FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 period ended July 31, 1995.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission file number for the transition period
from _________________ to ____________
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 86-0460312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 1750
3200 North Central Avenue
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 230-7575
Indicate by check mark whether the issuer (1) has 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 [ ].
The number of shares of the Issuer's Common Stock outstanding at September 8,
1995 was 2,081,818 Shares.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at July 31, 1995 3
Consolidated Statements of Operations for the
three months ended July 31, 1995 and 1994
and for the six months ended July 31, 1995
and 1994 4
Consolidated Statements of Cash Flows for the
six months ended July 31, 1995 and 1994. 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
ITEM 4. Submission of Matters to Vote of Security Holders 13
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JULY 31, 1995
Unaudited
ASSETS July 31, 1995
-------------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,407,603
Accounts receivable, less allowance for doubtful
accounts of $612,432 (Note 2) 6,022,248
Prepaid expenses and supplies 620,445
-----------
Total current assets 8,050,296
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $ 813, 966 832,184
-----------
PROPERTY AND EQUIPMENT:
Computer equipment 1,382,288
Office furniture and equipment 397,533
Leasehold improvements 34,957
-----------
Total property and equipment 1,814,778
Less-accumulated depreciation and amortization (857,446)
-----------
Net property and equipment 957,332
-----------
Excess purchase price over related net
assets acquired 593,204
Other Assets 166,715
-----------
$10,599,731
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations
under capital leases (Note 2) $ 1,642,616
Accounts payable 943,296
Accrued liabilities (Note 3) 3,442,017
Deferred revenues 2,410,899
-----------
Total current liabilities 8,438,828
-----------
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES,
excluding current installments (Note 2) 296,377
-----------
DEFERRED REVENUES 273,164
-----------
COMMITTMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value, 1,000,000
shares authorized, 125,000 issued and outstanding -
liquidation preference over common stockholders of
$2.40 per share 125
Common stock, $.001 par value, 5,000,000
shares authorized, 2,081,818 shares issued and
outstanding 1,896
Capital contributed in excess of par value 3,442,196
Accumulated deficit (1,849,290)
Less treasury stock, 1,784 shares at cost (3,565)
-----------
Net stockholders' equity 1,591,362
-----------
$10,599,731
===========
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Initial license fees $ 2,476,015 $ 1,850,216 $ 4,952,271 $ 3,478,456
Support, marketing services and material sales 1,631,205 1,697,268 3,382,744 3,337,902
----------- ----------- ----------- -----------
Total revenues 4,107,220 3,547,484 8,335,015 6,816,358
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of license fees 587,549 441,002 1,385,683 925,192
Cost of marketing services and materials sold 370,657 409,354 664,751 845,872
Selling, product support and development 2,136,409 1,858,204 4,488,092 3,594,620
General and administrative 563,450 447,842 954,343 783,455
Depreciation and amortization 221,792 124,293 401,664 203,146
Provision for doubtful accounts 26,500 66,422 71,500 122,822
----------- ----------- ----------- -----------
Total operating expenses 3,906,357 3,347,117 7,966,033 6,475,107
----------- ----------- ----------- -----------
Income before income taxes 200,863 200,367 368,982 341,251
Income taxes (Note 5) -- -- -- --
----------- ----------- ----------- -----------
NET INCOME $ 200,863 $ 200,367 $ 368,982 $ 341,251
=========== =========== =========== ===========
Net income per common share $ 0.09 $ 0.08 $ 0.16 $ 0.14
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,343,593 2,468,484 2,353,938 2,472,692
=========== =========== =========== ===========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Six Months Ended July 31,
--------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 368,982 $ 341,251
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 401,664 203,146
Provision for doubtful accounts 71,500 122,822
(Increase) decrease in accounts receivable (1,408,209) (1,594,188)
(Increase) decrease in prepaid expenses and supplies (329,117) (46,512)
Increase (decrease) in accounts payable (379,939) (245,785)
Increase (decrease) in accrued liabilities 1,112,704 520,366
Increase (decrease) in deferred revenues 358,310 244,767
----------- -----------
Net cash provided by (used in) operating activities 195,895 (454,133)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (77,481) (26,668)
Increase in capitalized software development costs (268,410) (135,519)
Increase in other assets (18,562) --
----------- -----------
Net cash used in investing activities (364,453) (162,187)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from borrowings on credit line(s) (500,000) 750,000
Principal payments on notes payable and lease obligations (154,604) (197,539)
Proceeds from note payable 750,000 --
----------- -----------
Net cash provided by financing activities 95,396 552,461
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (73,162) (63,859)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,480,765 1,199,597
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,407,603 $ 1,135,738
=========== ===========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
July 31, 1995
Note 1
------
The consolidated financial statements, which include the accounts of National
Health Enhancement Systems, Inc. and its wholly owned subsidiaries (collectively
the "Company"), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, the
accompanying unaudited financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly financial
position, results of operations, and cash flows for the periods presented.
