanded applications in the healthcare and
other industries. Accordingly, the use of this technology to expand the
Company's medical device business is unlikely. As a result of the merger, the
Company increased its ownership interest in HALIS to 8,939,010 shares of HALIS'
common stock, representing approximately 19% of its outstanding shares. In
January 1999, the Company converted outstanding debt owed by HALIS to the
Company into 1,824,645 additional shares of common stock of HALIS, bringing the
number of HALIS shares held by the Company to 10,763,655, representing
approximately 21% of HALIS' outstanding shares. The Company is now the single
largest shareholder of HALIS and due to the size of its holdings, now accounts
for its investment under the equity method of accounting (i.e., it recognizes
its proportionate amount of HALIS' income or loss each month).
Further, as a result of the merger of PHE into MERAD Software, Inc.,
the MERAD technology is now owned by the Company. HALIS is obligated to pay the
Company 10% of the gross revenues generated by HALIS from products and services
utilizing the MERAD technology. During fiscal 1999, the Company earned $66,087
in royalties from HALIS none of which has been paid to the Company as of
year-end. Additionally, the Company and HALIS currently share office space and
have a cost sharing arrangement relating to key personnel under an arrangement
that requires the Company to pay HALIS a calculated amount each month based upon
a reasonable cost basis of services provided.
<PAGE>
Effective October 10, 1997, PHE and Paul W. Harrison entered into a
consulting agreement with the Company which expired on December 31, 1998. The
agreement provided for, among other things, the payment to PHE commencing on
January 1, 1998 of $15,000 per month through June 30, 1998, the granting of a
five-year non-statutory stock option to Mr. Harrison representing the right to
acquire up to 150,000 shares of the Company's Common Stock at $2.65625 per
share, the then fair market value for the Company's Common Stock, and to loan to
Mr. Harrison up to $200,000 payable in four equal annual installments with
interest to accrue at 7% per annum to cover tax liabilities arising from the
stock swaps with PHE. As of the date hereof, $0 had been borrowed pursuant to
the loan commitment. In May 1998 the exercise price for the stock options were
repriced to $0.66 per share. None of the options have been exercised. In
February 1999, the consulting agreement was modified to remove PHE as a party
and to provide for the payment of $12,500 to Paul W. Harrison on a monthly basis
to manage the Company, effective as of January 1, 1999. As of June 30, 1999
$12,500 was paid under the revised consulting agreement to Mr. Harrison.
Effective October 10, 1997, Larry Fisher entered into a consulting
agreement with the Company, which expired on December 31, 1998. The agreement
provided, among other things, for the grant of a five-year non-statutory stock
option representing the right to acquire 80,000 shares of the Company's Common
Stock at $2.65625 per share, the then fair market value for the Company's Common
Stock. In May 1998 the exercise price for the stock options were repriced to
$0.66 per share.
On December 18, 1996, Daniel J. Kelly entered into an employment
agreement with the Company to become the Company's President and CEO. Under the
employment agreement he was to be paid $150,000 per annum, and was eligible for
a bonus of up to one-third of his base salary and received an option to purchase
120,000 shares of the Company's Common Stock. The Agreement provided for a
severance payment equal to five months salary if his employment was terminated
before December 31, 2000. Effective June 1, 1998 Mr. Kelly's employment was
terminated, and the Company entered into a separation agreement that provided
for the payment of $71,500 and acknowledgment by the Company that 40,000 of his
options were deemed to be fully vested at an exercise price of $0.66 per share.
On March 29, 1999, Mr. Kelly exercised all of the outstanding options.
On January 22, 1998, Paul W. Harrison, Larry Fisher and Lindley S.
Branson (the Secretary of the Company, and a former Director and President of
the Company) each loaned the Company $17,000 for a period of 90 days. The loans
were to bear interest at 7% per annum. As additional compensation for making the
loans, each was granted a warrant to acquire 16,666 shares of the Company's
Common Stock at $1.71875 per share, the fair market value for the Company's
Common Stock on January 22, 1998. In addition, during January 1998, a $35,000
loan which Mr. Branson made during the fourth quarter of calendar 1997 was paid
by the issuance to Mr. Branson of 20,000 shares of the Company's Common Stock.
Paul W. Harrison, Chairman of the Board, Chief Executive Officer and
President of the Company, is also the Chairman, President and Chief Executive
Officer of HALIS. Larry Fisher was a Director of both the Company and HALIS, but
resigned from HALIS effective December 31, 1999 and from the Company effective
June 1, 1999. Brian L. Schleicher, the Chief Financial Officer and Chief
Administrative Officer of the Company from September 1, 1998 until he resigned
on August 15, 1999, was also the Chief Administrative Officer of HALIS from
February 1, 1999 until he resigned on July 27, 1999.
<PAGE>
Item 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (2).
4.1 Specimen form of the Company's Common Stock certificate (2).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 (5).
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan
(5).
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) (6).
4.9 Subscription and Purchase Agreement between HealthWatch, Inc.
and HALIS, Inc.(7).
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock
of HealthWatch, Inc. (10)
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch,
Inc. (10)
10.1 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. (8).
10.2 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison
(8).
10.3 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher (8).
10.4 Agreement and Plan of Merger dated as of September 30, 1998
among HealthWatch, Inc., MERAD Software, Inc. and Paul
Harrison Enterprises, Inc. (9).
10.5 Letter of Intent between HealthWatch, Inc. and HALIS, Inc.
dated July 14, 1998 -- previously filed.
16.1 Letter on Change in Certifying Accountant (11).
21 Subsidiaries of the Company at June 30, 1999 (6).
23.1 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd.
23.2 Consent of Tauber & Balser, P.C.
27.1 Financial Data Schedule.
- -----------------------
<PAGE>
(1) Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form S-2
(File No. 33-42831).
(4) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to the Company's Annual Report,
Form 10-KSB, for the year ended June 30, 1996 (File No. 0-11476).
(6) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-73462).
(7) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1997 (File No. 0-11476).
(8) Incorporated herein by reference to the Company's Quarterly Report,
Form 10-QSB, for the quarter ended December 31, 1997.
(9) Incorporated herein by reference to the Company's Current Report, Form
8-K, dated October 1, 1998.
(10) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB, for the year ended June 30, 1998 (File No. 0-11475).
(11) Incorporated herein by reference to the Company's Current Report on
Form 8-K, dated June 29, 1999.
(b) During the quarter ended June 30, 1999, Registrant filed one report on
Form 8-K dated June 29, 1999 relating to the change of its auditor.
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
FINANCIAL STATEMENTS
--------------------
TABLE OF CONTENTS
Page
----
Independent Auditors' Report................................................F-1
Consolidated Balance Sheet..................................................F-2
Consolidated Statements of Operations.......................................F-4
Consolidated Statements of Cash Flows.......................................F-5
Consolidated Statements of Shareholders' Equity ............................F-7
Notes to Consolidated Financial Statements..................................F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
HealthWatch, Inc. d/b/a MERAD Technologies Corporation
We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and subsidiaries as of June 30, 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. HealthWatch, Inc.'s consolidated statements of operations,
shareholders' equity, and cash flows for the year ended June 30, 1998 were
audited by other auditors whose report dated August 14, 1998 and September 30,
1998 included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthWatch,
Inc. and subsidiaries as of June 30, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
As discussed in Note B to the consolidated financial statements, the Company's
recurring losses, negative working capital and negative cash flow from
operations raises substantial doubt about its ability to continue as a going
concern. Management's plans as to these matters are also described in Note B.
