U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY-REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended Commission file number
------------------------------ ---------------------
December 31, 1998 0-11476
HEALTHWATCH, INC.
---------------------------------------------------------------
Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9040 Roswell Road, Suite 470, Atlanta, GA 30350
-----------------------------------------------
(Address of Principal Executive Offices)
(770) 641-5555
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
-----------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Number of registrant's common shares outstanding at December 31, 1998:
2,020,721
---------
Transitional Small Business Disclosure Format (check one)
Yes No X
---- ----
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash $37,514
Accounts Receivable, net of allowance for doubtful
accounts of $24,633 92,812
Inventory 289,523
Other Current Assets 104,212
----------
Total current assets 524,061
Marketable equity securities - related party 1,299,360
Note Receivable related party 100,000
Property and equipment, net 30,899
Intangible assets, net 1,574,608
Other assets 33,323
----------
Total Assets $ 3,562,251
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 328,288
Accrued compensation and payroll taxes 187,529
Other accrued expenses - related parties 231,030
Other accrued expenses - unrelated parties 264,546
Deferred revenue 23,509
Current portion of debentures payable
- related parties 15,000
Current portion of debentures payable
- unrelated parties 478,000
----------
Total liabilities 1,527,902
----------
Shareholders' Equity
Cumulative preferred stock, 5,000,000 shares authorized, par value$.01 per share;
- 6% Series A, $ 1.00 stated value, 1,145,000 shares issued
and outstanding 11,450
- Series P, $10.00 stated value, 334,432 shares issued and outstanding 3,344
Common stock, $.01 par value; 50,000,000 shares authorized,
2,020,721 issued and outstanding 20,207
Additional paid-in capital 21,194,129
Accumulated deficit (19,194,781)
------------
Total shareholders' equity 2,034,349
------------
Total liabilities and shareholders' equity $ 3,562,251
============
</TABLE>
The accompanying notes are an integral part of these statements.
-2-<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December Six Months Ended December
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 296,268 $ 297,214 $ 661,877 $ 664,639
Product cost of sales 185,426 271,778 451,999 619,558
---------- --------- --------- ----------
Gross profit 110,842 25,436 209,878 45,081
---------- --------- --------- ----------
Operating costs and expenses:
Selling, general and administrative 264,148 387,024 593,954 828,536
Depreciation and amortization 84,576 70,206 151,572 140,413
Research and development 17,727 22,235 53,947 64,859
---------- --------- --------- ----------
Total operating costs and expenses 366,451 479,465 799,473 1,033,808
---------- --------- --------- ----------
Loss from continuing operations (255,609) (454,029) (589,595) (988,727)
---------- --------- --------- ----------
Other income (expense):
Unrealized loss on marketable equity
securities - related party -- -- (336,272) --
Interest expense (16,095) (13,980) (32,691) (30,150)
Miscellaneous (1,143) 1,052 1,173 1,052
--------- --------- --------- ----------
Total other income (expense) (17,238) (12,928) (367,790) (29,098)
--------- --------- --------- ----------
Net loss $ (272,847) $ (466,957) $ (957,385) $(1,017,825)
========= ========= ========= ==========
Net loss per share $ (0.12) $ (0.28) $ (0.38) $ (0.83)
========= =========
Weighted average number of shares
outstanding 2,316,825 1,668,141 2,550,005 1,222,644
========= ========= ========= ==========
The accompanying notes are an integral part of these statements
</TABLE>
-3-<PAGE>
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (957,385) $ (1,017,825)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Common stock issued as payment of expenses - 87,723
Depreciation and amortization 151,572 140,415
Unrealized loss on marketable equity securities 336,272 -
Gain on extinguishment of debt - (1,052)
Decrease (increase) in assets:
Accounts receivable 91,603 64,398
Inventory 82,750 97,634
Other current assets (10,534) (43,929)
Other assets (1,261) 4,643
Increase (decrease) in liabilities:
Accounts payable (31,043) (75,304)
Accrued expenses - related parties (89,566) (29,256)
Accrued expenses - unrelated parties (189,661) (8,225)
Deferred revenue (13,455) 40,466
Debentures payable (87,000) -
--------- ----------
Net cash used in operating activities $ (715,186) $ (740,312)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (1,590) -
Increase in note receivable (100,000) -
--------- ----------
Net cash provided by investing activities (101,590) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) of issuance of common stock - 768,985
Effect of exchange rate changes on cash - (568)
--------- ----------
Net cash provided by financing activities - 768,417
--------- ----------
Increase (decrease) in cash (816,776) 28,105
Cash - beginning of period 854,290 44,634
--------- ----------
Cash - end of period $ 37,514 $ 72,739
========= ==========
The accompanying notes are an integral part of these statements
</TABLE>
-4-
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of December 31,
1998, and it's results of operations and cash flows for the three-
months and six-months then ended have been included. However,
operating results for the interim periods noted are not necessarily
indicative of the results that may be expected for the year ending
June 30, 1999. This report should be read in conjunction with the
Company's Financial Statements and Notes thereto contained in the
Company's annual report on Form 10-KSB for the year ended June 30,
1998.
