U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY-REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended Commission file number
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March 31, 1999 0-11476
HEALTHWATCH, INC.
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Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9040 Roswell Road, Suite 470, Atlanta, GA 30350
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(Address of Principal Executive Offices)
(770) 641-5555
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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Number of registrant's common shares outstanding at April 30, 1999:
3,021,525
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Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash $ 104,283
Accounts Receivable, net of allowance for doubtful
accounts of $24,633 91,983
Inventory 278,308
Receivables related party 101,815
Other Current Assets 29,720
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Total current assets 606,109
Marketable equity securities - related party 1,897,094
Property and equipment, net 25,649
Intangible assets, net 1,534,134
Other assets 34,010
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Total Assets $ 4,096,996
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 126,671
Accrued compensation and payroll taxes 181,426
Other accrued expenses - related parties 214,636
Other accrued expenses - unrelated parties 493,259
Deferred revenue 34,236
Current portion of debentures payable
- related parties 15,000
Current portion of debentures payable
- unrelated parties 465,000
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Total liabilities 1,530,228
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Shareholders' Equity
Cumulative preferred stock, 5,000,000 shares authorized, par value$.01 per share;
- 6% Series A, $ 1.00 stated value, 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 30,215
Additional paid-in capital 21,609,121
Accumulated deficit (19,087,362)
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Total shareholders' equity 2,566,768
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Total liabilities and shareholders' equity $ 4,096,996
===========
</TABLE>
The accompanying notes are an integral part of these statements.
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HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March Nine Months Ended March
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 314,145 $ 449,026 $ 976,022 $ 1,113,665
Product cost of sales 162,844 291,337 614,843 910,895
---------- --------- --------- ----------
Gross profit 151,301 157,689 361,179 202,770
---------- --------- --------- ----------
Operating costs and expenses:
Selling, general and administrative 260,951 460,370 854,905 1,288,906
Depreciation and amortization 91,372 70,209 242,944 210,622
Research and development 113,619 17,773 167,566 82,632
---------- --------- --------- ----------
Total operating costs and expenses 456,942 548,352 1,265,415 1,582,160
---------- --------- --------- ----------
Loss from continuing operations (314,641) (390,663) (904,236) (1,379,390)
---------- --------- --------- ----------
Other income (expense):
Unrealized loss on marketable equity
securities - related party -- -- -- --
Equity in earnings of subsidiary 7,808 -- 103,721 --
Interest expense (17,933) (15,735) (50,624) (45,885)
Miscellaneous -- -- 1,173 1,052
Loss on sale of division -- (102,884) (102,884)
--------- --------- --------- ----------
Total other income (expense) (10,125) (118,619) 54,270 (147,717)
--------- --------- --------- ----------
Net loss $ (324,766) $ (509,282) $ (849,966) $(1,527,107)
========= ========= ========= ==========
Net loss per share $ (0.12) $ (0.21) $ (0.33) $ (0.95)
========= ========= ========= ==========
Weighted average number of shares
outstanding 2,673,248 2,388,311 2,590,469 1,607,358
========= ========= ========= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (849,966) $ (1,527,107)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Common stock issued as payment of expenses - 92,423
Depreciation and amortization 242,944 210,624
Unrealized loss on marketable equity securities - -
Equity in earnings of subsidiary (103,721) -
Gain on extinguishment of debt - (1,052)
Loss on sale of division - 90,876
Decrease (increase) in assets:
Accounts receivable 92,432 (59,589)
Inventory 93,965 185,344
Receivables related parties (16,905) -
Other current assets (20,952) (4,165)
Other assets 574 29,643
Increase (decrease) in liabilities:
Accounts payable (232,660) (18,467)
Accrued expenses - related parties (151,608) (29,256)
Accrued expenses - unrelated parties 32,949 95,737
Deferred revenue (2,728) 1,567
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Net cash used in operating activities (915,676) (933,422)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (1,590) -
Increase (decrease) in note receivable related party (157,741) -
--------- ----------
Net cash used in investing activities (159,331) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of debentures payable (100,000) 51,000
Net proceeds (costs) of issuance of common stock 425,000 846,485
Effect of exchange rate changes on cash - (1,981)
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Net cash provided by financing activities 325,000 895,504
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Increase (decrease) in cash (750,007) (37,918)
Cash - beginning of period 854,290 44,634
--------- ----------
Cash - end of period $ 104,283 $ 6,716
========= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
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HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of March 31,
1999, and it's results of operations and cash flows for the three-
months and nine-months then ended have been included. However,
operating results for the interim periods noted are not necessarily
indicative of the results that may be expected for the year ending
June 30, 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 has refocused 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.