The 1999 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Tauber & Balser, P.C.
Atlanta, Georgia
October 12, 1999
F-1
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 21,746
Accounts receivable, net of allowance for
doubtful accounts of $26,310 97,908
Inventory 83,864
Other current assets 9,931
----------
TOTAL CURRENT ASSETS 213,449
----------
OTHER ASSETS
Investment in HALIS, Inc. 1,769,671
Due from HALIS, Inc. 150,364
Property and equipment, net 22,796
Intangible assets, net 1,357,682
Other assets 34,010
----------
TOTAL OTHER ASSETS 3,334,523
----------
TOTAL ASSETS $3,547,972
==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Accounts payable $ 136,724
Accrued compensation and payroll taxes 198,068
Other accrued liabilities - related parties 206,196
Other accrued liabilities - unrelated parties 594,351
Deferred revenue 28,530
Debentures payable - related party 15,000
Debentures payable - unrelated parties 465,000
------------
TOTAL CURRENT LIABILITIES 1,643,869
------------
Contingencies and commitments
SHAREHOLDERS' EQUITY
Cumulative preferred stock, Series A, $.01 par value; 5,000,000
shares authorized, 1,145,000 shares issued and outstanding 11,450
Cumulative preferred stock, Series P, $.01 par value; 334,432
shares authorized, issued and outstanding 3,344
Common stock, $.01 par value, 50,000,000 shares authorized,
3,285,677 issued and outstanding 32,857
Additional paid-in capital 21,842,779
Accumulated deficit (19,986,327)
------------
TOTAL SHAREHOLDERS' EQUITY 1,904,103
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,547,972
============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Product sales $ 1,220,803 $ 1,383,335
Product cost of sales 940,950 1,359,028
----------- -----------
Gross Profit 279,853 24,307
OPERATING COSTS AND EXPENSES
Selling, general and administrative - related parties 294,976 261,906
Selling, general and administrative - unrelated parties 1,026,697 1,340,675
Depreciation and amortization 330,002 276,332
Research and development 286,921 231,169
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 1,938,596 2,110,082
----------- -----------
OPERATING LOSS (1,658,743) (2,085,775)
OTHER INCOME (EXPENSE)
Equity loss in HALIS, Inc. (23,702) -
Loss on marketable equity securities - related party -- (1,824,605)
Loss from disposition of subsidiary -- (102,885)
Interest expense - related parties (1,835) (2,659)
Interest expense - unrelated parties (65,824) (65,560)
Loss on disposal of equipment -- (4,043)
Miscellaneous 1,173 1,053
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (90,188) (1,998,699)
----------- -----------
NET LOSS $(1,748,931) $(4,084,474)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.65) $ (2.45)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,689,859 1,669,325
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,748,931) $(4,084,474)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 330,002 276,332
Equity loss from HALIS, Inc. 23,702 -
Common stock issued for payment of expenses - 120,783
Loss on disposal of equipment - 4,043
Loss on marketable equity securities - 1,824,605
Loss from disposition of subsidiary - 102,885
(Increase) decrease in assets:
Accounts receivable 86,507 52,009
Inventory 288,409 240,909
Other current assets 13,782 (5,820)
Due from HALIS, Inc. (150,364) -
Other assets (24,759) 35,032
Increase (decrease in liabilities)
Accounts payable (179,043) 63,093
Other accrued liabilities - related parties 3,304 158,574
Other accrued liabilities - unrelated parties 140,920 226,766
Deferred revenue (8,434) (28,291)
------------ -----------
Net cash used in operating activities (1,224,905) (1,013,554)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,198) -
Purchase of HALIS, Inc. stock (157,741) -
Cash forfeited in sale of subsidiary - (12,008)
------------ -----------
Net cash used in investing activities (168,939) (12,008)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debentures payable (100,000) -
Net proceeds from issuance of preferred stock - 1,113,952
Net proceeds from issuance of common stock 661,300 742,496
Issuance costs paid in common stock swap - (19,250)
------------ -----------
Net cash provided by financing activities 561,300 1,837,198
------------ -----------
Effect of exchange rate changes on cash - (1,980)
------------ -----------
(Decrease) Increase in cash (832,544) 809,656
Cash, beginning of year 854,290 44,634
------------ -----------
Cash, end of year $ 21,746 $ 854,290
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 25,601 $ 2,770
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1999:
The Company issued 488,400 shares of common stock valued at $448,436 to
MERAD Software, Inc. (formerly Paul Harrison Enterprises, Inc.) prior to
its acquisition by the Company in exchange for 1,400,000 shares of HALIS,
Inc. common stock.
The Company issued 334,432 shares of Series P preferred stock valued at
$2,560,000 for 6,177,010 shares of HALIS, Inc. common stock valued at
$868,488, 888,400 shares of its own common stock valued at $710,720 which
was retired, other assets valued at $80,628, and the MERAD Technology
valued at $900,164 in connection with the acquisition of MERAD Software,
Inc. (formerly Paul Harrison Enterprises, Inc.)
The Company accrued liabilities of $92,772 and increased its carrying value
of the MERAD Technology for additional consideration associated with the
acquisition of MERAD Software, Inc.
The Company received 1,824,645 shares of HALIS, Inc. common stock valued at
$157,741 in exchange for a note receivable from HALIS, Inc.
During the year ended June 30, 1998:
The Company issued 29,848 shares of common stock valued at $83,163 in
exchange for services.
The Company issued 17,100 shares of common stock valued at $37,620 for
employee bonuses.
The Company issued 1,089,600 shares of common stock in exchange for
1,362,000 shares of issued and outstanding HALIS, Inc. common stock.