MANAGEMENT'S OPERATING PLANS
As a result of recurring losses and negative cash flow from
operations, management has reviewed its operational and financial
plans relative to the Company's ability to continue in existence with
its historical lines of business and is refocusing the Company into an
information technology company. The Company, now d/b/a MERAD
Technologies Corporation, is in the process of changing from a company
primarily involved in the manufacture and marketing of medical
products to a company primarily involved in the software information
technology ("IT") business, and will be seeking the approval of its
shareholders for a name change at its next annual meeting.
Certain of the Company's medical products contain both hardware and
software components. While the hardware components are classified
more as a device, the completed medical equipment including software,
include an IT component as the equipment analyzes information and
reports diagnostic results to users. This IT software ran on device-
oriented hardware regulated by the Federal Food and Drug
Administration ("FDA") whereas the Company's new software will run on
computer-oriented hardware that does not fall under FDA regulations.
Based on the foregoing and the Company's determination that the IT
business offered significantly greater opportunities for the Company
than did its existing medical products business, the Company's focus
during the second half of fiscal 1998 and first half of fiscal 1999
was increasingly on the development of its IT business.
On October 1, 1998, as part of the transformation, the Company
acquired Paul Harrison Enterprises, Inc. ("PHE"). PHE owned the MERAD
technology, a sophisticated software application utility (the "MERAD
Technology") that utilizes an advanced multi-media object and
relational database which creates knowledge objects that can be used
and reused in a virtually unlimited number of combinations to provide
efficient applications that can be accessed and processed in both an
Internet and Intranet environment. Previously, during fiscal 1998,
the Company had obtained a license from MERAD Corporation ("MERAD"), a
-5-<PAGE>
subsidiary of PHE, for use of the MERAD Technology and retained MERAD
to develop proprietary software technology which was to be used to
expand the Company's product offerings to include products and
services specially focused on monitoring, capturing and managing
medical information at the point of care. Due to its limited
resources, the Company has not proceeded to develop software that
would be used in conjunction with its medical devises. In light of
the Company's refined emphasis on utilizing the newly acquired MERAD
Technology to develop expanded applications in the healthcare and
other industries, the use of this technology to expand the Company's
medical devise business is uncertain. The acquisition of PHE, which
is a significant shareholder of HALIS, Inc. ("HALIS") also increased
the Company's ownership of the common stock of HALIS, a health care IT
company, at that time to approximately 19% of HALIS' outstanding
shares of common stock. On January 29, 1999, the Company acquired an
additional 1,824,645 shares of HALIS' common stock by converting
$157,740 owed by HALIS to the Company bringing its interest in the
HALIS common stock to approximately 21.9%, and will now account for
its investment in HALIS on the equity method of accounting.
In the PHE acquisition, the Shareholders of PHE received 334,432
shares of the Company's Series P Preferred Stock, stated value $10.00
per share (the "Preferred Stock"). Subject to prior approval by the
Company's shareholders, the Preferred Stock will be convertible into
3,344,320 shares of the Company's common stock. Paul W. Harrison, Chairman,
President and Chief Executive Officer of the Company, received 125,088 of
the Series P Preferred Stock and Brian L. Schleicher, Chief Financial Officer
and Chief Administrative Officer of the Company received 7,812 of the Series
P Preferred Stock. All of the Preferred Stock is non-voting. The Series P
Preferred Stock has a cumulative dividend feature of 12%, which adjusts to a
maximum of 24% if the shares are not granted the right to convert by certain
target dates. As of February 1, 1999, the Series P Preferred Stock accrues
a dividend at the rate of 18% per annum. See designation of the Series
P Preferred Stock incorporated by reference from the Company's annual
report on Form 10-KSB for the year ended June 30, 1998. In addition
to the issuance of the Series P Preferred Stock, the PHE shareholders
shall be paid additional consideration based on the percentage of the
revenues that the Company receives in connection with the sale of
software developed utilizing the MERAD Technology, up to a maximum of
$7 million, and certain PHE shareholders received options for
approximately 625,000 shares of the Company's common stock with an
exercise price of $.96 per share in exchange for previously
outstanding options of PHE. Of the outstanding options issued in the
PHE acquisition, 583,333 were issued to Paul W. Harrison. During the
second quarter of fiscal 1999, the PHE Shareholders, as a group,
earned $31,036 as additional consideration, 50% of which will be paid
in cash and the balance paid in common stock of the Company.
During fiscal 1999, the Company intends to continue to emphasize the
IT business and expects to grow this business through a combination of
licensing partners, selected strategic acquisitions and internal sales
of its software and services. The Company also expects to continue to
expand its collaborative efforts with HALIS and to increase its
efforts to market the HALIS Healthcare Enterprise System (the "HALIS
HES") product to the Company's customer base (see discussion below).
