UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
--------------------------------------------------------------------------------
December 31, 2000 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.)
1100 Johnson Ferry Road, Suite 670, Atlanta, GA 30342
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(Address of Principal Executive Offices)
(404) 256-0083
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(Issuer's Telephone Number, Including Area Code)
N/A
-------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ______
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Number of registrant's common shares outstanding at January 31, 2001
2,142,751
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Transitional Small Business Disclosure Format (check one)
Yes ___ No X
---
EXPLANATORY NOTE:
This amended quarterly report on Form 10-QSB for the quarter ended December 31,
2000 includes restatement of the December 31, 2000 and 1999 financial statements
to (1) reflect the effects of a change in the amortization life of the Company's
intangible asset identified as the Merad Technology from ten years to five years
and (2) an adjustment to reflect the beneficial conversion feature related to
the Series P preferred stock.
We have made no further changes to the previously filed Form 10-QSB. All
information in this Form 10-QSB is as of December 31, 2000 and does not reflect
any subsequent information or events other than the aforementioned changes.
2
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 2000
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
December 31,
2000
----------------
ASSETS
Current assets:
Cash $ 52,084
Accounts receivable, net of allowance of $17,653 48,427
Marketable securities 1,848,406
Inventory 25,449
Other current assets 339,694
----------------
Total current assets 2,314,060
----------------
Investment in Halis, Inc. 1,645,701
Due from Halis, Inc. 541,976
Property and equipment, net of accumulated
depreciation of $138,224 127,320
Intangible assets, net of accumulated amortization
of $466,544 1,014,570
Other assets 56,370
----------------
Total other assets 3,385,937
----------------
Total assets $ 5,699,997
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 661,701
Deferred revenue 6,501
Debentures payable 25,000
----------------
Total liabilities (all current) 693,202
----------------
Shareholders' equity:
Cumulative preferred stock; 1,000,000 shares authorized; par
value $.05 per share:
Series A, 5,000 shares issued and outstanding 250
Series P, 66,886 shares issued and outstanding 3,344
Series C, 4,000 shares issued and outstanding 200
Series D, 74,130 shares issued and outstanding 3,707
Common stock, $.05 par value; 10,000,000 shares
Authorized, 2,142,751 issued and outstanding 107,137
Additional paid-in capital 35,641,951
Accumulated deficit (30,743,303)
Accumulated other comprehensive loss, net unrealized
investment losses (6,491)
----------------
Total shareholders' equity 5,006,795
----------------
Total liabilities and shareholders' equity $ 5,699,997
================
(The accompanying notes are an integral part of these statements)
3
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
Three Months Ended December 31,
2000 1999
-----------------------------------
Sales $ 79,356 $ 170,762
Cost of sales 15,312 37,911
-----------------------------------
Gross profit 64,044 132,851
-----------------------------------
Operating costs and expenses
Selling, general and administrative 958,340 529,702
Depreciation and amortization 70,202 110,545
Research and development 59,554 29,613
-----------------------------------
Total operating costs and expenses 1,088,096 669,860
-----------------------------------
Operating loss (1,024,052) (537,009)
-----------------------------------
Other income (expense)
Loss from investment in Halis, Inc. (9,050) (134,701)
Realized loss on sale of marketable securities (4,010) --
Interest income 37,845 --
Interest expense (6,401) (1,147)
-----------------------------------
Total other income (expense) 18,384 (135,848)
-----------------------------------
Loss before income taxes and
extraordinary item (1,005,668) (672,857)
Income tax benefit -- 66,000
-----------------------------------
Loss before extraordinary item (1,005,668) (606,857)
Extraordinary item - Gain on extinguishment
of debt, net of income tax of $66,000 -- 99,405
-----------------------------------
Net loss $ (1,005,668) $ (507,452)
===================================
Basic and diluted net loss per common share:
Loss before extraordinary item $ (1,005,668) $ (606,857)
Less preferred stock dividends (undeclared) 223,521 67,261
Less amortization of beneficial conversion
Option on Series D and Series P
preferred stock 1,495,845 78,257
----------------------------------
Loss available to common shareholders (2,725,034) (752,375)
Extraordinary item --- 99,405
----------------------------------
Net loss available to common shareholders $ (2,725,034) $ (652,970)
==================================
Net loss per common share, basic and diluted:
Loss before extraordinary item $ (1.27) $ (0.61)
