<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commision File Number
------------------------------ ---------------------
December 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.)
3525 Piedmont Road, 7 Piedmont Center Suite 300, Atlanta, GA 30305
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(Address of Principal Executive Offices)
(404) 262-0181
------------------------------------------------
(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 ______
--------
Number of registrant's common shares outstanding at January 31, 2000
1,934,174
---------
Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1999
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
<TABLE>
<CAPTION>
Current Assets
<S> <C>
Cash $ 223,302
Accounts Receivable, net of allowance for
doubtful accounts of $19,845 29,285
Inventory 63,750
Receivables - related party 60,744
Other Current Assets 7,830
-----------
Total current assets 384,912
-----------
Marketable equity securities - related party 1,538,868
Property and equipment, net 13,894
Intangible assets, net 1,210,293
Other assets 30,610
-----------
Total Assets $ 3,178,576
===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C>
Accounts payable $ 147,298
Accrued compensation and payroll taxes 14,799
Other accrued expenses - related parties 96,584
Other accrued expenses - unrelated parties 550,848
Deferred revenue 27,483
Current portion of debentures payable
- related parties 15,000
Current portion of debentures payable
- unrelated parties 465,000
------------
Total liabilities $ 1,317,012
============
Shareholders' equity
Cumulative preferred stock, 1,000,000 shares
authorized, $.05 par value;
Series A, 11,600 shares issued and outstanding 580
Series P, 66,886 shares issued and outstanding 3,344
Series C, 3,500 shares issued and outstanding, 175
$100 liquidation value
</TABLE>
<PAGE>
Common stock, $.05 par value; 10,000,000 shares
authorized, 1,635,666 issued and outstanding 81,783
Additional paid-in capital 22,673,574
Accumulated deficit (20,897,892)
------------
Total shareholders' equity 1,861,564
------------
Total liabilities and shareholders' equity $ 3,178,576
============
The accompanying notes are an integral part of these statements.
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
<S> <C> <C>
---------- ---------
Product sales $ 170,762 $ 296,268
Product cost of sales 37,911 185,426
---------- ---------
Gross profit 132,851 110,842
---------- ---------
Operating costs and expenses:
Selling, general and administrative 529,702 264,148
Depreciation and amortization 85,261 84,576
Research and development 29,613 17,727
---------- ---------
Total operating costs and expenses 644,576 366,451
---------- ---------
Loss from continuing operations (511,725) (255,609)
---------- ----------
Other income (expense):
Unrealized loss on marketable equity
securities - related party - -
Equity in earnings of subsidiary (134,701) -
Interest expense (1,147) (16,095)
Miscellaneous 165,405 (1,143)
---------- ---------
Total other income (expense) (29,558) (17,238)
Net loss $ (482,167) $ (272,847)
Net loss per share $ (0.39) $(0.59)
Weighted average number of shares
outstanding 1,236,535 463,366
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended December 31,
1999 1998
<S> <C> <C>
---------- ---------
Product sales $ 322,465 $ 661,877
Product cost of sales 120,462 451,999
---------- ---------
Gross profit 202,003 209,878
---------- ---------
Operating costs and expenses:
Selling, general and administrative 793,292 593,954
Depreciation and amortization 170,471 151,572
Research and development 66,804 53,947
---------- ---------
Total operating costs and expenses 1,030,576 799,473
---------- ---------
Loss from continuing operations (828,564) (589,595)
---------- ---------
Other income (expense):
Unrealized loss on marketable equity
securities - related party - (336,272)
Equity in earnings of subsidiary (230,803) -
Interest expense (17,605) (32,691)
Miscellaneous 165,405 (1,173)
---------- ---------
Total other income (expense) (83,002) (367,790)
Net loss $(911,566) $(957,385)
Net loss per share $(0.88) $(1.88)
Weighted average number of shares
outstanding 1,036,263 510,001
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(911,566) $(957,385)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 170,471 115,572
Unrealized loss on marketable equity securities - 336,272
Provision for bad debt (6,465) -
Equity in earnings of subsidiary 230,803 -
Issuance of stock for services 161,624 -
Write-off of accrued expense (165,405) -
Decrease (increase) in assets:
Accounts receivable 75,088 91,603
Inventory 20,114 82,750
Other current assets 2,101 (10,534)
Other assets 3,400 (1,261)
Increase (decrease) in liabilities:
Accounts payable 10,576 (31,043)
Accrued expenses - related parties 54,492 (89,566)
Accrued expenses - unrelated parties 67,750 (187,139)
Deferred revenue (1,047) (13,455)
Debentures payable - (87,000)
---------- ----------
Net cash used in operating activities (288,064) (715,186)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment -- (1,590)
Decrease (increase) in note receivable - related party 89,620 (100,000)
---------- ----------
Net cash provided by (used in) investing activities 89,620 (101,590)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (costs) of issuance of common stock 50,000 -
Net proceeds (costs) of issuance of preferred stock 350,000 -
--------- ---------
Net cash provided by financing activities 400,000 -
------- ---------
Increase (decrease) in cash 201,556 (816,776)
Cash - begining of period 21,746 854,290
---------- ---------
Cash - end of period $ 223,302 $37,514
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 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 an d 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, 1999, 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 necessary indicative of the results that may be expected
for the year ending June 30, 2000 . This report should be read in conjunction
with the Company's Financial Statements and Notes thereto contained in the
Company's annual report on Form 10-K for the year ended June 30, 1999.