Certain financial statement items from prior periods have been reclassified to
be consistent with the current period financial statement presentation. It is
suggested that these financial statements be read in conjunction with the
financial statements and the related disclosures contained in the Company's
Annual Report on Form 10-KSB filed for the fiscal year ended January 31, 1995
with the Securities and Exchange Commission.
The results of operations for the six month period ended July 31, 1995 are not
necessarily indicative of the results to be expected for the full fiscal year.
Note 2
------
<TABLE>
Notes Payable and Obligations Under Capital Leases:
<CAPTION>
July 31,1995
------------
<S> <C>
Bank line of credit, interest at the bank's prime rate payable
monthly (see below) $ 500,000
Note payable, interest at prime rate plus 750,000
5% with a floor of 14% (see below)
Note payable to bank, interest at the bank's prime rate plus 3.0%,
matures October 1995, guaranteed by two officers of FSG, secured
by, FSG accounts receivable and equipment 3,200
Note payable to preferred stockholder, interest at 12% matures October
1995, unsecured 84,151
Obligations under capital leases, interest rates ranging from 11% to 28%,
maturities through November 1999, secured by computer 601,642
and other equipment ---------
1,938,993
Less Current installments (1,642,616)
---------
$ 296,377
=========
</TABLE>
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
At January 31, 1995, the Company was not in compliance with certain covenants
under its two $500,000 lines of credit agreements with its bank. The bank waived
compliance with these covenants through the maturity dates of these agreements
(May 1995). The aggregate amount available under the two lines of credit was
reduced from $1 million at January 31, 1995 to $500,000 at July 31, 1995 due to
expiration of one of the lines. The remaining line of credit bears interest at
prime plus 1% (with a 7.5% floor) payable monthly, and is due on demand. The
bank line of credit is collateralized by a $500,000 deposit with the bank. The
deposit is included in cash and cash equivalents in the accompanying
consolidated financial statements.
In July 1995 the Company issued a promissory note to a third party lender in the
amount of $750,000. The note bears interest at prime plus 5% with a floor of
14%. Monthly principal payments of $93,750 plus interest payments are due and
payable beginning September 15, 1995. The note matures on April 15, 1996 and is
secured by accounts receivable.
Future maturities of notes payable and obligations under capital leases are as
follows as of July 31, 1995:
Notes Payable Capital Leases
------------- --------------
1996 $1,056,101 $360,266
1997 281,250 236,796
1998 - 70,662
1999 - 34,415
2000 and later - 23,953
---------- --------
$1,337,351 $726,092
Less amount representing interest - (124,450)
---------- --------
$1,337,351 $601,642
========== ========
Note 3
------
Accrued Liabilities consist of the following:
July 31,1995
------------
Accrued product cost of sales 1,366,932
Accrued commissions 499,882
Accrued royalties 981,979
Other accrued liabilities 593,224
----------
$3,442,017
==========
Note 4 Convertible Preferred Stock
------
On August 18, 1992 the Company issued 125,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock)" at $2.40 per share. The Company was
required to pay a quarterly dividend equal to a certain percentage of the
Company's gross quarterly revenue (the cumulative percentage based dividend as
defined in the Preferred Stock Agreement) through January 31, 2001. Effective
February 1, 1994, the Preferred Stock Agreement was amended. Pursuant to the
amendment, each share of the Preferred Stock shall be, at the option of the
holder, convertible into two shares of the Company's common stock. In addition,
the holder of the Preferred Stock is entitled to one vote for each share of
Preferred stock. Upon liquidation or dissolution of the Company, the holder of
the Preferred Stock shall have liquidating preferences equal to $2.40 per share.
The amendment eliminated all rights to receive dividends subsequent to the
effective date.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 5
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires deferred income tax assets and liabilities to be computed
based upon cumulative temporary differences in financial reporting and taxable
income, carry forwards available and enacted tax law.
The components of deferred taxes as of July 31, 1995 are as follows:
Allowance for doubtful accounts $244,973
Tax depreciation in excess
of book depreciation (78,000)
Capitalized software costs (332,874)
Accrued liabilities 256,000
Deferred revenues 15,873
Net operating loss carry forward 452,000
Valuation allowance (557,972)
--------
$ - 0 -
========
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1995 VS. THREE MONTHS ENDED JULY 31, 1994
INCOME. For the quarter ended July 31, 1995, the Company had net income of
$200,863 compared to net income of $200,367 for the quarter ended July 31, 1994.
During the past fiscal year ended January 31, 1995, and continuing through the
quarter ended July 31, 1995 the Company invested resources to expand and improve
its sales and client services functions and also invested to support its product
development efforts, which were primarily focused on the development of its new
Windows(TM)-based Centramax and Centramax Plus products, development of an
expanded interactive voice response product line and a Pediatric product line.