The HALIS HES software, which is owned by HALIS, was developed
utilizing the MERAD Technology. As a result of acquiring the MERAD
Technology in the PHE acquisition, the Company earns a royalty equal
to 10% of the gross revenues generated by HALIS on sales of the HALIS
HES and any derivative products or services associated therewith. The
Company earned $31,036 in royalties during the three-month period
ended December 31, 1998. The Company also will explore the
possibility of developing its own information systems utilizing the
-6-<PAGE>
MERAD Technology for other information-intensive industries such as
financial services, insurance and real estate, and hopes to introduce
a new product within the next twelve to twenty-four months, financing
permitted. In recognition of this change in the Company's business
focus, the Company will ask its stockholders at its next Annual
Meeting of Stockholders to approve a change in the Company's name to
MERAD Technologies Corporation.
NET INCOME (LOSS) PER SHARE
The net income (loss) per share was computed based on the weighted
average number of shares outstanding during the periods without taking
into effect outstanding options and warrants.
INVENTORY
Inventory consisted of the following at December 31, 1998 and June 30,
1998:
12/31/98 6/30/98
Raw materials $ 254,780 $ 159,655
Work in process 5,790 75,316
Finished goods 28,953 137,302
-------- --------
$ 289,523 $ 372,273
DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%, payable
quarterly. The debentures matured on March 1, 1998, and are currently
in default. The debentures could be converted, at the option of the
holder, at a conversion rate of one share of the Company's common
stock for every $70.00 of debentures, plus interest, converted.
During the three-month and six-month period ended December 31, 1998,
the Company has repaid $50,000 and $87,000, respectively, of the
debentures due and owing.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Pursuant to agreements entered into during fiscal 1998, the Company
issued an aggregate of 488,400 shares of common stock during the three-month
period ended September 30, 1998 to PHE (prior to its acquisition by the
Company) in exchange for 1,400,000 shares of Halis common stock owned
by PHE. During the three-month period ended December 31, 1998, the Company
issued the 334,432 shares of Series P Preferred Stock, and retired 888,400
shares of common stock, (which was all of the Company's common stock owned
by PHE at the date of acquisition.) All shares were retired at the price of
$.80/share, which represented the discounted approximate trading price at
the date of acquisition. Management has determined the fair market value
of the shares of Series P Preferred Stock issued to be $2,560,000 based on
the approximate trading price for the Company's common stock (into which they
would be converted if approved by the Company's shareholders) at the date
of the transaction, discounted to factor in the reduction in value
stemming from the non-marketable restrictions of the preferred shares
issued. During the three month period ended December 31, 1998, the
PHE shareholders earned $31,036 of additional consideration based on
-7-<PAGE>
software sales made during the quarter utilizing the MERAD Technology.
The Company accounted for the acquisition under the purchase method of
accounting whereby the assets and liabilities of PHE were recorded at
their fair market value as of the date of the acquisition. As a
result, the HALIS stock owned by PHE was stepped up to its fair value
of $868,488. The $900,164 excess purchase price over fair market
value of the net tangible assets acquired has been identified as
technology acquired (the MERAD Technology) and is being amortized over
a ten-year period.
INVESTMENT IN HALIS COMMON STOCK; HALIS BUSINESS COLLABORATION
As of December 31, 1998, the Company held 8,939,010 shares of the
common stock of HALIS, representing approximately 18% of the total
outstanding shares. During the three-month period ended September 30,
1998, the Company had recorded an unrealized loss on marketable equity
securities of $336,272, relating to a decrease in the market value of
the HALIS common shares held by the Company. No additional unrealized
loss has been recorded in the three-month period ended December 31,
1998, because management of the Company believes that the HALIS shares
are reflected at there approximate fair market value. The Company
does not hold the HALIS shares for trading purposes, but rather holds
them for long-term investment purposes. Subsequent to year-end, the
Company acquired an additional 1,824,645 shares of HALIS common stock
increasing its ownership interest in HALIS to in excess of 21%.
Consequently, the Company will now account for its investment in HALIS
on the equity method of accounting, thereby reflecting its portion of
HALIS' earnings or losses in the Company's income statement with a
corollary adjustment to its investment account, commencing in the
third quarter of fiscal 1999.
During fiscal 1997, the Company determined to expand its business to
include health care information software products and services. The
decision was based on the Company's desire to improve margins for its
medical products, particularly its Life Sciences peripheral vascular
diagnostic products, and to expand its product and service offerings
in order to increase revenues and to return the Company to
profitability. In this connection, the Company entered into a
business collaboration agreement with HALIS, pursuant to which the
Company and HALIS share sales prospects and the Company is marketing
the HALIS HES software to its client base of approximately 1,200
customers that have previously bought the Company's diagnostic
equipment. There are no assurances that the Company will be
successful in its attempts to sell the HES System to its customer
base.
HALIS, based in Atlanta, Georgia, supplies information technology and
services focused on the healthcare industry. Utilizing advanced
health care models and information technology, HALIS has developed the
HALIS HES software utilizing the MERAD Technology, a single system
which integrates all of the major functions needed by clinics,
hospitals, healthcare practices, payors, long-term care facilities,
laboratories, pharmacies and home healthcare facilities.