MANAGEMENT'S OPERATING PLANS
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational an financial plans relative to the
Company's ability to continue in existence with it's historical lines of
business and has refocused the Company into an information technology company.
The Company, now d/b/a MERAD Technologies Corporation, has changed from a
company primarily involved in the manufacture and marketing of medical products
to a company primarily involved in the software in form ion 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 98, the Company had obtained a license from MERAD Corporation ("MERAD"),
a subsidiary of PHE, for use of the MERAD Technology and retained MERAD to
develop proprietary software technology which was to be used to expand the
Company's product offerings to include products and services specially focused
on monitoring, capturing and managing medical information at the point of care.
Due to its limited resources, the Company has not proceeded to develop software
that would be used in conjunction with its medical devices. In light of the
Company's refined emphasis on utilizing the newly acquired MERAD Technology to
develop expanded applications in the healthcare and other industries, the
Company has decided not to expand the Company's medical device business. The
acquisition of PHE, which is a significant shareholder of HALIS, Inc. ("HALIS"),
also increased the Com ny'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
<PAGE>
owed by HALIS to the Company pursuant to a debenture, bringing its interest in
the HALIS common stock to approximately 21.9% and now accounts for its
investment in HALIS on the equity method of accounting.
In the PHE acquisition, the Shareholders of PHE received 334,432 shares of the
Company's Series Preferred Stock, stated value $10.00 per share (the "Preferred
Stock"). Subject to prior approval by the Company's shareholders, the Preferred
Stock will be convertible into 3,344,320 shares of the Company's common stock.
Paul W. Harrison, Chairman, President and Chief Executive Officer of the
Company., received 125,088 of the Series P Preferred Stock and Brian L.
Schleicher, the former Interim Chief Financial Officer and Chief Administrative
Officer of the Company received 7,812 o the Series P Preferred Stock. All of the
Preferred Stock is non-voting. The Series P Preferred Stock has a cumulative
dividend feature of 12%. which adjusts to a maximum of 24% if the shares are not
granted the. right to convert by certain target dates. As of February 1, 1999,
the Series P Preferred Stock accrued a dividend at the rate of 18% per annum,
which was increased to 24% on August 1, 1999. See designation of the Series P
Preferred Stock incorporated by reference from the Company's annual report on
Form 10-KSB for the year ended June 30, 1998. In addition to the issuance of
the Series P Preferred Stock, the PHE shareholders shall be paid additional
consideration based on the percentage of the revenues that the Company receives
in connection with the sale of software developed utilizing the MERAD
Technology, up to a maximum of $7 million, and certain PHE shareholders received
options for approximately 625,000 shares of the Company's common stock with an
exercise price of $.96 per share in exchange for previously outstanding options
of PHE. Of the outstanding options issued in the PHE aquisition, 583,333 were
issued to Paul W. Harrison. The PHE shareholders as a group, earned $92,772 and
$15,844 in additional consideration for the fiscal year ended June 30, 1999 and
the six month period ended December 31, 1999, of which 50% will be paid in cash
and the balance to be in common stock of the Company. During the three month
period ended December 31, 1999, the PHE shareholders were issued 142,087 of
common stock in exchange for $53,283 which represented 50% of the additional
consideration earned through September 30, 1999.