The Company converted 20,834 shares of Series H preferred stock valued at
$120,802 to 83,334 shares of common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 - $ - 702,018 $ 7,020 $ 14,823,100
Net loss - - - - -
Equity adjustment from foreign currency
translation - sale of subsidiary - - - - -
Series A preferred stock issued in private offering 1,145,000 11,450 - - 981,700
Series H preferred stock issued in private offering 20,834 208 - - 120,594
Common stock issued for conversion of Series H preferred stock (20,834) (208) 83,334 833 (625)
Common stock issued in exchange for marketable equity securities - - 1,089,600 10,896 2,113,167
Common stock issued in private offerings - - 441,866 4,419 657,631
Common stock issued for services - - 29,848 298 82,865
Common stock options exercised - - 15,600 156 46,944
Common stock warrants exercised - - 41,355 414 32,932
Common stock bonuses - - 17,100 171 37,449
-------- ----------- ---------- -------- ------------
Balance at June 30, 1998 1,145,000 11,450 2,420,721 24,207 18,895,757
Net loss - - - - -
Series P preferred stock issued in private offering 334,432 3,344 - - 2,556,656
Common stock purchased and retired - - (888,400) (8,884) (701,836)
Common stock issued - - 1,209,956 12,100 612,900
Common stock issued in stock exchange - - 488,400 4,884 443,552
Common stock options exercised - - 55,000 550 35,750
--------- ----------- ---------- -------- ------------
Balance at June 30, 1999 1,479,432 $ 14,794 3,285,677 $ 32,857 $ 21,842,779
========= =========== ========= ======== ============
</TABLE>
<TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<CAPTION>
Total
Accumulated Comprehensive Shareholders'
Deficit Income Equity
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1997 $(14,152,922) $ (49,887) $ 627,311
Net loss (4,084,474) - (4,084,474)
Equity adjustment from foreign currency
translation - sale of subsidiary - 49,887 49,887
Series A preferred stock issued in private offering - - 993,150
Series H preferred stock issued in private offering - - 120,802
Common stock issued for conversion of Series H preferred stock - - -
Common stock issued in exchange for marketable equity securities - - 2,124,063
Common stock issued in private offerings - - 662,050
Common stock issued for services - - 83,163
Common stock options exercised - - 47,100
Common stock warrants exercised - - 33,346
Common stock bonuses - - 37,620
---------- ----------- ----------
BALANCE AT JUNE 30, 1998 (18,237,396) - 694,018
Net loss (1,748,931) - (1,748,931)
Series P preferred stock issued in private offering - - 2,560,000
Common stock purchased and retired - - (710,720)
Common stock issued - - 625,000
Common stock issued in stock exchange - - 448,436
Common stock options exercised - - 36,300
------------ --------- ----------
BALANCE AT JUNE 20, 1999 $ 19,986,327 $ - $1,904,103
============ ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
- ----------------------
HealthWatch, Inc. d/b/a MERAD Technologies Corporation ("MERAD" or the
"Company") was founded in 1983 and has evolved from a supplier of noninvasive
vascular diagnostic medical instruments including a proprietary device used to
monitor and control intravenous ("IV") drug infusion to hospitals and medical
clinics throughout the United States into primarily a software information
technology ("IT") company. The Company's virtual software application utility
(the "MERAD Technology") utilizes an advanced multi-media object and relational
database which creates knowledge objects that can be used and reused in
virtually unlimited number of combinations to provide efficient applications
that can be accessed in both an Internet and Intranet environment. Headquartered
in Atlanta, Georgia, MERAD has research and development, marketing, sales and
support capabilities in the healthcare IT sector.
Principles of Consolidation and Accounting for Investees
- --------------------------------------------------------
The consolidated financial statements include the accounts of HealthWatch, Inc.
d/b/a MERAD Technologies Corporation and the Company's wholly owned subsidiaries
MERAD Software, Inc. and HealthWatch Technologies, Inc. and their wholly owned
subsidiaries, respectively. MERAD's investment in a company in which it has the
ability to exercise significant influence over operating and financial policies
is accounted for by the equity method. Accordingly, MERAD's share of the net
earnings of this company is included in consolidated net loss. As of January 29,
1999, MERAD's investment in HALIS, Inc. ("HALIS") is accounted for under the
equity method. Prior to this date, the Company accounted for its
available-for-sale investment in HALIS, Inc. at its fair value. All significant
intercompany balances and transactions are eliminated in consolidation.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to concentration risk
consist principally of cash, amounts due from HALIS, Inc. and accounts
receivable. The Company maintains cash in a bank deposit account which, at
times, may exceed federally insured limits. The Company believes it has its cash
deposits at high quality financial institutions. The Company believes no
significant credit risk exists with respect to these deposits.
Due from HALIS, Inc. represents amounts advanced to HALIS, Inc. for its portion
of shared administrative and office expenses and amounts owed to the Company for
unpaid royalties due on the MERAD Technology. The ultimate collection of these
unsecured advances is uncertain based on the financial position of HALIS, Inc.
and therefore the Company believes it is impracticable to estimate fair value at
June 30, 1999.
F-8
<PAGE>
Accounts receivable arise from the sale of medical supplies and the provision of
technical support to hospitals and medical clinics. The Company performs ongoing
credit evaluations of its customers' financial condition, and generally requires
no collateral from its customers. The Company's credit losses are subject to
general economic conditions of the medical industry.
Inventory
- ---------
Inventory is recorded at the lower of cost (determined on a first-in, first-out
basis) or market. During fiscal 1999, approximately $188,000 of inventory was
charged to operations - cost of sales as the products were determined to be
obsolete.
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is computed using
straight-line methods and is expensed based upon the estimated useful lives of
the assets. Expenditures for additions and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
Long-Lived Assets
- -----------------
MERAD evaluates the carrying value of long-lived assets, including intangibles
and technology, whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated future cash flows expected to result from the use of the asset
including disposition is less than the carrying value of the asset.
F-9
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS on the face of all income statements issued after December 15, 1997
for all entities with complex capital structures. The adoption of SFAS No. 128
had no effect on the Company's financial statements. Basic EPS is computed as
net income (loss) available to common shareholders divided by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable through
stock options, warrants, and convertible debt and stock. As the Company's stock
options, warrants, and convertible debt and stock are antidilutive for all
periods presented dilutive loss per share is the same as basic loss per share.
At June 30, 1999 and 1998, outstanding options and warrants to purchase
3,628,645 and 2,357,612 shares, respectively, of the Company's common stock were
not included in the computation of diluted loss per share as their effect would
be antidilutive.
Revenue Recognition
- -------------------
MERAD recognizes revenue from product sales at the time ownership transfers to
the customer, principally, at shipment. Revenues from service contracts are
generally recognized on the straight-line basis over the life of the contracts,
which are principally 12 months. Deferred revenue represents amounts received on
service contracts but not yet earned.
Stock Based Compensation
- ------------------------
The Company follows adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 establishes a fair
value-based method of measuring stock-based compensation, but does not require
an entity to adopt the fair value method for preparing its basic financial
statements. For entities not using the fair value method, SFAS No. 123 requires
disclosures in the footnotes of pro forma net earnings and earnings per share
information as if the fair value-based method had been adopted.
F-10
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
- -----------------------------
In June 1998 and 1999, the Financial Accounting Standards Board (FASB) issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133." These statements require
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. MERAD does not use derivatives
and accordingly, these statements will not have an impact on our financial
results.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. SOP 98-1 will be effective for MERAD's fiscal
year ending June 30, 2000. The Company believes that the adoption of this
statement will not have a significant impact on its financial results.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
F-11
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE B - MANAGEMENT'S OPERATING PLANS
During 1999 and 1998, respectively, MERAD incurred a net loss of $1,748,931 and
$4,084,474 and negative cash flow from operations of $1,224,905 and $1,013,554,
resulting in a net working capital deficit of $1,430,420 and $340,287 an
accumulated deficit of $19,986,327 and $18,237,396 at June 30, 1999 and 1998,
respectively. Given these results combined with the Company's defaults under its
debenture agreements, and the Company's commitments to loan a related party up
to $200,000, additional capital will be needed to sustain MERAD's operations.