On July 14, 1998, the Company entered into a letter of intent (the
"1998 Letter of Intent") with HALIS to merge the two companies.
However as a result of the volatility of the stock price of the HALIS
shares, the consummation of the merger is presently uncertain.
Pursuant to the 1998 Letter of Intent, the Company agreed to loan
HALIS up to a total of $250,000 pursuant to a 6% debenture maturing in
-8-<PAGE>
February 2000 (see Exhibit 10.8). As of December 31, 1998, the
Company had advanced $100,000 to HALIS under the debenture.
Subsequently, the Company advanced an additional $57,740 to HALIS. On
January 29, 1999 the Company exercised its conversion rights in the
debenture, and converted the outstanding amounts due to the Company
into 1,824,645 shares of HALIS common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FINANCIAL CONDITION
During the second half of fiscal 1998, the management of the Company
determined that the software information technology (IT) business
offered significantly greater opportunities for the Company than did
its existing medical products business. Accordingly, the Company's
focus during fiscal 1998 was increasingly on the development of its IT
business. In an effort to gain direct control over its efforts to
develop the IT business, the Company acquired PHE on October 1, 1998.
As a result of the PHE acquisition, the Company obtained ownership of
the MERAD Technology and increased its ownership of HALIS common
stock. Subsequent purchases of HALIS common stock has now brought the
Company's interest to approximately 21% of HALIS' outstanding shares
of common stock.
During fiscal 1999, the Company intends to continue to emphasize the
IT business and expects to grow this business through a combination of
licensing partners, selected strategic acquisitions and internal sales
of its software and services. In this connection, the Company expects
to continue to expand its collaborative efforts with HALIS and to
expand its efforts to market the HALIS HES software to the Company's
customer base. The Company also intends to explore the possibility of
developing information systems utilizing the MERAD Technology for
other information intensive industries such as financial services,
insurance and real estate, and is in the process of utilizing the
MERAD Technology to build a general business application.
Due to the recent change in the focus of the Company's core business,
the past operating results may not be necessarily indicative of future
operating results for, or future financial condition of, the Company
on a going forward basis. Management believes that with the new focus
of the Company and the strategic plans it is putting into place,
operating margins of the Company will begin to improve.
The Company has incurred significant operating losses during the past
several years and at December 31, 1998 had a retained earnings deficit
of $19,194,781. Until sales of the HES System start materializing in
a consistent manner, the Company will require additional debt or equity
capital to sustain operations and to continue its business development
efforts as it refocuses its medical products business and steps up
efforts to sell the HALIS HES software. Any efforts to develop new
products utilizing the MERAD Technology will require additional
capital that may not be available from operations. Additionally, as a
result of its acquisition of PHE, the Company will start to collect
royalties from HALIS equal to 10% of any revenues generated by HALIS
from products utilizing the MERAD Technology which will hopefully start
supplementing revenues from the Company's own operations. While the Company
is taking steps to improve its financial condition, shareholders should
note that the report of the Company's independent public accountants
for the years ended June 30, 1998 and 1997, contained a paragraph
noting substantial doubt regarding the Company's ability to continue
as a going concern.
-9-<PAGE>
Total assets at December 31, 1998 were $3,562,251, an increase of
$1,093,255 from total assets of $2,468,996 at June 30, 1998. This
difference is the net effect primarily resulting from a decrease in
cash of approximately $816,000 and decreases in accounts receivable
and inventory of approximately $92,000 and $83,000, respectively.
These decreases are offset primarily by the assets added as a result
of the acquisition of PHE and its two largest assets of additional
marketable securities in HALIS of $868,488 and the technology acquired
of $1,048,700, and an increase in notes receivable related party of
$100,000. The decreases in working capital are the result of the
Company making a concerted effort to conserve working capital by
focusing on selling and using inventory on hand. Cash resources have
been utilized during this period to offset losses, repay old
liabilities and the advance to HALIS under the debenture during the
six-month period.
Total liabilities at December 31, 1998 were $1,527,902, a decrease of
approximately $247,000 from total liabilities of $1,774,978 at June
30, 1998. This difference is primarily due to the net effect of a
payment of $87,000 on the Company's debentures, decreases in accounts
payable, accrued compensation and payroll taxes, other accrued
expenses, and deferred revenues of approximately $31,000, $95,000,
$182,000, and $13,000 respectively, and the addition of PHE
liabilities of approximately $118,000 of other accrued expenses-
related parties and $44,000 of accounts payable. These reductions were
as a result of management's efforts to reduce operating overhead during
the six-month period. The PHE accrued expenses-related parties are due
to various affiliates and an officer and director of the Company.
Stockholders' equity increased by $1,340,331 from June 30, 1998 to
December 31, 1998, primarily due to the acquisition of PHE and the
recording of its net assets at fair market value of approximately
$1,849,000 and $448,000 resulting from the issuance of 488,400 shares
of the Company's common stock. This was offset by a net loss of
approximately $957,000 during the six-month period. The fair market
value of the PHE net assets represents the fair market value of the
transaction of approximately $3,210,000, less a discount factor to
$2,560,000. The 2,560,000 fair market value has been reduced by the
retirement of the HALIS shares owned by PHE at the date of acquisition
of approximately $711,000.