During fiscal 2000, the Company intends to continue to emphasize the IT business
and provide IT services and support to its customers a to HALIS, its affiliate.
Additionally, the Company is in the process of identifying strategic acquisition
candidates in the systems integration and support area that will enhance the
Company's ability to provide these services. However , due to its depressed
stock price, the Company has found it difficult to proceed with any
acquisitions. The Company also expects to continue to expand its collaborative
efforts with HALIS and to increase its efforts to market the HALIS Healthcare
Enterprise System (the "HALIS HES") product and its derivatives to the Company's
customer base (see discussion below). The HALIS HES software, which is owned by
HALIS, was developed utilizing the MERAD Technology. As a result of acquiring
the MERAD Technology in the PHE acquisition, the Company earns a royalty equal
to 10% of the gross revenues generated by HALIS on sales of the HALIS HES and
any derivative products or services associated therewith. The Company earned
$1,350 and $9,452 in royalties during the three and six month periods ended
December 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 financial services, insurance and real
estate; however, due to the limited financial resources of the Company,
expansion into other lines of business is uncertain. In recognition of this
change in the Company's business focus, the Company will ask its stockholders at
its next Annual Meeting of Stockholders to approve a change in the Company's
name to MERAD Technologies
<PAGE>
Corporation.
NET INCOME (LOSS) PER SHARE
The net income (loss) pe 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, 1999 and June 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
12/31/99 6/30/99
Raw materials $ 63,750 $ 59,000
Work in process
Finished goods 24,864
--------- --------
$ 63,750 $ 83,864
</TABLE>
DEBENTURES PAYABLE
Debentures payable accrue interest at a annual rate of 10%, payable quarterly.
The debentures matured on March 1, 1998, and are currently in default as to the
payment of principal and past due interest. The debentures could be converted,
at the option of the holder, at a conversion rate of one share of the Company's
common stock for every $70.00 of debentures, plus interest, converted. During
fiscal 1999, the Company repaid $100,000 of the principal amount of the
debentures due and owing. During the six-month period ended December 31, 1999,
the Company did not pay any principal or interest on the debentures. As of
December 31, 1999, $147,275 in accrued but unpaid interest is outstanding on the
debentures. However, subsequent to December 31, 1999, the debenture holders
converted $455,000 of their debentures and related accrued interest of $139,357
into 316,990 shares of common stock of the Company. The Company will attempt to
reach an agreement with the remaining holder of $25,000 of debentures prior to
the end of the current quarter 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-
<PAGE>
marketable restrictions of the preferred shares issued. During the three-and six
month periods ended December 31, 1999, the PHE shareholders earned $2,050 and
$15,844 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 tangible assets acquired as been identified as technology
acquired (the MERAD Technology) and is being a amortized over a ten-year period.
During fiscal 1999, the Company received 1,824,645 of common stock of HALIS in
exchange for a 6% convertible debenture and subsequent advances totaling
$157,741. The conversion brought the Company's total investment in HALIS to
21.9% of HALIS outstanding common stock. As a result of this stock acquisition,
the Company converted its accounting for this long-term investment to the equity
method. Under generally accepted counting principles, the change is considered a
change in accounting principles and requires the Company to recalculate and
restate the carrying value of investment as if the investment was accounted for
under the equity method as of the date of its initial acquisition.
During the three and six months ended December 31, 1999 the Company issued stock
for current services of $111,622 and $161,624 of which $80,000 was for the
Chairman and CEO. Additionally, the Chairman and CEO converted $65,000 of loans
payable into 173,333 shares of common stock. and accrued liabilities of $147,162
for professional and consulting fees were converted into 792,040 shares of
common stock. during the current three month period. The PHE shareholders
converted of $53,283 of additional consideration into 142,087 shares of common
stock during the current three month period.
Additionally, during fiscal 2000, the Company's preferred shareholders, Series
A, converted 1,087,000 preferred shares into 3,556,261 shares of common stock in
accordance with the preferred stock, Series A, conversion feature.