Extraordinary item --- 0.08
----------------------------------
Net loss $ (1.27) $ (0.53)
==================================
Weighted average number of common
shares outstanding 2,142,751 1,236,535
==================================
(The accompanying notes are an integral part of these statements)
4
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
Six Months Ended December 31,
2000 1999
-----------------------------------
Sales $ 183,622 $ 322,465
Cost of sales 37,888 120,462
-----------------------------------
Gross profit 145,734 202,003
-----------------------------------
Operating costs and expenses
Selling, general and administrative 1,873,679 793,292
Depreciation and amortization 127,911 221,039
Research and development 98,034 66,804
-----------------------------------
Total operating costs and expenses 2,099,624 1,081,135
-----------------------------------
Operating loss (1,953,890) (879,132)
-----------------------------------
Other income (expense)
Loss from investment in Halis, Inc. (127,710) (230,803)
Realized loss on sale of marketable securities (3,860) --
Interest income 95,949 --
Interest expense (10,015) (17,605)
-----------------------------------
Total other income (expense) (45,636) (248,408)
-----------------------------------
Loss before income taxes and
extraordinary item (1,999,526) (1,127,540)
Income tax benefit -- 66,000
-----------------------------------
Loss before extraordinary item (1,999,526) (1,061,540)
Extraordinary item - Gain on extinguishment
of debt, net of income tax of $66,000 -- 99,405
-----------------------------------
Net loss $ (1,999,526) $ (962,135)
===================================
Basic and diluted net loss per common share:
Loss before extraordinary item $ (1,999,526) $ (1,061,540)
Less preferred stock dividends (undeclared) 447,042 134,522
Less amortization of beneficial conversion
Option on Series D and Series P
preferred stock 2,991,690 156,514
-----------------------------------
Loss available to common shareholders (5,438,258) (1,352,576)
Extraordinary item --- 99,405
-----------------------------------
Net loss available to common shareholders $ (5,438,258) $ (1,253,171)
===================================
Net loss per common share, basic and diluted:
Loss before extraordinary item $ (2.54) $ (1.31)
Extraordinary item --- 0.10
-----------------------------------
Net loss $ (2.54) $ (1.21)
===================================
Weighted average number of common
shares outstanding 2,142,751 1,036,263
===================================
5
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
Six Months Ended December 31,
2000 1999
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,999,526) $ (962,135)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 127,911 221,039
Loss from Investment in Halis, Inc. 127,710 230,803
Provision for bad debts -- (6,465)
Common stock issued for services -- 161,624
Loss on sale of marketable securities 3,860 --
Gain on extinguishment of debt -- (165,405)
Decrease (increase) in assets:
Accounts receivable (13,888) 75,088
Inventory 10,028 20,114
Other current assets (73,401) 2,101
Other assets (13,157) 3,401
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 154,657 132,818
Deferred revenue (1,989) (1,047)
--------------------------------------
Net cash used in operating activities (1,677,795) (288,064)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (119,378) --
Proceeds from sale of marketable securities 2,190,143 --
Purchase of intangible assets, capitalized Merad
Technology costs (248,597) --
Net (increase) decrease in due from Halis, Inc. (108,553) 89,620
--------------------------------------
Net cash provided by investing activities 1,713,615 89,620
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 50,000
Net proceeds from issuance of preferred stock -- 350,000
--------------------------------------
Net cash provided by financing activities -- 400,000
--------------------------------------
Net increase in cash 35,820 201,556
Cash - beginning of period 16,264 21,746
--------------------------------------
Cash - end of period $ 52,084 $ 223,302
======================================
(The accompanying notes are an integral part of these statements)
6
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of December 31, 2000, and
its results of operations and cash flows for the six months then ended have been
included. However, operating results for the interim periods noted are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2001. 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, 2000.
MANAGEMENT'S OPERATING PLANS
HealthWatch has been in business for over a decade, but its information
technology business is still relatively new. Prior to fiscal year 1998,
HealthWatch was primarily in the business of manufacturing and selling medical
devices and related supplies. In 1997, management decided to phase out the
medical device business and focus its energies on developing an information
technology business. The Company still provides maintenance support to a number
of customers who purchased medical devices in the past.