RESULTS OF OPERATIONS
Revenues for the six-month period ending December 31, 1998 were almost
identical to the comparable six-month period for the prior year.
However, a review of the make-up of these revenues indicates a shift
of the Company's revenues from its Pacer product to its MVL product
and a movement away from revenues generated from a former subsidiary
based in the United Kingdom (which was sold last fiscal year). The
Company had no revenues from the Pacer product during the current
quarter and only nominal revenues from this product during the first
quarter because a previously announced upgrade of the product has not
occurred.
Cost of goods sold decreased by approximately $168,000 for the six-
month period ended December 31, 1998 compared to the comparable six-
month period of the prior year. This represents a shift in revenues
during the period to the Company's MVL product that has a higher
profit margin than the Pacer product with a low margin, which
-10-<PAGE>
accounted for a more significant portion of the sales generated during
the six-month period in the prior year. Further, costs were reduced
as wages, facility allocation and inventory obsolescence have been
reduced during the current period as a result of the sale of the
United Kingdom subsidiary.
Total operating costs decreased by approximately $235,000 for the six-
month period ending December 31, 1998 compared to the comparable period
of the prior year, and was primarily reflected in the decrease in selling,
general and administrative expenses resulting from the downsizing of the
Company from the previous year.
The net loss for the six-month period was approximately $957,000, a
decrease of approximately $61,000 over the comparable period of the
prior year. The decrease is the effect of the decrease in selling,
general and administrative expenses resulting from the downsizing of
the Company from the previous year, and additional recognition of
$336,272 of unrealized loss on marketable equity securities that was
deemed to be other than temporary.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had approximately $131,000 in cash
and accounts receivable, a decrease of approximately $908,000 from
June 30, 1998. Cash reserves for the Company continue to be
inadequate. The Company continues to monitor its cash situation very
closely. While the downsizing of the Company has reduced its cash
requirements, if the Company is unable to increase revenues or contain
costs further, the Company may not be able to continue to generate
sufficient cash flow from its operations to meet its obligations
without seeking debt financing or additional capital.
The Company has a significant investment in HALIS and considers its
investment in HALIS to be a long-term investment. However, in the
event that the Company is unable to raise additional capital, it may
be required to sell shares of the HALIS common stock. The HALIS
common stock is traded in the over-the-counter market on the NASDAQ
Bulletin Board. The 8,939,010 shares of HALIS common stock owned by
the Company at December 31, 1998 represents approximately 19% of the
total outstanding shares of HALIS common stock (which was increased to
10,763,655 shares, approximately 21%, as of January 29,1999). Due to the
fact that the Company may be considered an affiliate of HALIS, the
Company's ability to sell its HALIS shares could be adversely affected by
the requirement of Rule 144 promulgated by the Securities and Exchange
Commission, which could limit the number of HALIS shares that could be
sold in any three-month period. There can be no assurance as to the
price the Company could receive for the HALIS common stock if it were
required to sell the stock to raise additional working capital.
YEAR 2000
Software applications that use only two digits to identify a year in
the date field may cause fatal errors in the processing of data (the
"Year 2000 Concern"). The Company acknowledges that the failure of
its software to recognize the proper date codes could cause
substantial harm to the Company and its customers. However, the HALIS
HES software developed by HALIS and being marketed by the Company was
developed with the Year 2000 Concern in mind and has been designed to
be Year 2000 compliant. This means that HALIS has indicated, and the
Company believes, that the HALIS HES software being marketed to
-11-<PAGE>
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 will be undertaking a review of
its business systems to make a determination whether this belief is
sound and justified and will query those vendors whose systems the
Company employs to determine their Year 2000 readiness. The Company
believes that even if the software it utilizes from vendors is not
Year 2000 compliant, there are sufficient alternatives available that
the Company can resolve any issues by the fourth quarter of fiscal
1999 without incurring any material amounts to resolve any Year 2000
Concerns.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, and is subject
to the safe harbors created by those sections. These forward-looking
statements are subject to significant risks and uncertainties,
including those identified in the section of this Form 10-QSB entitled
"Factors That May Affect Future Operating Results," which may cause
actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within
this Form 10-QSB are identified by words such as "believes,"
"anticipates," "expects," "intends," "may," "will" and other similar
expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer
to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. The Company
undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of
this Form 10-QSB with the Securities and Exchange Commission ("SEC").
Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's
other reports filed with the SEC that attempt to advise interested
parties of the risks and factors that may affect the Company's
business.
RECENT OPERATING LOSSES. The Company has incurred losses from
operations in each of its last five fiscal years. There can be no
assurance that the Company will be able to operate at a profit in the
future. The Company may not be able to finance current working
capital requirements from operations.