SUBSEQUENT EVENTS
During January and February, 2000, the Company issued 689,157 shares of common
stock to debenture holders, directors and consultants. The debenture holders
converted $455,000 of their debentures and related accrued interest of $139,357
into 316,990 shares of common stock of the Company. Directors and consultants
converted 1999 fees for services totaling $94,800 into 40,000 and 20,000 shares
of common stock, respectively. These conversions increased total shareholder's
equity from $1,861,564 at December 31, 1999 to approximately $2,550,000 on a
pro-forma basis. The following is a proforma balance sheet as of December 31,
1999 including such transactions:
<TABLE>
<CAPTION>
Historical Proforma Proforma
<S> <C> <C> <C>
12/31/99 Adjustmets 12/31/99
Current Assets 384,912 0 384,912
Marketable Equity
Securities - Related Party 1,538,868 0 1,538,868
Property and Equipment, net 13,894 0 13,894
Intangible Assets, net 1,210,293 0 1,210,293
Other Assets 30,610 0 30,610
Total Assets 3,178,576 0 3,178,576
Current Liabilities 837,012 (234,157) 602,855
Debentures Payable 480,000 (455,000) 25,000
--------- -------- ---------
Total Liabilities 1,317,012 (689,157) 627,855
Shareholders' Equity 1,861,564 689,157 2,550,721
--------- -------- ---------
Total Liabilities and Shareholders
Equity 3,178,576 0 3,178,576
</TABLE>
<PAGE>
INVESTMENT IN HALIS COMMON STOCK; HALIS BUSINESS COLLABORATION
As of December 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 fiscal 1999, the Company acquired
an additional 1,824,645 shares of HALIS common stock increasing its ownership
interest in HALIS to its present holdings. Consequently, until this additional
acquisition, the Company reflected its interest in HALIS at cost but now is
required by generally accepted accounting principles to account for its
investment in HALIS on the equity method Of accounting, thereby reflecting its
portion of HALIS' earnings or losses in the Company's income statement with a
corollary adjustment to its investment account. additionally, the Company was
required to recalculate and restate the carrying value of its investment as if
the investment was accounted for under the equity method as of the date of its
initial acquisition. The Company's change in method to the equity method is
considered a change in accounting principle. The cumulative effect of changing
to the new accounting principle on the amount of retained earnings at the
beginning of the fiscal year is required to be reported in net income of the
period of change. Due to the Company's determination that a decline in market
value at June 30, 1998 was other than temporary, and the related unrealized loss
of $1,824,605 was included in net income for the year ended June 30, 1998, the
Company did not restate the value of the shares held at June 30, 1998 above the
fair market value at that date of $318,708. Hence, there is no cumulative
effect of an accounting change reported in the Company's statement of
operations. Subsequent increases in the carrying value of the investment
related to additional shares being acquired in October 1998 and January 1999 as
disclosed above. Other increases and decreases to the investment related to the
Company recording its pro-rata share of HALIS net income or loss or each of the
quarters ended September 1998, December 1998 and March 1999. The company's share
of HALIS' net loss for the three-and six month periods ended December 31, 1999
was $134,701 and $230,803.
Due to the accounting change taking place in the third quarter of fiscal 1999,
the Company was required to restate its operating results for each of the
interim period since the close of its prior fiscal year. The change was to
decrease the net loss for the quarter ended September 30, 1998 by $319,287,
decrease the net loss for the quarter ended December 31, 1998 by $112,898, and
decrease the net loss for the quarter ended March 31, 1999 by $7,808. The change
in net income at the time of the change to the equity method was an increase of
$432,185. The increase is the result of recording the
<PAGE>
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. The carrying value of the investment at December 31, 1999 is
$1,538,868. Based on the closing bid price of the HALIS shares on September 30,
1999, the shares had a fair market value of approximately $1,681,283.
At December 31, 1999 the calculated value exceeds the carrying value by
$142,415. In management's opinion, the previous decline was temporary in
nature, and therefore, no adjustment was necessary to the carrying value as a
result of the use of the equity method of accounting. Additionally the carrying
value of the HALIS investment under the equity method exceeded the 21% equity in
the underlying assets of HALIS at the date of conversion to the equity method by
$1,845,329. This excess is being amortized on the straight line method over 10
years, or $184,533 per year.
During fiscal 1997, the Company determined to expand its business to include
healthcare information software product and services. The decision was based on
the Company's desire to improve margins or 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 's 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 HALIS HES software to its customer
base.