Management's plans in this regard include acting as a reseller of the HALIS
Enterprise System and its derivatives to its healthcare customer base and the
continued sale of supplies and provision of technical support to the users of
the medical products it previously sold. If resources are available, the Company
hopes to use the MERAD Technology to develop additional applications, Also, as
HALIS continues its efforts to sell the HALIS Enterprise System and its
derivatives, MERAD will collect royalties because such products incorporate the
MERAD Technology. The Company believes that the MERAD Technology will contribute
greatly toward the future operations of the Company, although no assurance
regarding the commercial success of the Technology can be provided at this time.
Additionally, the Company will continued its efforts to raise the additional
capital required to fund planned 2000 activities.
In the event that Management's plans as described above are not successful,
MERAD could be forced to further reduce its operations, curtail acquisitions or
other projects, liquidate any excess inventory, liquidate its investment in
HALIS, and sell any non-performing operating lines.
The actions described above may not be sufficient to prevent the Company from
liquidating. The consolidated financial statements do not contain any
adjustments, which might be necessary, if MERAD is unable to continue as a going
concern.
NOTE C - INVESTMENT IN HALIS, INC.
During fiscal 1998, MERAD issued 1,089,600 shares of its common stock in
exchange for 1,362,000 shares, or approximately 2%, of the issued and
outstanding registered shares of HALIS, Inc. at that time. In addition, the
Company paid $19,250 of costs directly related to this transaction. The HALIS
shares received were recorded at their fair market value as of the exchange
dates of $2,143,313, with MERAD recording net equity related to the issuance of
its shares of $2,124,063 (net of issuance costs). As of June 30, 1998, the
Company had classified all common shares of HALIS as available-for-sale.
Throughout 1998, the investment in HALIS' common stock experienced a decline in
value and during the fourth quarter of 1998, management deemed the decline to be
"other-than-temporary." As a result, an unrealized loss aggregating $1,824,605
was reflected as a separate component in the statement of operations and the
amortized cost was been written down to its new cost basis of $318,708 as of
June 30, 1998.
F-12
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE C - INVESTMENT IN HALIS, INC. (Continued)
During fiscal 1999, MERAD acquired additional shares in HALIS bringing its
ownership to approximately 21%, and accordingly, the Company changed its
accounting from fair value to the equity method of accounting. This change in
accounting principle resulted in a cumulative effect adjustment during fiscal
1999 to MERAD's beginning accumulated deficit to reflect the balance of the
investment in HALIS as of July 1, 1999. 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 operations for fiscal
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.
The carrying value of the investment with HALIS under the equity method exceeded
the 21% equity in the underlying net assets of HALIS at the date of conversion
to the equity method by $1,845,329. This excess of the investment over the 21%
equity in the underlying net assets of HALIS is being amortized on the
straight-line method over ten years.
A summary of financial information for HALIS, Inc. as of June 30, 1999 is as
follows:
<TABLE>
<S> <C>
Current assets $ 1,418,713
Noncurrent assets 2,433,233
-----------
Total assets $ 3,851,946
===========
Current liabilities $ 3,319,376
Noncurrent liabilities 223,354
-----------
Total liabilities $ 3,542,730
===========
Shareholders' equity $ 309,216
===========
MERAD's equity investment $ 1,832,345
===========
Year ended June 30, 1999
Net revenues $ 6,071,574
Cost of goods sold 1,876,267
-----------
Gross profit $ 4,195,307
===========
Operating loss $(1,032,346)
===========
Cash operating loss <F1> $ (154,546)
============
Net loss $ (257,349)
============
MERAD's equity income <F2> $ 38,972
============
<FN>
<F1> Cash operating loss is defined as operating loss plus depreciation and
amortization expense and other noncash operating expenses.
<F2> MERAD's equity income is based upon ownership percentages that began at
approximately 4.9% and increased to approximately 21% during the year
ended June 30, 1999.
</FN>
</TABLE>
F-13
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE C - INVESTMENT IN HALIS, INC. (Continued)
If valued at the June 30, 1999 quoted closing price of publicly traded HALIS
shares, the calculated value of MERAD's investment in HALIS is $1,342,082. The
calculated value exceeds the Company's carrying value by $424,103. In
Management's opinion, this decline is temporary in nature, and therefore, no
adjustment is necessary to the carrying value of HALIS by the equity method.
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. The 10,763,655 shares of HALIS common stock
owned by the Company represent approximately 21% 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 would 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.
NOTE D - ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE")
During fiscal 1999, the Company completed the acquisition of MERAD Software,
Inc. (formerly Paul Harrison Enterprises, Inc.) and subsidiaries. The Company
issued 334,443 shares of Series P Preferred Stock in exchange for all of the
issued and outstanding common stock of PHE. In addition, MERAD will pay to the
shareholders of PHE additional consideration based on a variable rate of gross
revenues related to the MERAD Technology. The additional consideration, payable
quarterly in equal increments of the Company's common stock and cash, equals 5%
of the first $1,000,000 gross revenues related to the MERAD Technology acquired
and 10% of revenues thereafter in any fiscal year. The additional consideration
is payable for a period of ten years or until the Company has paid in the
aggregate $7,000,000 in additional consideration.
F-14
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE D - ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)
The Series P preferred stock is non-voting with a stated value of $10.00 per
share. The preferred stock is convertible into ten shares of fully-paid and
non-assessable common share, provided the conversion feature is approved by the
vote of the Company's shareholders; and provided, through March 2000, that
immediately following the conversion the PHE shareholders own less than 45% of
MERAD's then outstanding shares of common stock. Dividends are cumulative and
payable semi-annually, if declared, at a variable rate, $1.20 per share through
January 1999 increasing to $1.80 on February 1, 1999 and to $2.40 per share on
August 1, 1999 if not converted into common stock on or before such dates. The
Series P preferred stock has dividend and liquidation preferences over all
common stock, and is on an equal liquidation and dividend (other than rate)
basis with the Series A preferred stock of the Company (See Note J). Management
has determined the fair market value of these shares to be $2,560,000 based on
the approximate trading price for MERAD's common stock 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.
The Company has accounted for the acquisition under the purchase method of
accounting whereby the assets and liabilities of PHE are recorded at their fair
market value as of the date of the acquisition. The $900,164 excess purchase
price over the fair market value of the net tangible assets acquired has been
identified as the MERAD Technology acquired and is being amortized over a ten
year period.
Summarized below is the unaudited condensed and pro forma consolidated statement
of operations as if the acquisition had taken place at the beginning of the year
ended June 30, 1999.
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations (Unaudited)
----------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Consolidating HealthWatch, Inc.