On October 1, 1998, as part of its transformation to an information technology
business, the Company acquired Paul Harrison Enterprises, Inc. ("PHE"). PHE
owned the Merad Technology, a sophisticated virtual software application utility
that utilizes an advanced multi-media object and relational database. This
technology 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 (the "Merad
Technology"). The acquisition of PHE, which was a significant shareholder of
Halis, Inc. ("Halis"), also increased the Company's ownership of the common
stock of Halis, a healthcare IT company, 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 ownership interest
in Halis to approximately 22% and allowed it to account for its investment in
Halis under the equity method of accounting.
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 HES System, which incorporates
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.
7
As part of the Company's business plan, management is in the process of
identifying strategic business partners and acquisition candidates in the
systems integration and support area that will enhance the Company's ability to
develop its information management business. The first such candidate is Halis.
On June 29, 2000, the Company and Halis executed a definitive merger agreement
pursuant to which Halis will merge with and into a wholly owned subsidiary of
the Company. Management anticipates that the merger will close in March 2001.
The merger with Halis is especially attractive to the Company because of the HES
System and the long term operating relationship and common management between
the two companies (Paul W. Harrison is President, Chief Executive Officer and
Chairman of the Board of both companies). HealthWatch and Halis have operated
under a Business Collaboration Agreement (the "Collaboration Agreement") since
October 1997. The Collaboration Agreement provides, among other things, for
revenue sharing from sales of each company's products based on a 60/40 split
(i.e., the selling company would receive 60% of the sales price received and the
company that owns the technology would receive 40% of the sales price received).
Furthermore, HealthWatch is obligated to pay Halis a collaboration fee of
$50,000 per month, which is applied as a credit against any revenue sharing
amount that is due to Halis. Halis is obligated to provide support to
HealthWatch for the Halis software products, provide reasonable product
enhancement as part of product release updates and cooperate with HealthWatch in
regard to product enhancement requests. HealthWatch may terminate the $50,000
monthly collaboration fee payable to Halis on or after October 1, 2001, under
certain terms and conditions. The Collaboration Agreement terminates on
September 20, 2005 and provides for automatic one-year extensions unless
terminated with a ninety-day notice by either party. HealthWatch and Halis also
share office space in Atlanta, Georgia and administrative support under a cost
sharing arrangement.
The Halis merger agreement provides for the issuance of shares of HealthWatch
common stock to Halis shareholders in exchange for all outstanding stock of
Halis. The holder of each share of Halis common stock will be entitled to
receive .050 shares of HealthWatch's common stock (i.e., an exchange ratio of
one share of HealthWatch common stock for twenty shares of Halis common stock).
Under the terms of the merger agreement, the Company will issue approximately
2,300,000 shares of its common stock to Halis stockholders, excluding
HealthWatch. Completion of the merger is conditioned upon certain events such as
approval by both companies' shareholders, obtaining any required governmental
and regulatory approvals, and the absence of any material adverse changes in
Halis' business or operations.
NET LOSS PER SHARE
Basic loss per share is calculated as net loss available to common shareholders
divided by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock options, stock warrants and
convertible debt and stock. As the Company's stock options, stock warrants and
convertible debt and stock are antidilutive for all periods presented, dilutive
loss per share is the same as basic loss per share.
8
DEBENTURES PAYABLE
As of December 31, 2000, the Company had outstanding debentures with principal
totaling $25,000. The debentures 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,
including unpaid accrued interest, could be converted, at the option of the
holder, into shares of the Company's common stock. As of December 31, 2000,
$13,327 in accrued but unpaid interest was outstanding on the debentures. The
Company is attempting to reach an agreement with the remaining debenture holder
in an effort to resolve the amounts outstanding or otherwise bring the
debentures out of their default status.
INVESTMENT IN HALIS COMMON STOCK
As of December 31, 2000, the Company held 15,763,655 shares of the common stock
of Halis, representing approximately 25.8% of the total outstanding shares. The
Company holds the Halis shares for long-term investment purposes rather than for
trading purposes. Thus, as required by generally accepted accounting principles,
the Company accounts for its investment in Halis under the equity method of
accounting, thereby reflecting its portion of Halis' earnings or losses in the
Company's statement of operations with a corollary adjustment to its investment
account. The Company's share of Halis' net loss for the three and six months
ended December 31, 2000 was $9,050 and $127,710, respectively.
At December 31, 2000, the carrying value of the Company's investment in Halis
exceeded the aggregate value, based on the quoted market price, by $1,399,788.