HALIS, based in Atlanta, Georgia, supplies information technology and services
focused on the healthcare industry. Utilizing advanced healthcare models and
information technology, HALIS has developed the HALIS HES software utilizing the
MERAD Technology, a single system which integrates all of the major functions
needed by clinics, hospitals, healthcare practices, payors, long-term care
facilities, laboratories, pharmacies and home healthcare facilities.
On July 14, 1998, the Company entered into a letter of intent (the "1998 Letter
of Intent") with HALIS to merge the two companies. However as a result of the
volatility of the stock price of the HALIS shares, the consummation of the
merger is presently uncertain. Pursuant to the 1998 Letter of Intent, the
Company agreed to loan HALIS up to a total of $250,000 pursuant to a 6%
debenture maturing in February 2000 (see Exhibit 10.6). As of December 31,
1998, the Company had advanced $100,000 to HALIS under the debenture.
Subsequently, the Company advanced an additional $57,741 to HALIS. On
January 29, 1999 the Company exercised its conversion rights in the debenture,
and converted the outstanding amounts due to the Company into 1,824,645 shares
of HALIS common stock.
YEAR 2000
Software applications that use only two digits to identify a year in the date
field may cause fatal errors in the processing of data (the "Year 2000
Concern"). The Company acknowledges that the failure of its soft ware 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
<PAGE>
designed to be Year 2000 compliant. This means that HALIS has indicated, and the
Company believes, that the HALIS HES software being marketed to customers will
accept and recognize date codes for the Year 2000 and beyond, and process that
information recognizing the correct year in the date field. Further, the MERAD
technology was also designed to be Year 2000 compliant. The Company does not
believe that the failure of any of the software that it utilizes in its
operations from third-party vendors to be Year 2000 compliant will have a
material effect on the Company. The Company believes that even if the software
it utilizes from vendors is not Year 2000 compliant, there are sufficient
alternatives available that the Company can resolve any issues without incurring
any material amounts to resolve any Year 2000 Concerns.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During fiscal 2000, the Company continued efforts to develop proprietary
technology utilizing MERAD and to market, as a reseller HALIS' Healthcare
Enterprise System to the Company's customers. The Company expects to continue to
expand its collaborative efforts with HALIS and to expand its efforts to market
the HALIS healthcare enterprise system to the Company's customer base. The
Company also intends to explore the possibility of developing information
systems utilizing the MERAD technology for other information intensive
industries, such as financial services, insurance and real estate.
The Company has incurred significant operating losses during the past several
years and at June 30, 1999 had an accumulated deficit of $19,986,327. The
Company will require additional debt or equity capital to sustain operations and
to continue its business development efforts. The report of the Company's
independent public accountants for the years ended June 30, 1999 and 1998,
contained a paragraph noting substantial doubt regarding the Company's ability
to continue as a going concern.
Total assets at December 31, 1999 were $3,178,576, representing a decrease of
$369,396 from June 30, 1999. Amortization of intangible assets and a decrease
in value in HALIS investment, under the equity method, accounted for $161,569
and $230,803, respectively, of the decrease. Other decreases include amounts
due from HALIS of $89,620, accounts receivable of $68,623, and inventory of
$20,114. The decreases were offset by an increase of cash of $201,556.
Current liabilities decreased by $326,857 from $1,643,869 at June 30, 1999 to
$1,317,012 at December 31, 1999. The decrease is primarily attributable to the
conversion of accrued expenses and shareholder loans totaling $469,028 into
common stock of the company, and the write-off of a previously recorded $165,000
liability. These decreases are offset by increases in other accrued expenses
related to professional and consulting fees. The debentures payable balance at
December 31, 1999 remained unchanged from June 30, 1999. Accrued interest on
the debentures for the six month period ended December 31, 1999 was $31,597 and
is included in other accrued expenses.
Shareholders' equity decreased from $1,904,103 at June 30, 1999 to $1,861,564 at
December 31, 1999, a decrease of $42,539. The decrease is attributable to a net
loss for the six month period of $911,566. This net loss is offset by the
issuance of 792,040 shares of common stock for services valued at $350,745,
conversion of $65,000 in shareholder loans for the issuance of 173,333 shares of
common stock, conversion of $53,283 of additional consideration due to former
PHE shareholders for 142,087 shares of common stock, and proceeds of $50,000 and
$350,000 from the issuance of
<PAGE>
142,858 shares of common stock and 3,500 shares of Series C convertible
preferred stock, respectively.