Consolidated Consolidated Entries Consolidated
----------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 1,220,803 $ 157,024 $ (117,024) <F2> $ 1,260,803
Cost of sales 940,050 - - 940,950
----------- --------- ---------- -----------
Gross profit 279,853 157,024 (117,024) 319,853
Operating expenses 1,938,596 80,737 24,823 <F1> 2,044,156
----------- --------- ---------- -----------
Loss from operations (1,658,743) 76,287 (141,847) (1,724,303)
Other income (expense) (90,188) - - (90,188)
----------- --------- ---------- -----------
Net income (loss) $(1,748,931) $(76,287) $ (141,847) $(1,814,491)
=========== ======== ========== ===========
Net loss per share $ (0.65) $ (0.67)
============ ============
Weighted average
Number of shares
outstanding 2,689,859 2,689,859
========= =========
<FN>
<F1> To record amortization of MERAD Technology.
<F2> To eliminate intercompany sales of investments.
</FN>
</TABLE>
F-15
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE D - ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)
Summarized below is the unaudited condensed and proforma consolidated balance
sheet and statement of operations as if the acquisition had taken place at the
beginning of the year ended 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 (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 $ 1,434,691 $ 129,120 $ -- $ (95,000)<F4> $ 1,468,811
Marketable equity (710,720)<F3>
Securities - related party 318,708 525,000 -- 1,149,332 1,282,320
Technology and other
intangible assets 715,597 255,038 -- 938,064 1,908,699
Investment in
Subsidiary -- -- 2,560,000<F1> (2,560,000)<F2> --
----------- ----------- ----------- ------------ -----------
Total assets $ 2,468,996 $ 909,158 $ 2,560,000 $(1,278,324) $ 4,659,830
=========== =========== =========== =========== ===========
Current liabilities $ 1,774,978 $ 436,604 -- $ (95,000)<F4> $ 2,116,582
Long-term debt -- -- -- (710,720)<F3> --
Shareholders' equity 694,018 472,554 2,560,000<F1> (472,604)<F2> 2,543,248
----------- ----------- ----------- ------------ -----------
Total liabilities and equity $ 2,468,996 $ 909,158 $ 2,560,000 $(1,278,324) $ 4,659,830
=========== =========== =========== =========== ===========
<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 part of the
acquisition of PHE.
<F4> To eliminate intercompany balances as of June 30, 1998.
</FN>
</TABLE>
F-16
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE D - ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations (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 $ 1,383,335 $ 105,000 $ -- $ 95,000<F1> $ 1,393,335
Cost of sales 1,359,028 -- -- -- 1,359,028
--------- ----------- ---------- ----------- -----------
Gross profit 24,307 105,000 -- 95,000 34,307
Operating expenses 2,110,082 495,902 -- (95,000)<F1> 2,510,984
--------- ----------- ---------- ----------- -----------
Loss from operations (2,085,775) (390,902) -- -- (2,476,677)
Other income (expense) (1,998,699) 129,265 -- -- (1,869,434)
--------- ----------- ---------- ----------- -----------
Net loss $(4,084,474) $ (261,637) $ -- $ -- $(4,346,111)
=========== =========== ========== ============= ===========
Net loss per share $ (2.45) $ (2.60)
=========== ===========
Weighted average number
of shares outstanding 1,669,325 1,669,325
========= =========
<FN>
<F1> To eliminate intercompany activity during the year ended June 30, 1998.
</FN>
</TABLE>
F-17
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE E - INVENTORY
Inventory consisted of the following at June 30, 1999
Raw materials $ 59,000
Work in process --
Finished goods 24,864
-----------
Total inventory $ 83,864
===========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1999
Furniture and equipment $ 635,569
Less accumulated depreciation (612,773)
----------
Property and equipment, net $ 22,796
==========
NOTE G - INTANGIBLE ASSETS
Intangible assets arising from the acquisition of Life Sciences, Inc. and the
acquisition of MERAD Software, Inc. (formerly Paul Harrison Enterprises, Inc.)
and subsidiaries consists of technology known as the Life Sciences Technology
and the MERAD Technology, respectively, and are being amortized over ten years
on the straight-line method. Life Sciences Technology and MERAD Technology
consists of the following as of June 30, 1999:
Life Sciences Technology $ 2,716,987
Less accumulated amortization (2,281,333)
-----------
Life Sciences Technology, net 435,654
MERAD Technology $ 992,936
Less accumulated amortization (70,908)
-----------
MERAD Technology, net 922,028
-----------
Intangible assets, net $ 1,357,682
===========
The Life Sciences Technology includes technology, drawings and documentation,
name, applications and customer base. MERAD Technology includes the technology
and virtual software application utility.
F-18
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE H - DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%, payable quarterly
and are secured by substantially all assets of the Company. The debentures
matured March 1, 1998 and are presently in default. As of June 30, 1999, the
debentures had not been extended and the Company is in default under the
debenture agreements. The debentures are convertible into common stock, at
the option of the holder, at a conversion rate of one share of common stock for
every $70.00 of debentures converted. During 1999 and 1998, no debentures were
converted into common stock.
Debentures payable to related parties consist of debentures issued to a
director/shareholder of MERAD.
At June 30, 1998, the Company believed that the carrying value of the debt
approximated its fair value, as MERAD's borrowing terms had not changed
substantially since the issuance of its debentures. At June 30, 1999, the
Company does not believe that it is practicable to estimate the carrying value
because of the operating difficulties of the Company.
NOTE I - CONTINGENCIES AND COMMITMENTS
Operating Leases
- ----------------
The Company has entered into an operating lease for office and warehouse, which
began on January 1, 1999 and is for a period of three years. The lease agreement
calls for total annual rent of $49,200, with a 4% increase each year. Prior to
the execution of this lease, the Company subleased its office and warehouse
space on a month-to-month basis.
Rent expense for 1999 and 1998 was $59,055 and $152,899, respectively.
F-19
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED JUNE 30, 1999 AND 1998
NOTE J - PREFERRED STOCK
Convertible Series A Preferred Stock
- ------------------------------------
In June 1998, the Company issued 1,145,000 shares of non-voting Series A, $.01
par value, 6% cumulative and convertible preferred stock for net proceeds of
$993,150. Series A preferred shareholders have the option to convert the Series
A preferred stock, which has a stated value of $1.00 per share, into fully-paid
and non-assessable shares of $.01 par value common stock at a conversion rate
equal to the lesser of $.52 per share or 70% of the market value of the common
stock at the time of conversion. Dividends are payable semi-annually, if
declared. No dividends were declared during the years ended June 30, 1999 and
1998. At June 30, 1999, the amount of dividends in arrears was $68,700. The
Series A preferred stock has dividend and liquidation preferences over common
stock, and is an equal liquidation and dividend (other than rate) basis with the
Series P preferred stock of the Company. The stated liquidation preference value
is $1,145,000. As of October 1, 1999 (but after the year ended June 30, 1999),
567,000 shares of the Series A preffered stock have been converted into
1,384,438 shares of the Company's common stock.
Convertible Series H Preferred Stock
- ------------------------------------
During 1998, the Company issued 20,834 shares of non-voting Series H, $.01 par
value convertible preferred stock to HALIS for net proceeds of $120,802. Series
H preferred shareholders had the option to convert each share of Series H
preferred stock into four fully-paid and non-assessable shares of the $.01 par
value common stock.
During 1998, HALIS converted its 20,834 shares of Series H preferred stock into
83,334 shares of common stock in accordance with the conversion policy.