On October 1, 1998, as part of the transformation, the Company
acquired Paul Harrison Enterprises, Inc. ("PHE"). PHE owned the MERAD
technology, a sophisticated virtual software application utility (the
"MERAD Technology") that utilizes an advanced multi-media object and
relational database which creates knowledge objects that can be used
and reused in a virtually unlimited number of combinations to provide
efficient applications that can be accessed and processed in both an
Internet and Intranet environment. Previously, during fiscal 1998,
the Company had obtained a license from MERAD Corporation ("MERAD"), a
subsidiary of PHE, for use of the MERAD Technology and retained MERAD
to develop proprietary software technology which was to be used to
expand the Company's product offerings to include products and
services specially focused on monitoring, capturing and managing
medical information at the point of care. Due to its limited
resources, the Company has not proceeded to develop software that
would be used in conjunction with its medical devices. In light of
the Company's refined emphasis on utilizing the newly acquired MERAD
Technology to develop expanded applications in the healthcare and
other industries, the use of this technology to expand the Company's
medical device business is uncertain. The acquisition of PHE, which
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<PAGE>
is a significant shareholder of HALIS, Inc. ("HALIS"), also increased
the Company's ownership of the common stock of HALIS, a healthcare IT
company, at that time to approximately 19% of HALIS' outstanding
shares of common stock. On January 29, 1999, the Company acquired an
additional 1,824,645 shares of HALIS' common stock by converting
$157,741 owed by HALIS to the Company pursuant to a debenture, bringing
its interest in the HALIS common stock to approximately 21.9%, and 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 and third quarters of fiscal 1999, the
PHE Shareholders, as a group, earned $31,036 and $45,648, respectively, 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 provide IT services and support to its customers and to HALIS,
its affiliate. Additionally, the Company is in the process of identifying
strategic acquisition candidates in the systems integration and support area
that will enhance the Company's ability to provide these services. 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 and $76,684 in
royalties during the three-month and nine-month period ended March 31, 1999.
The Company also will explore the possibility of developing its own information
systems utilizing the MERAD Technology for other information-intensive
industries such as financial services, insurance and real estate, and hopes
to introduce a new product within the next twelve to twenty-four months,
financing permitting. In recognition of this change in the Company's business
focus, the Company will ask its stockholders at its next Annual
Meeting of Stockholders to approve a change in the Company's name to
MERAD Technologies Corporation.
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NET INCOME (LOSS) PER SHARE
The net income (loss) per share was computed based on the weighted
average number of shares outstanding during the periods without taking
into effect outstanding options and warrants.
INVENTORY
Inventory consisted of the following at March 31, 1999 and June 30,
1998:
3/31/99 6/30/98
Raw materials $ 244,911 $ 159,655
Work in process 5,566 75,316
Finished goods 27,831 137,302
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$ 278,308 $ 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 as to the payment of principal and past due interest. The
debentures could be converted, at the option of the holder, at a
conversion rate of one share of the Company's common stock for every
$70.00 of debentures, plus interest, converted. During the three-month
and nine-month periods ended March 31, 1999, the Company has repaid
$13,000 and $100,000, respectively, of the debentures due and owing.