In management's opinion, the decline is temporary in nature, and therefore, no
adjustment was made to reduce the carrying value of the Halis investment.
Additionally, the carrying value of the Halis investment under the equity method
exceeded the 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.
RESTATEMENTS
The December 31, 2000 financial statements have been restated to reflect an
adjustment to the June 30, 2000 financial statements for interest expense of
$419,551 from the issuance of warrants in connection with short-term financing.
The effect of the adjustment increased additional paid-in capital and increased
accumulated deficit by $419,551 at December 31, 2000.
The December 31, 2000 financial statements have been restated to reflect an
adjustment to the June 30, 2000 and 1999 financial statements to reflect the
beneficial conversion feature related to the Series P preferred stock. The
effect of the adjustment increased additional paid-in capital and increased
accumulated deficit by $547,796 at December 31, 2000. In addition, additional
paid-in capital and accumulated deficit increased by $156,514 as a result of the
amortization of the beneficial conversion feature for the six months ended
December 31, 2000. The effect of the adjustments increased the loss available to
common shareholders by $156,514 for the six months ended December 31, 2000 and
1999, and increased the loss per common share by $.07 and $.15 for the six
months ended December 31, 2000 and 1999, respectively.
9
The December 31, 2000 and 1999 financial statements have been restated to
reflect the effects of a change in the amortization life of the Company's
intangible asset identified as the Merad Technology from ten years to five
years. The effect of the adjustment decreased intangible assets by $233,272 at
December 31, 2000, increased the loss before extraordinary item and the loss
available to common shareholders by $61,228 and $50,568 for the six months ended
December 31, 2000 and 1999, respectively, and increased the loss per common
share before extraordinary item and the net loss per common share by $.03 and
$.05 for the six months ended December 31, 2000 and 1999, respectively.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities and
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
the Company for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. The Company's plans and objectives are based on the assumption
that the Company's entry into the healthcare industry will be successful, that
competitive conditions within the healthcare industry will not change materially
or adversely, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions, as well as future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During fiscal 2001, the Company continues efforts to develop and market, as a
reseller, Halis' Healthcare Enterprise System which incorporates the Merad
Technology. The Company expects to continue to expand its collaborative efforts
with Halis and to expand its efforts to market the Halis Healthcare Enterprise
System. As such, on June 29, 2000, the board of directors of HealthWatch and
Halis executed an agreement and plan of merger whereby Halis would become a
wholly owned subsidiary of HealthWatch. Management of both companies believe
that the combined company's breadth of technology, products, management and
operational experience and financial resources should enable it to respond more
quickly and effectively to technological change, intensifying competition,
increasing consolidation and evolving market demands. Moreover, management of
HealthWatch and Halis believe that the combined company could achieve operating
synergies through cross marketing of each company's products and services, as
well as possible cost savings related to more efficient administrative and
support functions of the combined companies.
The Company has incurred significant operating losses during the past several
years and at December 31, 2000 had an accumulated deficit of $30,743,303. In the
third quarter of fiscal year ending June 30, 2000, the Company obtained
additional equity capital to sustain operations and to continue its business
development efforts.
Total assets at December 31, 2000 were $5,699,997, a decrease of $1,739,949 from
June 30, 2000. This decrease is primarily the result of (a) a decrease in
marketable securities of $2,087,094 to fund current operating expenses and to
payoff certain accrued liabilities and (b) a decrease in investment in Halis,
Inc. of $127,710, offset by (i) an increase in cash of $35,820, (ii) an increase
of $73,401 in prepaid and other current assets, (iii) an increase in advances to
Halis of $108,553, (iv) a net increase in property and equipment of $112,266 and
(v) an increase in intangible and other assets of $127,798.
Current liabilities increased by $152,668 from $540,534 at June 30, 2000 to
$693,202 at December 31, 2000. This increase is the result of an increase in
accounts payable and accrued expenses of $154,657, offset by a decrease in
deferred revenue of $1,989.
Shareholders' equity decreased $1,892,617 from $6,899,412 at June 30, 2000 to
$5,006,795 at December 31, 2000. This decrease is attributable to a net loss for
the six months of $1,999,526 with an offsetting decrease in unrealized loss on
investment of $106,909.