RESULTS OF OPERATIONS
Revenues declined by $125,506 and $339,412, or 42.3% and 51.3%, for the three
and six month periods ended December 31, 1999, respectively, when compared to
similar periods in 1998. The decline in revenue is primarily due to the
Company's continued shift from a product driven supply company to a software
information technology company. The Company recognized $1,350 and $9,450 in
royalties from HALIS for the three and six month periods ended December 31,
1999, respectively, under its 10% royalty agreement with HALIS for sales of
HALIS' Healthcare Enterprise System. Such royalties are included in product
sales.
Gross profit was 77.8% and 62.6% for the three and six month periods ended
December 31, 1999, respectively, as compared to 37.4% and 31.7% for the same
periods in 1998. The increase in gross profit percentage is due primarily to
greatly reduced manufacturing overhead expenses, the mature nature of the
Company's remaining product lines, previous write-downs of slow moving inventory
to lower of cost or market and a general shift from product sales to service and
support.
Selling, general and administrative expenses increased by $265,554 and $199,338
for the three and six month periods ended December 31, 1999, respectively, from
the comparable 1998 periods due to increased professional fees. Depreciation and
amortization increased by $685 and $18,899 for the three and six month periods
ended December 31, 1999, respectively, as compared to the same 1998 periods,
resulting from the additional amortization associated with the Company's October
1, 1999 acquisition of the MERAD technology and related current period
amortization. Research and development costs remained increased slightly for the
three and six month periods ended December 31, 1999 as compared with the same
1998 periods due to an increased focus on software information technology.
During fiscal year ended June 30, 1999, the Company changed its method of
accounting for its investment in HALIS to the equity method from the available-
for-sale fair value method because it acquired additional interests bringing its
ownership interest in HALIS to approximately 21%. For the three and six month
periods ended December 31, 1999, the Company recognized losses from its
investment in HALIS of $134,701 and $230,803, respectively. For the same 1998
periods, the Company determined a permanent decline in its available-for-sale
fair value investment in HALIS of $336,272. During the three month period ended
December 31, 1999, the Company determined that a liability of approximately
$165,000 from the early 1990's related to a previously acquired, inactive
subsidiary, was no longer appropriate. The Company has received no
communication from the creditor since and management believes that the
------
Company never will. Such amount is recorded as miscellaneous income in the
accompanying consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had $262,587 of cash and accounts receivable.
During the three and six month periods ended December 31, 1999, operating
activities consumed $288,064 of cash as compared to $715,186 for the same
periods in 1998. As previously discussed, the primary reason was the change in
accounting method for the HALIS
<PAGE>
investment from available-for-sale to the equity method and issuance of common
stock for services. Due to the Company's operating losses, it has been required
to raise additional equity capital to fund its operations. Capital expenditures
during this period have been virtually nonexistent. Since the beginning of
fiscal 2000, the Company has raised $400,000 through the sale of 142,858 shares
of its common stock and 3,500 shares of its Series C convertible preferred
stock. During fiscal 2000, the Company's Series A preferred shareholders,
converted 1,087,000 shares of Series A preferred stock into 3,556,261 shares of
common stock in accordance with the conversion rights under the Series A
preferred stock.
The Company's 10% Convertible Secured Debentures in the principal amount of
$480,000 were due and payable on March 1, 1998. The Company previously reported
that it needed to raise in excess of $1,000,000 of working capital in addition
to that already raised and committed in fiscal 2000 to sustain operations during
the next twelve months and to pay the Debentures. However, subsequent to
December 31, 1999, the holders of all but $25,000 of the 10% Convertible Secured
Debentures have converted their debt to common stock.
The Company continues to monitor its cash situation very closely. Due to the
down-sizing of the Company and shift from a product supplier to a software
information technology company, its cash needs are not as acute as they were
during the prior year. However, the Company has been unsuccessful in expanding
its customer base and royalty stream from its recently acquired MERAD technology
during the current period. If the Company is unable to increase its customer
base and royalty stream from its MERAD technology during fiscal 2000, the
Company will not be able to continue to generate sufficient positive cash flow
to meet its obligations without seeking an additional capital infusion.
The Company is considering additional private placements of its securities for
these requirements. There can be no assurance that the Company will be able to
raise additional debt or equity capital on terms that are acceptable to the
company, if at all.