The Company will attempt to reach an agreement with the holders of the
debentures prior to the end of the current fiscal year in an effort to
resolve the amounts outstanding or otherwise bring the debentures out
of their default status.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Pursuant to agreements entered into during fiscal 1998, the Company
issued to PHE an aggregate of 488,400 shares of common stock during the three-
month period ended September 30, 1998 (prior to its acquisition by the
Company) in exchange for 1,400,000 shares of HALIS' common stock owned
by PHE. During the three-month period ended December 31, 1998, the Company
issued the 334,432 shares of Series P Preferred Stock, and retired 888,400
shares of common stock, (which was all of the Company's common stock owned
by PHE at the date of acquisition). All shares were retired at the price of
$.80/share, which represented the discounted approximate trading price at
the date of acquisition. Management has determined the fair market value
of the shares of Series P Preferred Stock issued to be $2,560,000 based on
the approximate trading price for the Company's common stock (into which
they would be converted if approved by the Company's shareholders) at the
date of the transaction, discounted to factor in the reduction in value
stemming from the non-marketable restrictions of the preferred shares
issued. During the three-month and nine-month periods ended March 31, 1999,
the PHE shareholders earned $31,036 and $76,684 of additional consideration
based on software sales made during the quarter utilizing the MERAD
Technology. The Company accounted for the acquisition under the purchase
method of accounting whereby the assets and liabilities of PHE were recorded
at their fair market value as of the date of the acquisition. As a result,
the HALIS stock owned by PHE was stepped up to its fair value of $868,488.
The $900,164 excess purchase price over fair market value of the net
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<PAGE>
tangible assets acquired has been identified as technology acquired (the
MERAD Technology) and is being amortized over a ten-year period.
During the three-month period ended March 31, 1999, the Company received
1,824,645 of common stock of HALIS in exchange for a 6% convertible
debenture and subsequent advances totaling $157,741. The conversion brought
the Company's total investment in HALIS to 21.9% of HALIS outstanding
common stock. During the three months ended March 31, 1999, the Company
converted its accounting for this long-term investment to the equity method.
Under generally accepted accounting principles, the change is considered a
change in accounting principle and requires the Company to recalculate and
restate the carrying value of its investment as if the investment was
accounted for under the equity method as of the date of its initial
acquisition.
INVESTMENT IN HALIS COMMON STOCK; HALIS BUSINESS COLLABORATION
As of March 31, 1999, the Company held 10,763,655 shares of the
common stock of HALIS, representing approximately 21.0% of the total
outstanding shares. The Company does not hold the HALIS shares for
trading purposes, but rather holds them for long-term investment purposes.
During the three months ended March 31, 1999, the Company acquired
an additional 1,824,645 shares of HALIS common stock increasing its
ownership interest in HALIS to its present holdings. Consequently, until this
additional acquisition, the Company reflected its interest in HALIS at cost but
is now required by generally accepted accounting principles to account for its
investment in HALIS on the equity method of accounting, thereby reflecting its
portion of HALIS' earnings or losses in the Company's income statement with a
corollary adjustment to its investment account. Additionally, the Company
was required to recalculate and restate the carrying value of its investment
as if the investment was accounted for under the equity method as of the
date of its initial acquisition. The Company's change in method to the
equity method is considered a change in accounting principle. The
cumulative effect of changing to the new accounting principle on the amount
of retained earnings at the beginning of the fiscal year is required to be
reported in net income of the period of change. Due to the Company's
determination that a decline in market value at June 30, 1998 was other than
temporary, and the related unrealized loss of $1,824,605 was included in net
income for the year ended June 30, 1998, the Company did not restate the
value of the shares held at June 30, 1998 above the fair market value at
that date of $318,708. Hence, there is no cumulative effect of an
accounting change reported in the Company's statement of operations.
Subsequent increases in the carrying value of the investment related
to additional shares being acquired in October 1998 and January 1999 as
disclosed above. Other increases and decreases to the investment relate to
the Company recording its pro-rata share of HALIS net income or loss for
each of the quarters ended September 1998, December 1998 and March 1999.
The Company's share of HALIS' net income for the three-month and nine-month
periods ended March 31, 1999 was $7,808 and $103,721, respectively.
Due to the accounting change taking place in the third quarter,
the Company is required to restate its operating results for each of the
interim periods since the close of its last fiscal year. The change was
to decrease the net loss for the quarter ended September 30, 1998 by
$319,287, decrease the net loss for the quarter ended December 31, 1998 by
$112,898, and decrease the net loss for the quarter ended March 31, 1999 by
$7,808. The change in year to date net income is an increase of $432,185.
The increase is the result of recording the Company's share of HALIS' net
income of $103,721 and the reversal of a $336,272 write down of the investment
to fair market value during the quarter ended September 30, 1998.
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<PAGE>
The carrying value of the investment at March 31, 1999 is $1,897,094. Based
on the closing bid price of the HALIS shares on March 31, 1999, the shares
have a fair market value of approximately $2.7 million.