RESULTS OF OPERATIONS
(Six months ended December 31, 2000 compared to six months ended December 31,
1999)
Revenue. Total revenue was $183,622 for the six months ended December 31, 2000
as compared to $322,465 for the six months ended December 31, 1999, a decrease
of $138,843 or 43.1%. This decrease was primarily the result of the Company's
continued shift from a product driven supply company to a software information
technology company. During the six months ended December 31, 2000, product sales
were minimal and most of the revenues generated were the result of sales of
supplies, service and repair work related to the medical device business. The
Company recognized income of $2,940 from Halis for the six months ended December
31,
11
2000, compared to $9,453 for the same period in 1999 under its business
collaboration agreement with Halis for sales of the HES System. Such amounts are
included in product sales.
Gross profit. Gross profit was 79.4% for the six months ended December 31, 2000,
as compared to 62.6% for the same period in 1999. The increase in gross profit
percentage is due primarily to previous write-downs of slow moving inventory to
lower of cost or market and a general shift from product sales to service and
support.
Expenses. Selling, general and administrative expenses increased by $1,080,387
or 136.2% to $1,873,679 for the six months ended December 31, 2000, as compared
to $793,292 for the same period in 1999. The increase is due primarily to
increased cost associated with implementing the Company's business plan of
$678,389 and SEC and Nasdaq compliance reporting of $401,998.
Depreciation and amortization decreased by $93,128, or 42.1%, to $127,911 for
the six months ended December 31, 2000, as compared to $221,039 for the same
period in 1999. This decrease is the result of reduced amortization expense
during the period due to a write down of intangible assets in the fiscal year
ended June 30, 2000.
Research and development costs increased by $31,230, or 46.8%, to $98,034 for
the six months ended December 31, 2000, as compared to $66,804 for the same
period in 1999. This increase is the result of the Company's increasing focus on
software information technology.
Losses from investment in Halis decreased by $103,093, or 44.7%, to $127,710 for
the six months ended December 31, 2000, as compared to $230,803 for the same
period in 1999. The losses represent the Company's pro-rata share of Halis' net
loss, plus charges for amortization of the excess carrying value of the Halis
investment over the equity in the underlying net assets of Halis during the six
months ended December 31, 2000 and 1999, respectively.
Interest income was $95,949 for the six months ended December 31, 2000. This
represents interest on the marketable securities.
The extraordinary item of $99,405, net of income tax, represents extinguishment
of debt.
Interest expense decreased by $7,590, or 43.1%, to $10,015 for the six months
ended December 31, 2000, as compared to $17,605 for the same period ended in
1999. This decrease is due to the conversion of interest bearing debentures into
common stock during the fiscal year ended June 30, 2000.
The Company has discontinued the sale of its medical products (i.e., the MVL and
Pacer products) and will continue to focus on its information technology
business. However, it will continue to offer supplies and technical support to
its customer base relating to its medical products still in service. As a result
of the restructuring during fiscal years ended June 30, 1999 and 2000, the
Company has improved its financial condition and is now capable of devoting its
resources to the marketing and distribution of the HES system.
12
(Three months ended December 31, 2000 compared to three months ended December
31, 1999)
Revenue. Total revenue was $79,356 for the three months ended December 31, 2000,
as compared to $170,762 for the same period in 1999, a decrease of $91,406 or
53.5%. This decrease was primarily the result of the Company's continued shift
from a product driven supply company to a software information technology
company. During the three months ended December 31, 2000, product sales were
minimal and most of the revenues generated were the result of sales of supplies,
service and repair work related to its medical products still in service. The
Company recognized income of $2,670 from Halis for the three months ended
December 31, 2000, compared to $1,350 for the same period in 1999 under its
business collaboration agreement with Halis for sales of the HES System. Such
amounts are included in product sales.
Gross profit. Gross profit was $64,044, or 80.7% of sales, for the three months
ended December 31, 2000, as compared to $132,851, or 77.8% of sales, for the
same period in 1999. The increase in gross profit is due primarily to previous
write-downs of slow moving inventory to lower of cost or market and a general
shift from product sales to service and support.
Expenses. Selling, general and administrative expenses increased by $428,638, or
80.9%, to $958,340 for the three months ended December 31, 2000, as compared to
$529,702 for the same period in 1999. The increase is due primarily to increased
cost associated with implementing the Company's business plan of $282,256 and
SEC and Nasdaq compliance reporting of $146,382.