F-20
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE J - PREFERRED STOCK (Continued)
Convertible Series P Preferred Stock
- ------------------------------------
During 1999, the Company issued 334,432 shares of $.01 par value Series P
Preferred Stock in exchange for all of the issued and outstanding common stock
of PHE. The Series P Preferred Stock is non-voting with a stated value of $10.00
per share. The preferred stock is convertible into ten shares of fully-paid and
non-assessable common stock, provided the conversion feature is approved by the
vote of the Company's shareholders; and provided, through March 2000, that
immediately following the conversion the PHE shareholders own less than 45% of
the Company's then outstanding shares of common stock. Dividends are cumulative
and payable semi-annually, if declared, at a variable rate of $1.20 per share
through January 1999 increasing to $1.80 per share on February 1, 1999 and to
$2.40 per share on August 1, 1999 if not converted into common stock by such
dates. At June 30, 1999, the amount of dividends in arrears was $384,597. The
Series P Preferred Stock has dividend and liquidation preferences over all
common stock, and is on an equal liquidation and dividend (other than rate)
Basis with the Series A Preferred Stock of the Company. The stated liquidation
preference value of $3,344,320. Management has determined the fair market value
of these shares to be $2,560,000 based on the approximate trading price for the
Company's common stock 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.
NOTE K - SHAREHOLDERS' EQUITY
Private Placement of Common Stock
- ---------------------------------
During 1999, the Company offered and issued 1,209,956 shares of common stock at
various prices per share in private offerings. Net proceeds to the Company
aggregated $625,000.
During 1999, 55,000 shares of common stock were issued as a result of options
being exercised by former employees of the Company.
During 1998, the Company offered and issued 20,000 shares of common stock at
$1.75 per share to an existing shareholder of the Company. Net proceeds to the
Company aggregated $35,000.
During 1998, the Company offered up to 360,000 shares of its common stock at
$1.50 per share. Pursuant to the offering, the Company issued 349,333 shares of
common stock to HALIS shareholders resulting in proceeds, net of direct expenses
(aggregating $4,760) of $519,240.
Additionally, in 1998, the Company offered 30 units of its securities at $6,000
per unit. Each unit consisting of 4,000 shares of common stock and 2,000 stock
purchase warrants, representing the right to purchase additional shares of
common stock at $.75 per share. Pursuant to the offering, the Company sold
18.133 units or 72,533 shares of common stock and 36,267 warrants to purchase
common stock to HALIS shareholders, resulting in proceeds, net of commissions
and other expenses (aggregating $990), of $107,810.
F-21
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE K - SHAREHOLDERS' EQUITY (Continued)
Securities Offerings - HALIS, Inc.
During 1998, the Company pursued a joint venture and co-marketing arrangement
with HALIS, a publicly traded Georgia corporation. Pursuant to this arrangement,
MERAD entered into the following series of transactions with HALIS and certain
shareholders and affiliates of HALIS.
* The Company offered and issued 20,834 shares of Series H preferred
stock to HALIS at $6.00 per share resulting in proceeds, net of direct
expenses (aggregating $4,202), of $120,802. The Series H Preferred
Stock was converted during 1998 into 83,334 shares of common stock.
* The Company approved the exchange of up to 1,258,000 shares of issued
and outstanding HALIS common stock with various HALIS shareholders and
affiliates. All such shares of HALIS common stock received by
MERAD pursuant to this exchange have been registered with the SEC
and are marketable by the Company pursuant to Rule 144 promulgated by
the Securities and Exchange Commission. In addition, MERAD granted
an option to exchange an additional 400,000 shares of HALIS common
stock for 320,000 shares of the Company's common stock provided that
immediately following any such exchange HALIS and its affiliates own
less than 48% of MERAD's then outstanding shares of common stock.
During 1998, the Company issued 1,089,600 shares of common stock in
exchange for 1,362,000 shares of HALIS' issued and outstanding common
stock.
* As of June 30, 1998, the Company had entered into two subscription and
exchange agreements with Paul Harrison Enterprises ("PHE"). Pursuant to
these agreements, MERAD agreed to issue an additional 488,400 shares of
its common stock in exchange for 1,400,000 shares of HALIS common stock
owned by PHE. During fiscal 1999, the exchanges under these two
subscription agreements were completed.
Stock Options
- -------------
At June 30, 1999, 425,000 shares of common stock were reserved for issuance
under the Company's 1995 Stock Option Plan. Pursuant to the plan, the Board of
Directors may grant options to key individuals at their discretion. Option
prices under the Incentive Stock Option Plan may not be less than the fair
market value on the date the option is granted, whereas, non-statutory stock
option prices may not be less than 85% of the fair market value on the date the
option is granted. The options vest over a period of one to three years.
F-22
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE K - SHAREHOLDERS' EQUITY (Continued)
A summary of the status of the Company's stock options plans as of June 30, 1999
and 1998 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year 859,695 $ 1.29 354,600 $ 11.09
Granted 626,000 $ .96 831,714 $ 1.01
Exercised (55,000) $ .66 (15,600) $ 3.02
Expired (6,553) $ 15.30 - $ -
Cancelled (161,302) $ 1.91 (311,019) $ 10.59
--------- ------- -------- ---------
Outstanding at end of year 1,262,840 $ .90 859,695 $ 1.29
========= ======= ======== ========
Options exercisable at end of year 1,194,508 $ .91 337,572 $ 1.22
========= ======= ======== ========
Weighted-average fair value of
options granted during the year $ .07 $ .51
======= ========
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Exercise Outstanding Remaining Exercise Outstanding Exercise
Prices at 6/30/99 Contractual Life Price at 6/30/99 Price
------ ---------- ---------------- ----- ---------- -----
<C> <C> <S> <C> <C> <C>
$13.30 1,428 .8 Years $13.30 1,428 $13.30
$ 6.75 15,000 2.5 Years $ 6.75 15,000 $ 6.75
$ 2.80 3,000 3.2 Years $ 2.80 3,000 $ 2.80
$ .96 626,000 4.3 Years $ .96 626,000 $ .96
$ .66 617,412 3.5 Years $ .66 549,000 $ .66
--------- ---------
1,262,840 1,194,508
========= =========
</TABLE>
Various officers and directors have been granted a total of 1,178,475 options
under the Company's Stock Options Plans which are included in the above table
(see Note L).
SFAS No. 123, "Accounting for Stock-Based Compensation," equires the Company to
provide pro-forma information regarding net loss and loss per share as if
compensation cost for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: no dividend yield
for each year; expected volatility of 136.25% and 147.50%, respectively; and
risk free interest rates of 4.72% and 5.98%, respectively.