During fiscal 1997, the Company determined to expand its business to
include healthcare information software products and services. The
decision was based on the Company's desire to improve margins for its
medical products, particularly its Life Sciences peripheral vascular
diagnostic products, and to expand its product and service offerings
in order to increase revenues and to return the Company to profitability.
In this connection, the Company entered into a business collaboration
agreement with HALIS, pursuant to which the Company and HALIS share sales
prospects and the Company is marketing the HALIS HES software to its client
base of approximately 1,200 customers that have previously bought the
Company's diagnostic equipment. There are no assurances that the Company
will be successful in its attempts to sell the HALIS HES software to its
customer base.
HALIS, based in Atlanta, Georgia, supplies information technology and
services focused on the healthcare industry. Utilizing advanced
healthcare models and information technology, HALIS has developed the
HALIS HES software utilizing the MERAD Technology, a single system
which integrates all of the major functions needed by clinics,
hospitals, healthcare practices, payors, long-term care facilities,
laboratories, pharmacies and home healthcare facilities.
On July 14, 1998, the Company entered into a letter of intent (the
"1998 Letter of Intent") with HALIS to merge the two companies.
However as a result of the volatility of the stock price of the HALIS
shares, the consummation of the merger is presently uncertain.
Pursuant to the 1998 Letter of Intent, the Company agreed to loan
HALIS up to a total of $250,000 pursuant to a 6% debenture maturing in
February 2000 (see Exhibit 10.6). As of December 31, 1998, the
Company had advanced $100,000 to HALIS under the debenture.
Subsequently, the Company advanced an additional $57,741 to HALIS. On
January 29, 1999 the Company exercised its conversion rights in the
debenture, and converted the outstanding amounts due to the Company
into 1,824,645 shares of HALIS common stock.
During the three months ended March 31, 1999, the Company recorded a net
$60,000 of selling, general and administrative expenses as a result of
the business collaboration agreement. Such expenses consisted of shared
executive and administrative services, rent and other office overhead, and
research and development expenses.
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 has ben 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.
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During fiscal 1999, the Company intends to continue to emphasize the
IT business and expects 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 is presently exploring acquisition opportunities
in an effort to expand its service and support capabilities. In this
regard the Company has identified, and is in discussions with, a number
of system integration companies that, if acquired, would greatly enhance
the Company's service and support capabilities for itself, and its
affiliates. 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 although it is in the process of utilizing
the MERAD Technology to build a general business application, financial
constraints have inhibited the Company's ability to develop additional
application products until new financing is obtained.
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 March 31, 1999 had a retained earnings deficit
of $19,087,362. 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 and develop its IT business.
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.
Total assets at March 31, 1999 were $4,096,996, an increase of
$1,628,000 from total assets of $2,468,996 at June 30, 1998. This
difference is the net effect resulting primarily from a decrease in
cash of approximately $750,000 and decreases in accounts receivable
and inventory of approximately $92,000 and $94,000, respectively, offset
by (1) the assets added as a result of the acquisition of PHE and its two
largest assets of additional marketable securities in HALIS of $951,306 and
the technology acquired of $1,094,348, and (2) the cumulative effect of an
accounting change to the equity method in accounting for the Company's long-
term investment in HALIS of $493,993. 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
advances to HALIS under the debenture agreement during the nine-month period
March 31, 1999.
Total liabilities at March 31, 1999 were $1,530,228, a decrease of
approximately $245,000 from total liabilities of $1,774,978 at June
30, 1998. This difference is primarily due to payments of $100,000 on
the Company's debentures, decreases in accounts payable, accrued compensation
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and payroll taxes, and other accrued expenses of approximately $154,000 in
the aggregate. These reductions were as a result of management's efforts to
reduce operating overhead and reduce its past due balances during the nine-
month period ended March 31, 1999.
Stockholders' equity increased by $1,872,750 from June 30, 1998 to March 31,
1999, 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,
respectively, resulting from the issuance of 488,400 shares of the Company's
common stock. Additionally, the Company raised $425,000 of capital during the
three-month period ended March 31, 1999. This was offset by net losses of
approximately $850,000 for the nine-month period ended March 31 ,1999, as
restated for the cumulative effect of the accounting change to the equity
method for the Company's long-term investment in HALIS. 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 approximately $711,000
relating to the retirement of the HALIS shares owned by PHE at the date of
its acquisition by the Company.