The Company considers its investment in HALIS to be a long-term investment.
However, in the event that the Company is unable to raise additional capital, it
may be required to sell shares of the HALIS common stock. The HALIS common
stock is traded in the over-the-counter market on the NASDAQ Bulletin Board.
While the 10,763,655 shares of HALIS common stock owned by the Company
represents approximately 21% of the total outstanding shares of HALIS common
stock, the Company's ability to sell its HALIS shares could be adversely
affected by the limited trading volume for HALIS' stock and the requirement that
the Company sell its HALIS shares in accordance with Rule 144 promulgated by the
Securities and Exchange Commission which could limit the number of HALIS shares
which could be sold in any three-month period to approximately 536,000 shares.
There can be no assurance as to the price the Company could receive for the
HALIS common stock if it were required to sell the stock to raise additional
working capital.
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the six-month period ended December 31, 1999, the Company issued a total
of 3,556,261 shares of common stock upon conversion of 1,087,000 shares of the
Series A Preferred Stock. During the six-month period ended December 31, 1999,
the Company issued 1,250,318 shares of common stock, 792,040 of which was in
lieu of services, 142,087 in connection with the PHE acquisition, 173,333 in
exchange for shareholder loans, and 142,858 in a private placement of
securities. The Company also issued 3,500 shares of. Series C cumulative
preferred stock for $350,000. The Company issued the securities without
registration under the Securities Act of 1933, as amended, in reliance upon an
exemption from the registration requirements of such Act contained in Section
4(2) thereof. All of the foregoing securities were acquired for investment
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 1, 1998, $580,000 principal amount of the Company's 10% Secured
Convertible Debentures ("Debentures") were due and payable. The Company was
unable to pay the Debentures in accordance with their terms and the Company
obtained no further extension of the maturity date. During fiscal 1999,
$100,000 in fair value of the debentures was paid to the holders thereof. As of
December 31, 1999, $480,000 of the debentures remain outstanding and due, plus
approximately $147,275 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. In January and February, 2000,
the debenture holders converted $455,000 of their debentures and related accrued
interest of $139,357 into 316,990 shares of common stock of the Company.
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 (Fl)
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)
<PAGE>
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. (FlO)
4.11 Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. (FlO)
10.1 Business Collaboration Agreement dated as of October 10, 1997 between the
Company and HALIS, Inc. (F8)
10.2 License and Software Development Agreement dated as of October 10, 1997
between the Company and MERAD Corporation (F8)
10.3 Consulting Agreement dated as of October 10, 1997 among the Company, Paul
Harrison Enterprises, Inc. and Paul Harrison (F8)
10.4 Consulting Agreement dated as of October 10, 1997 between the Company and
Larry Fisher (F8)
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison Enterprises, Inc.
(F9)
10.6 Letter of Intent between HealthWatch, Inc. and HALIS, Inc. dated July 14,
1998 (F10)
27.1 Financial Data Schedule (for SEC use only).
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during the
quarter ended December 31, 1999.
10.7 Press Release stating that HealthWatch, Inc. has 1 for 5 Reverse Stock
Split put into effect to help meet NASDAQ's minimum rice per share
compliance requirements. (F11)
(Fl) 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).
<PAGE>
(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
Form10QSB, 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 for the year ended June 30, 1998 (File No. 0-11476).
(F11) Incorporated herein by reference to the Company's Report, Form 8-K,
dated December 28, 1999.
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: February 14, 2000 HealthWatch, Inc.
By: /s/ Paul W. Harrison
--------------------
Paul W. Harrison
(Chairman, President and
Chief Executive Officer)
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended, of the Company (Fl)
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. (FlO)
4.11 Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. (FlO)
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 (FlO)
10.7 Press Release stating that HealthWatch, Inc. has 1 for 5 Reverse Stock
Split put into effect to help meet NASDAQ's minimum rice per share
compliance requirements. (F11)
27.1 Financial Data Schedule (for SEC use only).
(Fl) Incorporated herein by reference to the Company's Annual Report, Form10-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 Form10-KSB,
for the year ended June 30, 1994 (File No. 0-11476).
<PAGE>
(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).
(F11) Incorporated herein by reference to the Company's Report, Form 8-K, dated
December 28, 1999.
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<PAGE>
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