F-23
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE K - SHAREHOLDERS' EQUITY (Continued)
1999 1998
-------------- --------------
Net loss:
As reported $(1,748,931) $(4,084,474)
Pro forma $(1,849,368) $(4,892,134)
Net loss per share:
As reported $ (0.65) $ (2.45)
Pro forma $ (0.69) $ (2.93)
The Company has issued stock warrants in conjunction with the issuance of common
stock. Activity related to stock warrants was as follows:
Weighted Average
Warrants Exercise Price
-------- --------------
Outstanding at June 30, 1997 300,000 $10.00
Granted 1,239,252 $ 1.21
Exercised (41,335) $ .81
Expired - $ -
---------- -------
Outstanding at June 30, 1998 1,497,917 $ 2.98
Granted 1,170,804 $ .63
Exercised - $ -
Expired (302,916) $ 9.91
--------- ------
Outstanding at June 30, 1999 2,365,805 $ .93
========= ======
At June 30, 1999, the Company had warrants outstanding as follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- --------------- -------------
145,455 $ .45 January 2001
666,670 $ .49 January 2001
188,680 $ .86 March 2001
70,000 $ .38 April 2001
100,000 $ 1.59 April 2001
50,000 $ 1.72 January 2003
1,145,000 $ 1.20 June 2003
---------
2,365,805
=========
F-24
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE L - RELATED PARTY TRANSACTIONS
Officer and Director Options
- ----------------------------
At June 30, 1999, the Company had outstanding the following qualified and
nonqualified stock options granted to officers and directors:
Common Shares Exercise Expiration
Under Option Price Per Share Date
------------- --------------- -------------
1,428 $13.30 May 2000
15,000 $ 6.75 December 2001
110,714 $ .66 August 2002
3,000 $ 2.80 August 2002
150,000 $ .66 October 2002
80,000 $ .66 November 2002
235,000 $ .66 May 2003
583,333 $ .96 October 2003
---------
1,178,475
=========
F-25
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE L - RELATED PARTY TRANSACTIONS (Continued)
Of the total outstanding options granted to officers and directors as discussed
above, options to acquire up to an aggregate of 1,110,143 shares of common stock
are exercisable at June 30, 1999.
Officer and Director Warrants
- -----------------------------
At June 30, 1999, the Company had outstanding to officers and directors, stock
warrants to purchase 308,663 shares of common stock at prices ranging from $.45
per share to $1.72 per share. These warrants expire at various dates from
January 2001 through January 2003.
Software License and Development Agreement
- ------------------------------------------
In October 1997, the Company entered into a software license and development
agreement with MERAD Corporation, a company owned by Paul Harrison Enterprises
(PHE), an entity controlled by an officer/director of the Company. Pursuant to
the agreement, the Company was to license from MERAD Corporation certain
computer architecture, concepts, algorithms and processes which the Company
originally planned to integrate into its line of noninvasive vascular diagnostic
equipment. In addition, MERAD Corporation was to develop healthcare software for
the Company. In exchange for these licenses and services, the Company agreed to
pay MERAD Corporation a development fee of $15,000 per month during the period
January 1998 through January 2000. In addition, the Company was to pay MERAD
Corporation a fee based on a variable rate of gross software revenues as
follows:
Rate Gross Aggregate Software Revenues
- ---- ---------------------------------
5.0% $0 to $5,000,000
2.5% $5,000,001 to $10,000,000
1.0% In excess of $10,000,000
During 1998, the Company had incurred $90,000 of development fees, of which
$90,000 remained unpaid at June 30, 1998 and was included in other accrued
liabilities - related parties as of such date. No software revenue was earned
during 1998 and accordingly, no variable rate license fees were incurred. This
agreement was effectively cancelled effective June 30, 1999 as a result of the
acquisition of PHE by the Company, and no additional amounts were accrued during
fiscal 1999.
Technology and Patent Agreement
- -------------------------------
The Company had an agreement with a former officer/director to license certain
technology and patent rights through June 1999 in exchange for a fee. The fee
was based on a variable rate based on unit sales. For 1999 and 1998, licensing
fee expense in accordance with this agreement was $40,000, of which $40,000 and
$5,000, respectively, remained unpaid at June 30, 1999 and 1998 and is included
in other accrued liabilities - related parties.
Employment Agreement
- --------------------
During 1998, the Company entered into a termination agreement with an officer
under which the officer is entitled to receive a severance package totaling
$71,500 payable over a five-month period. At June 30, 1998, $59,000 of the
balance remained unpaid and was included in accrued compensation and payroll
taxes. The balance of this liability was paid in full during 1999.
F-26
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE L - RELATED PARTY TRANSACTIONS (Continued)
Consulting Agreements
- ---------------------
During 1997, the Company entered into an agreement with an officer/director and
an entity owned by the officer, PHE. Pursuant to the agreement, the officer and
PHE provided the Company with various consulting services through December 1998,
in exchange for a nonstatutory option to purchase up to 150,000 shares of the
Company's common stock at $.66 per share. In addition, the Company agreed to pay
PHE a monthly fee of $15,000 beginning in January 1998 and committed to loan the
officer/director up to $200,000 at 7% with a maturity in July 2002. During 1998,
the Company had incurred $30,000 of consulting expenses, of which $30,000
remained unpaid at June 30, 1998 and were included in other accrued liabilities
- - related parties. This liability was eliminated during 1999 when the Company
acquired PHE. No amounts had been loaned to this officer as of June 30, 1999.
During 1997, the Company entered into an agreement with an officer/director of
the Company. Pursuant to the agreement, the officer/director provided the
Company with various consulting services through December 1998, in exchange for
a nonstatutory option to purchase up to 80,000 shares of the Company's common
stock at $.66 per share. In addition, the Company agreed to pay the
officer/director a monthly fee of $5,000 beginning in March 1998. During 1999
and 1998, the Company had incurred $45,000 and $20,000, respectively, of
consulting expense of which none and $10,000, remained unpaid at June 30, 1999
and 1998 and was included in other accrued liabilities - related parties.
Creative Business Strategies, Inc. (CBS), a company owned by a current
director/shareholder of the Company and a former director/shareholder of the
Company, provides the Company with business development consulting services in
exchange for a fee. During 1999 and 1998, the Company had incurred $29,674 and
$31,906, respectively, of fees to CBS, of which $45,000 and $15,326,
respectively, remained unpaid at June 30, 1999 and 1998 and is included in other
accrued liabilities - related parties.
Consulting Agreement
- --------------------
During 1999, the Company entered into a consulting agreement with an
officer/director under which the officer is entitled to receive a consulting fee
of $12,500 per month payable over a one-year period. During fiscal 1999 the
Company incurred $75,000 of these consulting fees, of which $62,500 remained
unpaid as of June 30, 1999 and were included in other accrued liabilities -
related parties. This liability was paid in full during fiscal 1999.
Purchased Services
- ------------------
During 1998, the Company purchased systems integration services and marketing
support services from HALIS. Total purchased services from HALIS aggregated
$50,000, all of which remained unpaid at June 30, 1998 and were included in
other accrued liabilities - related parties. This liability was paid in full
during fiscal 1999.
MERAD Royalty
- -------------
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
sale of the HALIS Healthcare Enterprise System and any derivative products or
services associated therewith. The Company earned $66,087 in royalties during
fiscal 1999.
F-27
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE L - RELATED PARTY TRANSACTIONS (Continued)
Letter of Intent to Acquire HALIS, Inc.