NEED FOR ADDITIONAL FINANCING. Although the Company raised $300,000
during January 1999, the Company estimates that it needs approximately
$300,000 to $600,000 from operations or additional debt or equity
capital to complete development and introduction of its new
information software technology and to sustain its operations during
the next twelve months. In addition, the Company will need to obtain
approximately $500,000 of additional capital to pay its outstanding
Secured Convertible Debentures, which are past due. There can be no
assurance that the Company will be able to obtain such amounts from
operations or that financing, if obtained, will be sufficient or on
terms and conditions acceptable to the Company. If such funds are
-12-<PAGE>
obtained through the issuance of additional equity securities of the
Company, there can be no assurance that such shares will be issued at
prices or on terms equal to or greater than the offering price or terms
of this offering. Any such future equity financing could be dilutive to
shareholders of the Company.
UNCERTAINTY OF MARKET ACCEPTANCE; RELIANCE ON A LIMITED NUMBER OF
PRODUCTS. The Company's new software information technology is under
development and there can be no assurance that this product will be
successfully developed and introduced to the marketplace. Achieving
market acceptance for the Company's products will require substantial
marketing efforts and expenditures to inform potential customers of
the distinctive characteristics and benefits of these products. Since
the Company has limited financial and other resources to undertake
extensive independent marketing activities, there can be no assurance
that the Company will be able to market its products successfully.
TECHNOLOGICAL CHANGE; PROPRIETARY TECHNOLOGY. Future advances in the
healthcare information systems industry could lead to new
technologies, products or services that are competitive with the
products and services offered by the Company. The Company' success
will depend, in part, on its ability to be responsive to technological
developments and challenges. Such technological advances could also
lower the cost of such products and services or otherwise result in
competitive pricing pressures, which could have an adverse effect on
the Company. To remain competitive in the evolving healthcare
information systems marketplace; the Company must develop new products
on a timely basis. The failure to develop competitive products or to
introduce new products on a timely basis could have an adverse effect
on the Company's future financial performance.
PROTECTION OF PROPRIETARY INFORMATION. The Company does not have any
patents or registered copyrights and does not anticipate obtaining any
patents or registered copyrights in the near future. The Company
treats its software and related technical data as confidential and
relies on internal nondisclosure safeguards, including confidentiality
agreements with employees, and on laws protecting trade secrets, to
protect what it regards as proprietary information. Competitors and
customers may nevertheless be able to copy certain functional aspects
of the Company's products.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock may be subject to significant fluctuations in response to
the Company's operating results and other factors. In addition, the
stock market has from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, which
have often been unrelated to the operating performance of particular
companies. Such fluctuations and factors such as announcements of
technological innovations or new products by the Company or its
competitors or third parties, as well as market conditions in the
computer software or hardware industries and healthcare reform
measures, may have a significant effect on the market price of the
Company's common stock.
FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company's future product
sales, and royalties are expected to be derived primarily from the
sale of software systems and related services in the healthcare
industry, the market for which is still developing. Accordingly, the
Company's quarterly results of operations are difficult to predict,
and delays in the closing of sales near the end of the quarter could
cause quarterly revenues and, to a greater degree, operating and net
income to fall substantially short of anticipated levels. The
-13-<PAGE>
Company's total revenues and net income levels could also be adversely
affected by cancellations or delays of orders, interruptions or delays
in the supply of key components, changes in customer base or product
mix, seasonal patterns of capital spending by customers, delays in
purchase decisions due to new product announcements by the Company or
its competitors, increased competition and reductions in average
selling prices.
LIMITATIONS ON BROKER/DEALER SALES OF COMPANY COMMON STOCK;
APPLICABILITY OF PENNY STOCK RULES. The Company's common stock is
currently traded on the Nasdaq Small Cap Market. To remain listed on
the Nasdaq Small Cap Market, the Company must, among other things,
maintain a minimum tangible net worth of $2 million and a minimum bid
price of $1.00 per share. As of the date of this filing, the
Company's tangible net worth was in excess of $2 million. However the
Company has been notified by Nasdaq that its listing was in jeopardy
if it was not able to maintain a minimum closing bid price of at least
$1.00 per share for at least 10 consecutive trading days. As of
February 5, 1999 the closing bid price for the Company's stock was in
excess of $1.00 per share for more than ten consecutive trading days.
Accordingly, the Company believes that it has satisfied both
conditions to allow it to continue to be listed by Nasdaq on the small
capital market. However, due to the volatility of the Company's stock
price and the level of losses it has experienced, there can be no
assurance that the Company's revised business strategy will be
successful and that its shares of common stock will continue to be
listed on the Nasdaq Small Cap Market. In the event that the
Company's common stock is delisted from the Nasdaq Small Cap Market,
the application of the "Penny Stock Rules" under the Securities and
Exchange Act of 1934, as amended, would make it more difficult for
broker/dealers to sell the Company's common stock and purchasers of
the Shares offered hereby may have difficulty in selling their Shares
in the future in the secondary trading market.
CONTROL BY PAUL W. HARRISON. Paul Harrison, the Chairman of the Board
of Directors of the Company, exercises effective control over the
Company and beneficially owns approximately 8.27% of the Company's
common stock and approximately 37% of the Series P Preferred Stock.