RESULTS OF OPERATIONS
Revenues for the three-month and nine-month periods ended March 31, 1999
decreased by $134,881 and $137,643, respectively, as compared to the same
periods for the prior fiscal year. 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). 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 $128,493 and $296,142, respectively, for the
three-month and nine-month periods ended March 31, 1999 as compared to the
same periods for the prior fiscal 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 accounted for a more
significant portion of the sales generated during the nine-month period in the
prior year and the shift in focus to service revenues which made up a higher
percentage of the total sales during the current period and current fiscal year.
Furthermore, costs were reduced as wages, facility allocation and inventory
obsolescence have been reduced during the current year as a result
of the sale of the United Kingdom subsidiary.
Total operating costs decreased by $82,410 and $316,745 for the three-month
and nine-month periods ended March 31, 1999 as compared to the same periods
for 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 increase in research and development
expenses of approximately $96,000 during the current quarter as compared
to the same quarter for the prior year is the result of the change in
business focus to service and providing technical support to HALIS under the
business collaboration agreement.
The net losses for the three and nine month periods were $324,766 and
$849,966, which represent decreases of $184,516 and $677,141 as compared to
the same periods for 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.
-11-<PAGE>
<PAGE>
Due to the accounting change to the equity method in the Company's
accounting for its long-term investment in HALIS taking place in the third
quarter, the Company is required to restate its operating results for each
of the interim periods since the close of its last fiscal year. The change
was to decrease the net loss for the quarter ended September 30, 1998 by
$319,287, decrease the net loss for the quarter ended December 31, 1998 by
$112,898, and decrease the net loss for the quarter ended March 31, 1999 by
$7,808. The change to year to date net income is an increase of $432,185.
The increase is the result of recording the Company's share of HALIS' net
income of $103,721 and the reversal of a $336,272 write down of the
investment to fair market value during the quarter ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had approximately $196,000 in cash
and accounts receivable, a decrease of approximately $842,000 from
June 30, 1998. Although the Company raised $425,000 from the issuance
of common stock during the current three-month period, cash reserves
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 10,763,655 shares of HALIS common stock owned by
the Company at March 31, 1999 represent approximately 21.0% of the
total outstanding shares of HALIS common stock. Due to the
fact that the Company may be considered an affiliate of HALIS, the
Company's ability to sell its HALIS shares could be adversely affected by
the requirement of Rule 144 promulgated by the Securities and Exchange
Commission, which could limit the number of HALIS shares that could be
sold in any three-month period. There can be no assurance as to the
price the Company could receive for the HALIS common stock if it were
required to sell the stock to raise additional working capital.
YEAR 2000
Software applications that use only two digits to identify a year in
the date field may cause fatal errors in the processing of data (the
"Year 2000 Concern"). The Company acknowledges that the failure of
its software to recognize the proper date codes could cause
substantial harm to the Company and its customers. However, the HALIS
HES software developed by HALIS and being marketed by the Company was
developed with the Year 2000 Concern in mind and has been designed to
be Year 2000 compliant. This means that HALIS has indicated, and the
Company believes, that the HALIS HES software being marketed to
customers will accept and recognize date codes for the Year 2000 and
beyond, and process that information recognizing the correct year in
the date field. Further, the MERAD Technology was also designed to be
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
-12-<PAGE>
<PAGE>
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.
RISK 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 noted
herein, 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 $425,000
during the three-month period ended March 31, 1999, the Company
estimates that it needs approximately $500,000 to $1,000,000 from operations
or additional debt or equity capital 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 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 HES software will require substantial
marketing efforts and expenditures by the Company and HALIS to inform
potential customers of the distinctive characteristics and benefits of
-13-<PAGE>
<PAGE>
this product. 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 the HES and
its other services 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's 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 the HALIS HES software and related services in the healthcare
industry, the market for which is still developing. Accordingly, the
Company's quarterly results of operations are difficult to predict,
and delays in the closing of sales near the end of the quarter could
cause quarterly revenues and, to a greater degree, operating and net
income to fall substantially short of anticipated levels. The
Company's total revenues and net income levels could also be adversely
affected by cancellations or delays of orders, interruptions or delays
in the supply of key components, changes in customer base or product
mix, seasonal patterns of capital spending by customers, delays in
purchase decisions due to new product announcements by the Company or
its competitors, increased competition and reductions in average
selling prices.