As a result, operating expenses increased and are expected to continue at
current or increasing levels. The Company believes it will be necessary to
continue to invest resources to support the Company's growth plans and client
obligations. The investment in the sales and client services functions (which
are designed to enable the Company to improve product sales to its existing
client network) and the investment in product development is part of
management's strategy to increase revenues. While management believes this
strategy will result in increased revenues, there are no assurances that future
revenues will increase.
The Company's operations are also currently being affected by consolidation,
alliances and mergers in the healthcare market. Nonetheless, and while there are
no assurances, the Company's management believes that its competitive strengths
will permit it to continue to compete in its targeted market and that the
Company is positioned favorably to take advantage of future opportunities in the
healthcare market. The Company's management believes that healthcare reform will
result in a shift to managed care at the local level. The Company's management
also believes its products help healthcare providers improve their services and
also help reduce healthcare costs by providing objective information on
healthcare issues to individuals thereby enabling them to make informed choices
about when, where and how to seek healthcare services and reduce healthcare
costs while providing healthcare providers with a favorable return on their
investment in the Company's products. Nonetheless, the Company's operations may
be materially and adversely affected by continuing consolidation, alliances and
mergers in the healthcare industry, healthcare reform in the private or public
sector, and by future economic conditions.
The Company has little or no backlog, and revenues and operating results
therefore depends primarily on the volume and timing of orders received during
each fiscal quarter, which are difficult to forecast. Historically, the Company
has often recognized a substantial portion of its license revenues in the last
month of each fiscal quarter, frequently in the last week. Because a significant
portion of the Company's operating expenses are relatively fixed with personnel
levels and other expenses based upon anticipated revenues, a substantial portion
of which may not be generated until the end of each fiscal quarter, the Company
may not be able to reduce spending in response to sales shortfalls or delays.
These factors could cause variations in operating results from quarter to
quarter.
REVENUES. Total revenues increased approximately 16% to $4,107,220 for the
quarter ended July 31, 1995 from $3,547,484 for the quarter ended July 31, 1994.
The increase is primarily attributed to increases in revenues generated from
initial license fees.
Initial license fees represent revenues from the initial sale of the following
Company products: Centramax, Centramax Plus, The Professionals, the Patient
Acquisition System (TM) ("PAS") (which includes eight health screening and
education products), Referral One(TM), Health Direct(TM), and voice response
products. Revenue from initial license fees increased to $2,476,015 for the
quarter ended July 31, 1995, from $1,850,216 for the quarter ended July 31,
1994. This increase is primarily attributable to an increase in the number of
licenses granted for the Company's medical call center products, such as
Centramax Plus.
Support, marketing service and material revenues were $1,631,205 for the quarter
ended July 31, 1995 compared to $1,697,268 for the quarter ended July 31, 1994.
The decrease in support, marketing services and material revenues is primarily
attributed to a decrease in marketing service revenue (which represents
strategic and creative service revenue generated from the Company's FSG
subsidiary) and a decrease in the Health Direct subscription revenue from the
quarter ended July 31, 1995 compared to the quarter ended July 31, 1994. Support
fee revenues represent charges to the Company's licensees, as provided for in
the Company's license agreements, for continued use of the products and for
ongoing software maintenance and enhancements to the products. The support fees
generally begin within six months after a customer executes a license agreement.
Revenue generated from support fees increased approximately $274,000 for the
quarter ended July 31, 1995 compared to the quarter ended July 31, 1994,
primarily as a result of the increase in the total number of product license
agreements. The Company believes that as the number of customers it has for all
products increases, revenues generated from support fees will continue to
increase
OPERATING EXPENSES. Total operating expenses increased approximately 17% to
$3,906,357 for the quarter ended July 31, 1995 from $3,347,117 for the quarter
ended July 31, 1994. Total operating expenses increased primarily due to an
increase in variable expenses associated with increased initial license fees and
also due to an increase in certain costs associated with selling, product
support and development expenses.
COST OF LICENSE FEES, MATERIALS AND SERVICE REVENUES. The cost of initial
license fees increased to $587,549 for the quarter ended July 31, 1995 from
$441,002 for the quarter ended July 31, 1994. The increase is due to an increase
in variable costs associated with the increase in the number of product
placements, primarily of the Centramax Plus product.
Cost of materials and service revenues, which includes the cost of printed
report forms and questionnaires sold to PAS licensees, the costs of materials
associated with the Health Direct product and costs associated with FSG services
revenue, decreased to $370,657 for the quarter ended July 31, 1995 from $409,354
for the quarter ended July 31, 1994. The decrease is a result of lower costs
associated with the lower service revenues generated from FSG.