Mr. Harrison is also critical to the development of the HALIS HES
software owned by HALIS and is the creator of the MERAD Technology.
As a result of such concentration of ownership and importance to the
Company, Mr. Harrison has the ability to exert significant influence
on the policies and affairs of the Company and corporate actions
requiring shareholder approval, including the election of the members
of the Board of Directors.
COMPETITION. There are many companies that produce equipment and
software that competes with the Company's current and proposed
products. Most of the Company's competitors have substantially
greater financial and marketing resources than the Company. The
Company expects that these competitors will continue to compete
aggressively with tactics such as offering volume discounts based on
"bundled" purchases of a broader-range of medical equipment and
supplies, a tactic that the Company is unable to pursue except on a
joint venture basis. There can be no assurance that such competition
will not adversely affect the Company's results of operations or its
ability to maintain or increase sales and market share. Competition
could require that the Company commit significantly greater resources
to the introduction of its products than would otherwise be required.
-14-<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 334,432 shares of the
Company's Series P Preferred Stock, stated value $10.00 per share, and
other consideration in the merger. PHE was merged into MERAD
Software, Inc., a Nevada corporation, and a wholly-owned subsidiary of
the Company. At the time of the merger, PHE held 6,177,010 shares of
HALIS common stock. The Company issued 488,400 shares of common stock
to PHE in connection with the subscription and exchange agreements
previously entered by the Company. The Company issued the securities
without registration under the Securities Act of 1933, as amended, in
reliance upon an exemption from the registration requirements of such
Act contained in Section 4(2) thereof. All of the foregoing
securities were acquired for investment purposes. As a result of the
acquisition of PHE, the Company retired 888,400 of its common stock
that was held by PHE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 1, 1998, $580,000 principal amount of the Company's 10%
Secured Convertible Debentures ("Debentures") were due and payable.
The Company was unable to pay the Debentures in accordance with their
terms and the Company obtained no further extension of the maturity
date. During the six-month period ended December 31, 1998, $87,000 in
fair value of the debentures was paid to the holders thereof. As of
December 31, 1998, $493,000 of the debentures remains outstanding and
due, plus approximately $102,000 in accrued but unpaid interest. The
debentures are convertible by the holders thereof into shares of
common stock of the Company at the rate of $70 of the outstanding
debentures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed with or incorporated
by reference into this report:
3.1 Articles of Incorporation, as amended, of the Company <F1>
3.2 Bylaws, as amended, of the Company <F2>
4.1 Specimen form of the Company's Common Stock certificate <F2>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 <F3>
4.3 Form of Incentive Stock Option Agreement <F3>
4.4 Form of Non-statutory Stock Option Agreement <F3>
4.5 HealthWatch, Inc. Stock Option Plan of 1993 <F4>
4.6 HealthWatch, Inc. Stock Option Plan of 1996 <F5>
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan <F5>
4.8 Subscription and Purchase Agreement dated as of the 14th day of
August 1992 between the Company and the Purchasers of the
Company's 10% convertible senior debentures due 1997 (including
as an appendix thereto the form of the debenture certificate) <F6>
-15-<PAGE>
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and
HALIS, Inc. <F7>
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock of
HealthWatch, Inc. <F10>
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch, Inc.
<F10>
10.1 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. <F8>
10.2 License and Software Development Agreement dated as of October
10, 1997 between the Company and MERAD Corporation <F8>
10.3 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison <F8>
10.4 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher <F8>
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison
Enterprises, Inc. <F9>
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc. dated
July 14, 1998 <F10>
27.1 Financial Data Schedule (for SEC use only).
99.1 Proforma Condensed Consolidated Statements of Operations for the
Six Months Ended December 31, 1998 and 1997 - filed herewith
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed
during the quarter ended December 31, 1998.
1) Form 8K was filed on October 8, 1998 with regard to the acquisition
of Paul Harrison Enterprises, Inc. by the Company.
- ------------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, File No, 0-11476.
<F2> Incorporated herein by reference to Registration Statement,
Form S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement S-2
(File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1994 (File No.
0-11476).
<F5> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1996 (File No. 0-
11476).
<F6> Incorporated herein by reference to Registration Statement SB-2
(File No. 33-73462).
<F7> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1997 (File No. 0-
11476).
<F8> Incorporated herein by reference to the Company's Quarterly
Report Form 10QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's Report, Form
8-K, dated October 1, 1998.
<F10> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1998 (File No. 0-
11476).
-16-<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this
report to be signed by the undersigned, thereunto duly authorized.
Date: February 18, 1999
HealthWatch, Inc.