Depreciation and amortization decreased by $40,343, or 36.5%, to $70,202 for the
three months ended December 31, 2000, as compared to $110,545 for the same
period in 1999. This decrease is the result of reduced amortization expense
during the quarter due to a write down of intangible assets in the fiscal year
ended June 30, 2000.
Research and development costs increased by $29,941, or 101.1%, to $59,554 for
the three months ended December 31, 2000, as compared to $29,613 for the same
period in 1999. This increase is the result of the Company's increasing focus on
software information technology.
Losses from investment in Halis decreased by $125,651, or 93.3%, to $9,050 for
the three months ended December 31, 2000, as compared to $134,701 for the same
period in 1999. The losses represent the Company's pro-rata share of Halis' net
loss plus charges for both three months of amortization of the excess carrying
value of the Halis investment over the equity in the underlying net assets of
Halis during the three months ended December 31, 2000 and 1999, respectively.
Interest income was $37,845 for the three months ended December 31, 2000. This
represents interest on the marketable securities.
The extraordinary item of $99,405, net of income tax, represents extinguishment
of debt.
Interest expense increased by $5,254, or 458.1%, to $6,401 for the three months
ended December 31, 2000 as compared to $1,147 for the same period ended in 1999.
This increase represents an adjustment of $4,768 of accrued interest related to
the $25,000 Debenture outstanding.
13
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had $52,084 of cash and $1,848,406 of
investments in marketable securities. During the six months ended December 31,
2000, operating activities used $1,677,795 of cash compared to $288,064 for the
same period in 1999. The increase in cash used in operations for the six months
ended December 31, 2000 is primarily the result of increased costs associated
with implementing the Company's business plan.
Investing activities provided $1,713,615 and $89,620 of cash during the six
months ended December 31, 2000 and 1999, respectively. The increase is primarily
attributable to the sale of marketable securities of $2,190,143, offset by an
increase in investment in and advances to Halis of $108,553, the purchase of
property and equipment of $119,378, and the capitalization of Merad technology
development costs of $248,597.
Due to the Company's history of operating losses, it has been required to raise
additional equity capital to fund its operations. The capital raised during the
fiscal year ended June 30, 2000 was sufficient to allow the Company to fund
current operating expenses and to payoff certain prior period accrued
liabilities without raising any additional funds through financing activities
during the six months ended December 31, 2000. However, in the future the
Company may be required to raise additional equity or debt capital to continue
the implementation of its business plan.
14
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no securities issued during the six months ended December 31, 2000.
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 from the holders. During
fiscal 1999, $100,000 in principal of the Debentures was paid to the holders
thereof. 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. As of December 31, 2000, only $25,000 of the
Debentures remain outstanding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders during
the quarter ended December 31, 2000.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed with or incorporated by
reference into this report:
2.1 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch
Merger Sub, Inc. and HealthWatch, Inc. dated as of June 29, 2000 (1).
2.2 Amendment to the Agreement and Plan of Merger dated as of September
29, 2000 (1).
2.3 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated March
8, 2000 (1).
2.4 Amendment to the Financing Option between HealthWatch, Inc. and Halis,
Inc. dated July 28, 2000 (1).
2.5 Second Amendment to the Agreement and Plan of Merger, dated as of
January 31, 2001 (1).
3.1 Articles of Incorporation of HealthWatch, Inc., dated June 10, 1983
(1).
3.2 Certificate of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated October 20, 1987(1)
3.3 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 5, 1989 (1).
3.4 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 8, 1999 (1).
3.5 Bylaws of HealthWatch, Inc. (1).
3.13 Certification of Designation, Preferences, Rights and Limitations of
the 6% Series A Convertible Preferred Stock of HealthWatch, Inc. dated
June 9, 1998 (1).
3.14 Amended and Restated Certification of Designation, Preferences, Rights
and Limitations of the Series P Preferred Stock of HealthWatch, Inc.
dated March 22, 2000 (1).
3.15 Certification of Designation, Preferences, Rights and Limitations of
the Series C 8% Convertible Preferred Stock of HealthWatch, Inc. dated
March 20, 2000 (1).
3.16 Certification of Designation, Preferences, Rights and Limitations of
the Series D 8% Convertible Preferred Stock of HealthWatch, Inc. dated
March 20, 2000 (1).