- ---------------------------------------
On July 14, 1998, the Company entered into a letter of intent to acquire all of
the issued and outstanding shares of HALIS's common stock. As of the date of
this report, consummation of the transaction is uncertain. Pursuant to the
letter of intent the Company committed to loan HALIS up to $250,000 ($50,000 per
month), in exchange for a 6% convertible debenture maturing in February 2000.
During fiscal 1999, the Company made loans aggregating approximately $157,000 to
HALIS, which was converted into 1,824,645 shares of HALIS' common stock.
NOTE M - INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate as a
result of the following items:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Tax benefit computed at the maximum federal statutory rate (34.0%) (34.0)%
Increase in taxes resulting from:
Amortization of intangible assets 6.0 2.0
Unrealized loss on marketable equity securities - 15.0
Loss to be carried forward 28.0 17.0
------ -----
Income tax provision 0.0% 0.0%
====== =====
</TABLE>
Deferred income taxes and the related valuation allowances result from the
potential tax benefits of tax carryforwards. The Company has recorded a
valuation allowance to reflect the uncertainty of the ultimate utilization of
the deferred tax assets as follows:
1999 1998
----------- -----------
Deferred tax assets $ 3,887,000 $ 3,229,000
Less valuation allowance (3,887,000) (3,229,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
F-28
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE M - INCOME TAXES (Continued)
For financial statement purposes, no tax benefit has been reported in 1999 and
1998 as the Company has had significant losses in recent years and realization
of the tax benefits is uncertain. Accordingly, a valuation allowance has been
established for the full amount of the deferred tax asset.
The net change in the deferred tax valuation allowance was an increase of
$658,000 and $886,000 for the years ended June 30, 1999 and 1998, respectively.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $11,476,000 and unused investment tax credits of approximately
$28,000. The net operating loss carry forwards expire beginning in 2002 through
2018 and the investment tax credits expire beginning in 2000 through 2002.
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30 Carryforwards Carryforwards
----------- --------------- --------------
2000 $ - $ 9,634
2001 - 3,798
2002 627,889 14,560
2003 11,744 -
2004 122,457 -
2005 1,371 -
2006 235,901 -
2007 1,461,790 -
2008 281,054 -
2009 1,644,839 -
2010 1,666,725 -
2011 1,815,490 -
2012 1,881,569 -
2013 1,725,000 -
------------ -----------
$11,475,829 $27,992
=========== =======
The utilization of the carryforwards is dependent upon the ability to generate
sufficient taxable income during the carryforward period. In addition, the
availability of these net operating loss carryforwards to offset future taxable
income may be significantly limited due to ownership changes as defined in the
Internal Revenue Code.
NOTE N - SALE OF CAMBRIDGE MEDICAL EQUIPMENTS LIMITED
During March 1998, the Company sold all of the issued and outstanding shares of
stock in its wholly owned subsidiary, Cambridge Medical Equipments Limited
(Cambridge), located in Great Britain. In connection with the sale, the Company
sold net assets of Cambridge with a net book value aggregating $102,886 for
$1 and recognized a loss on sale of the subsidiary of $102,885.
F-29
<PAGE>
HEALTHWATCH, INC.
d/b/a MERAD TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE P - GEOGRAPHICAL SEGMENT INFORMATION
1999 1998
----------- ----------
Revenues:
United Stated $ 1,220,803 $1,169,629
Great Britain - 213,706
Elimination's - -
----------- ----------
Consolidated $ 1,220,803 $1,383,335
=========== ==========
Operating profit (loss):
United States $(1,658,743) $(2,034,418)
Great Britain - (51,357)
Elimination's - -
------------ ------------
Consolidated $(1,658,743) $(2,085,775)
=========== ===========
F-30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHWATCH, INC.
Date: October 15, 1999 By /s/ Paul W. Harrison
--------------------------------------
Paul W. Harrison (Chief Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Paul W. Harrison October 15, 1999
- -----------------------------------------------------
Paul W. Harrison, (Chief Executive Officer)
(Principal Executive Officer and Principal Financial
and Accounting Officer)
/s/ Richard T. Case October 15, 1999
- -----------------------------------------------------
Richard T. Case
(Director)
/s/ Sanford L. Schwartz October 15, 1999
- -----------------------------------------------------
Sanford L. Schwartz
(Director)
>> EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our report, which contains an explanatory
paragraph with respect to the substantial doubt about the Company's ability to
continue as a going concern, dated August 14, 1998, except Notes 10 and 17 which
are dated September 30, 1998, accompanying the consolidated financial statements
of HealthWatch, Inc. as of June 30, 1998, included in the Company's Annual
Report on Form 10-KSB and to the incorporation by reference of the
aforementioned financial statements in the Registration Statements on Form S-8
for the 1983 Incentive Stock Option Plan, Employee Stock Purchase Plan of
1987,Stock Option Plan of 1989 and Stock Option Plan of 1993, Registration
Statement nos. 33-36833, 33-22729, 33-36832 and 33-75470, respectively,
Registration Statements on Form S-8 for the 1995 Stock Option Plan and 1995
Stock Grant and Salary Deferral Plan Registration Statement nos. 033-65151 and
333-35297 and S-3 Registration Statements for Selling Shareholders nos.
33-88032, 333-19393, 333-21929 and 333-26913.
/s/ Silverman Olson Thorvilson & Kaufmann Ltd.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
October 20, 1999
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our report, which contains an explanatory
paragraph with respect to the substantial doubt about the Company's ability to
continue as a going concern, dated October 10, 1998 accompanying the
consolidated financial statements of HealthWatch, Inc. as of June 30, 1999,
included in the Company's Annual Report on Form 10-KSB and to the incorporation
by reference of the aforementioned financial statements in the Registration
Statements on Form S-8 for the 1983 Incentive Stock Option Plan, Employee Stock
Purchase Plan of 1987,Stock Option Plan of 1989 and Stock Option Plan of 1993,
Registration Statement nos. 33-36833, 33-22729, 33-36832 and 33-75470,
respectively, Registration Statements on Form S-8 for the 1995 Stock Option Plan
and 1995 Stock Grant and Salary Deferral Plan Registration Statement nos.
033-65151 and 333-35297 and S-3 Registration Statements for Selling Shareholders
nos. 33-88032, 333-19393, 333-21929 and 333-26913.
/s/ Tauber & Balser, P.C.
TAUBER & BALSER, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Atlanta, Georgia
October 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000725627
<NAME> HEALTHWATCH, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 21,746
<SECURITIES> 1,769,671
<RECEIVABLES> 124,218
<ALLOWANCES> (26,310)
<INVENTORY> 83,864
<CURRENT-ASSETS> 213,449
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,547,972
<CURRENT-LIABILITIES> 1,643,869
<BONDS> 480,000
0
14,794
<COMMON> 32,857
<OTHER-SE> 1,856,452
<TOTAL-LIABILITY-AND-EQUITY> 3,547,972
<SALES> 1,220,803
<TOTAL-REVENUES> 1,220,803
<CGS> 940,950
<TOTAL-COSTS> 940,950
<OTHER-EXPENSES> 1,938,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,659
<INCOME-PRETAX> (1,748,931)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,748,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,748,931)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