By /s/ Paul W. Harrison
----------------------------------------
Paul W. Harrison
(Chairman, President and Chief Executive
Officer)
By /s/ Brian L. Schleicher
----------------------------------------
Brian L. Schleicher
(Chief Financial Officer, Chief
Administrative Officer and General
Counsel)
-17-<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended, of the Company <F1>
3.2 Bylaws, as amended, of the Company <F2>
4.1 Specimen form of the Company's Common Stock certificate <F2>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 <F3>
4.3 Form of Incentive Stock Option Agreement <F3>
4.4 Form of Non-statutory Stock Option Agreement <F3>
4.5 HealthWatch, Inc. Stock Option Plan of 1993 <F4>
4.6 HealthWatch, Inc. Stock Option Plan of 1996 <F5>
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan <F5>
4.8 Subscription and Purchase Agreement dated as of the 14th day of
August 1992 between the Company and the Purchasers of the
Company's 10% convertible senior debentures due 1997 (including
as an appendix thereto the form of the debenture certificate) <F6>
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and
HALIS, Inc. <F7>
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock of
HealthWatch, Inc. <F10>
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch, Inc.
<F10>
10.1 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. <F8>
10.2 License and Software Development Agreement dated as of October
10, 1997 between the Company and MERAD Corporation <F8>
10.3 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison <F8>
10.4 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher <F8>
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison
Enterprises, Inc. <F9>
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc. dated
July 14, 1998 <F10>
27.1 Financial Data Schedule (for SEC use only).
99.1 Proforma Condensed Consolidated Statements of Operations for the
Six Months Ended December 31, 1998 and 1997- filed herewith
- ------------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, file No, 0-11476.
<F2> Incorporated herein by reference to Registration Statement,
Form S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement S-2
(File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1994 (File No. 0-
11476).
<F5> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1996 (File No. 0-
11476).
-18-<PAGE>
<F6> Incorporated herein by reference to Registration Statement SB-2
(File No. 33-73462).
<F7> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1997 (File No.
0-11476).
<F8> Incorporated herein by reference to the Company's Quarterly
Report Form 10QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's Report, Form
8-K, dated October 1, 1998.
<F10> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1998 (File No.
0-11476).
</FN>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 37,514
<SECURITIES> 1,299,360
<RECEIVABLES> 92,812
<ALLOWANCES> 245,633
<INVENTORY> 289,523
<CURRENT-ASSETS> 524,061
<PP&E> 739,890
<DEPRECIATION> 708,991
<TOTAL-ASSETS> 3,562,251
<CURRENT-LIABILITIES> 1,527,902
<BONDS> 493,000
0
14,794
<COMMON> 20,207
<OTHER-SE> 1,999,348
<TOTAL-LIABILITY-AND-EQUITY> 3,562,251
<SALES> 661,877
<TOTAL-REVENUES> 661,877
<CGS> 451,999
<TOTAL-COSTS> 451,999
<OTHER-EXPENSES> 799,473
<LOSS-PROVISION> 958
<INTEREST-EXPENSE> 32,691
<INCOME-PRETAX> (957,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (589,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (957,385)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
EXHIBIT 99.1
Summarized below is the unaudited condensed and proforma consolidated
statements of operations for the six-month periods ended December 31, 1998
and December 31, 1997 as if the acquisition of Paul Harrison Enterprises,
Inc. had taken place at June 30, 1997.
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations
for the Six-Month Period Ended December 31, 1998 (Unaudited)
---------------------------------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ----------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Sales $ 621,912 $ 15,000 $ -- $ -- $ 636,912
Cost of sales 451,999 -- -- -- 451,999
---------- ---------- ---------- ----------- ----------
Gross profit 169,913 15,000 -- -- 184,913
Operating expenses 747,137 70,056 -- 52,434<F1> 869,627
---------- ---------- ---------- ----------- ----------
Loss from operations (577,224) (55,056) -- (52,434) (684,714)
Other income (expense) (342,825) 503,578 -- -- 160,753
---------- ---------- ---------- ----------- ----------
Net Income (loss) $ (920,049) $ 448,522 $ -- $ (52,434) $ (523,961)
========== ========== ========== =========== ==========
Net loss per share $ (.36) (.21)
========== ==========
Weighted average
number of shares
outstanding 2,550,005 2,550,005
========== ==========
</TABLE>
[FN]
<F1> To record amortization of technology and other intangible assets.
</FN>
-1-
<PAGE>
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations
for the Six-Month Period Ended December 31, 1997 (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 $ 664,639 $ -- $ -- $ -- $ 664,639
Cost of sales 619,558 -- -- -- 619,558
---------- ---------- ---------- ----------- -----------
Gross profit 45,081 -- -- -- 45,081
Operating expenses 1,033,808 208,043 -- 52,434<F1> 1,294,285
---------- ---------- ---------- ----------- -----------
Loss from operations (988,727) (208,043) -- (52,434) (1,249,204)
Other income (expense) (29,098) 433,299 -- -- 404,201
---------- ---------- ---------- ----------- -----------
Net Income (loss) $(1,017,825) $ 225,256 $ -- $ (52,434) $ (845,003)
========== ========== ========== =========== ===========
Net loss per share $ (.83) (.69)
========== ===========
Weighted average
number of shares
outstanding 1,222,644 1,222,644
========== ===========
<FN>
<F1> To record amortization of technology and other intangible assets.
</FN>
</TABLE>
-2-