4.1 Specimen form of the Company's Common Stock certificate (2)
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) (3)
10.1 Business Collaboration Agreement dated as of October 10, 1997 between
HealthWatch, Inc. and Halis, Inc. (1)
10.6 Form of Warrant Certificate of HealthWatch, Inc. (1)
10.8 Amended and Restated Agency Agreement between Commonwealth Associates,
L.P. and HealthWatch, Inc. dated February 7, 2000 (1).
10.9 HealthWatch, Inc. 2000 Stock Option Plan, adopted as of May 8,
2000, approved by HealthWatch stockholders July 14 2000 (1).
10.10 Form of Stock Option Agreement (1).
10.11 Amendment to the Business Collaboration Agreement dated September 20,
2000 between Halis, Inc. and HealthWatch, Inc. (1)
10.12 Finders Agreement between HealthWatch, Inc. and Commonwealth
Associates, L.P., dated March 21, 2000 (1)
16
21.1 Subsidiaries of HealthWatch, Inc. (1).
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during
the quarter ended December 31, 2000.
None.
-------------------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-4, as amended, filed on October 24, 2000 ( File No. 333-48546).
(2) Incorporated herein by reference to Registration Statement on Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement on Form SB-2
(File No. 33-73462).
17
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed by the undersigned, thereunto duly authorized.
HEALTHWATCH, INC.
Date: April 23, 2001 /s/ Paul W. Harrison
--------------------
Paul W. Harrison
Chairman, President and
Chief Executive Officer
Date: April 23, 2001 /s/ Thomas C. Ridenour
----------------------
Chief Financial Officer and
Principal Accounting Officer
EXHIBIT INDEX
Number Description
------ -----------
2.1 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch
Merger Sub, Inc. and HealthWatch, Inc. dated as of June 29, 2000 (1).
2.2 Amendment to the Agreement and Plan of Merger dated as of September
29, 2000 (1).
2.3 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated March
8, 2000 (1).
2.4 Amendment to the Financing Option between HealthWatch, Inc. and Halis,
Inc. dated July 28, 2000 (1).
2.5 Second Amendment to the Agreement and Plan of Merger, dated as of
January 31, 2001 (1).
3.1 Articles of Incorporation of HealthWatch, Inc., dated June 10, 1983
(1).
3.2 Certificate of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated October 20, 1987(1)
3.3 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 5, 1989 (1).
3.4 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 8, 1999 (1).
3.5 Bylaws of HealthWatch, Inc. (1).
3.13 Certification of Designation, Preferences, Rights and Limitations of
the 6% Series A Convertible Preferred Stock of HealthWatch, Inc. dated
June 9, 1998 (1).
3.14 Amended and Restated Certification of Designation, Preferences, Rights
and Limitations of the Series P Preferred Stock of HealthWatch, Inc.
dated March 22, 2000 (1).
3.15 Certification of Designation, Preferences, Rights and Limitations of
the Series C 8% Convertible Preferred Stock of HealthWatch, Inc. dated
March 20, 2000 (1).
3.16 Certification of Designation, Preferences, Rights and Limitations of
the Series D 8% Convertible Preferred Stock of HealthWatch, Inc. dated
March 20, 2000 (1).
4.1 Specimen form of the Company's Common Stock certificate (2)
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) (3)
10.1 Business Collaboration Agreement dated as of October 10, 1997 between
HealthWatch, Inc. and Halis, Inc. (1)
10.6 Form of Warrant Certificate of HealthWatch, Inc. (1)
10.8 Amended and Restated Agency Agreement between Commonwealth Associates,
L.P. and HealthWatch, Inc. dated February 7, 2000 (1).
10.9 HealthWatch, Inc. 2000 Stock Option Plan, adopted as of May 8, 2000,
approved by HealthWatch stockholders July 14 2000 (1).
10.10 Form of Stock Option Agreement (1).
10.11 Amendment to the Business Collaboration Agreement dated September 20,
2000 between Halis, Inc. and HealthWatch, Inc. (1)
10.12 Finders Agreement between HealthWatch, Inc. and Commonwealth
Associates, L.P., dated March 21, 2000 (1)
21.1 Subsidiaries of HealthWatch, Inc. (1)
------------------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-4, filed on October 24, 2000 ( File No. 333-48546).
(2) Incorporated herein by reference to Registration Statement on Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement on Form SB-2
(File No. 33-73462).