LIMITATIONS ON BROKER/DEALER SALES OF COMPANY COMMON STOCK;
APPLICABILITY OF PENNY STOCK RULES. The Company's common stock is
currently traded on the Nasdaq Small Cap Market. To remain listed on
the Nasdaq Small Cap Market, the Company must, among other things,
-14-<PAGE>
<PAGE>
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. Additionally,
the Company must maintain a minimum closing bid price for its stock of
in excess of $1.00 per share for certain periods of time. The Company's
stock has been trading recently just in excess of $1.00 per share.
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 10.62% 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.
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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. 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
-15-<PAGE>
<PAGE>
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 during the three-month period ended December 31, 1998.
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 nine-month period ended March 31, 1999, $100,000 in
fair value of the debentures was paid to the holders thereof. As of
March 31, 1999, $480,000 of the debentures remain outstanding and
due, plus approximately $115,000 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>
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>
-16-<PAGE>
<PAGE>
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison
Enterprises, Inc. <F9>
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc. dated
July 14, 1998 <F10>
27.1 Financial Data Schedule (for SEC use only).
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed
during the quarter ended March 31, 1999.
None
- ------------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, File No, 0-11476.
<F2> Incorporated herein by reference to Registration Statement,
Form S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement S-2
(File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1994 (File No.
0-11476).
<F5> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1996 (File No. 0-
11476).
<F6> Incorporated herein by reference to Registration Statement SB-2
(File No. 33-73462).
<F7> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1997 (File No. 0-
11476).
<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).
-17-<PAGE>
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this
report to be signed by the undersigned, thereunto duly authorized.
Date: May 21, 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)
-18-<PAGE>
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended, of the Company <F1>
3.2 Bylaws, as amended, of the Company <F2>
4.1 Specimen form of the Company's Common Stock certificate <F2>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 <F3>
4.3 Form of Incentive Stock Option Agreement <F3>
4.4 Form of Non-statutory Stock Option Agreement <F3>
4.5 HealthWatch, Inc. Stock Option Plan of 1993 <F4>
4.6 HealthWatch, Inc. Stock Option Plan of 1996 <F5>
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan <F5>
4.8 Subscription and Purchase Agreement dated as of the 14th day of
August 1992 between the Company and the Purchasers of the
Company's 10% convertible senior debentures due 1997 (including
as an appendix thereto the form of the debenture certificate) <F6>
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and
HALIS, Inc. <F7>
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock of
HealthWatch, Inc. <F10>
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch, Inc.
<F10>
10.1 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. <F8>
10.2 License and Software Development Agreement dated as of October
10, 1997 between the Company and MERAD Corporation <F8>
10.3 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison <F8>
10.4 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher <F8>
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison
Enterprises, Inc. <F9>
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc. dated
July 14, 1998 <F10>
27.1 Financial Data Schedule (for SEC use only).
- ------------
[FN]
<F1> Incorporated herein by reference to the Company's Annual Report,
Form 10-K, for the year ended June 30, 1990, file No, 0-11476.
<F2> Incorporated herein by reference to Registration Statement,
Form S-18 (File No. 2-85688D).
<F3> Incorporated herein by reference to Registration Statement S-2
(File No. 33-42831).
<F4> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1994 (File No. 0-
11476).
<F5> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1996 (File No. 0-
11476).
<F6> Incorporated herein by reference to Registration Statement SB-2
(File No. 33-73462).
-19-<PAGE>
<PAGE>
<F7> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1997 (File No.
0-11476).
<F8> Incorporated herein by reference to the Company's Quarterly
Report Form 10QSB, for the quarter ended December 31, 1997.
<F9> Incorporated herein by reference to the Company's Report, Form
8-K, dated October 1, 1998.
<F10> Incorporated herein by reference to the Company's Annual
Report Form 10-KSB, for the year ended June 30, 1998 (File No.
0-11476).
</FN>
-20-
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<PERIOD-START> JAN-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 104,283
<SECURITIES> 1,897,094
<RECEIVABLES> 116,616
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14,794
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