SELLING, PRODUCT SUPPORT AND DEVELOPMENT. Selling, product support and
development expenses increased to $2,136,409 for the quarter ended July 31, 1995
from $1,858,204 for the quarter ended July 31, 1994. The increase is primarily
attributable to increases in the Company's payroll and related payroll expense
as a result of an increase in the Company's sales staff, product support and
development staff and the expansion of the client management and client services
staffs.
GENERAL AND ADMINISTRATIVE. General and administrative operating expenses
increased to $563,450 for the quarter ended July 31, 1995 from $447,842 for the
quarter ended July 31, 1994. The increase is attributable to increases in
professional service and other general operating expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to $221,792 for the quarter ended July 31, 1995 from $124,293 for the quarter
ended July 31, 1994. This increase is due to the increased amortization expense
associated with the Company's Windows(TM) based product, which the Company began
to amortize in its fiscal quarter ended January 31, 1995.
SIX MONTHS ENDED JULY 31, 1995 VS. SIX MONTHS ENDED JULY 31, 1994
-----------------------------------------------------------------
INCOME. For the six months ended July 31, 1995, the Company had net income of
$368,982 compared to net income of $341,251 for the six months ended July 31,
1994. Continued improvement in the Company's operating results will depend on
its ability to introduce new products and to expand the sale of its existing
products into other healthcare markets. There are no assurances that the Company
will be able to achieve these goals.
REVENUE. Total revenue increased approximately 22% to $8,335,015 for the six
months ended July 31, 1995 from $6,816,358 for the six months ended July 31,
1994. The increase is due primarily to increased revenues generated from initial
license fees.
Revenues from initial license fees increased to $4,952,271 for the six months
ended July 31, 1995 from $3,478,456 for the six months ended July 31, 1994. The
increase is due primarily to an increase in the number of licenses for the
Company's medical call center products, such as Centramax Plus.
Support, marketing service and material revenue increased to $3,382,744 for the
six months ended July 31, 1995 from $3,337,902 for the six months ended July
1994. Revenue from support fees increased approximately $570,000 for the six
months ended July 31, 1995 from the six months ended July 31, 1994 due to the
increased customer base and related product license agreements. Revenue
generated from the sale of materials and services decreased for the six months
ended July 31, 1995 from the six months ended July 31, 1994 due to a decrease in
sale of Health Direct subscriptions and a decrease in the service revenue from
FSG.
OPERATING EXPENSES. Total operating expenses increased approximately 23% to
$7,966,033 for the six months ended July 31, 1995 from $6,475,107 for the six
months ended July 31, 1994. The increase is due primarily to an increase in
variable costs associated with revenues from initial license and an increase in
certain expenses associated with increases in sales and product development
activities.
COST OF LICENSE FEES, MATERIALS AND SERVICE REVENUES. The cost of license fees
increased to $1,385,683 for the six months ended July 31, 1995, compared to
$925,192 for the six months ended July 31, 1994. The increase is due primarily
to an increase in variable costs associated with increased initial license fee
revenues.
Cost of materials and service revenue decreased to $664,751 for the six months
ended July 31, 1995 from $845,872 for the six months ended July 31, 1994. The
decrease is due to a decrease in the sales of materials associated with the
Health Direct product and variable costs associated the lower service revenue
from FSG.
SELLING, PRODUCT SUPPORT AND DEVELOPMENT. Selling, product support and
development expense increased to $4,488,092 for the six months ended July 31,
1995 from $3,594,620 for the six months ended July 31, 1994. The increase was
due primarily to increased sales, product support and development staffs. These
increases in staff were, in management's opinion, necessary to expand product
distribution, support the Windows product as well as expand the client
management and client services function to properly service the Company's
customers.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$954,343 for the six months ended July 31, 1995 from $783,455 for the six months
ended July 31, 1994. The increase is attributable to an increase in professional
service and other general operating expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
to $421,664 for the six months ended July 31, 1995 from $203,146 for the quarter
ended July 31, 1994. This increase is due to the increased amortization expense
associated with the Company's WindowsTM based product which the Company began to
amortize in its fiscal quarter ended January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of July 31, 1995, the Company had a working capital deficit (current assets
minus current liabilities) of $388,532 compared to a working capital deficit of
$958,318 as of January 31, 1995. The improvement in working capital was
primarily caused by the Company's operating profit for the six months ended July
31, 1995 and a reclassification of certain long term receivables to current. The
Company's accounts receivable balance increased to $6,022,248 at July 31, 1995
from $4,686,354 (which includes $321,000 in long term accounts receivable) at
January 31, 1995. During and prior to the fiscal year ended January 31, 1995 the
Company experienced that payment of the initial license fees was often deferred,
on a negotiated basis, for a period after the license agreements were executed.
The Company believes this trend will continue at a decreasing rate. The Company
has taken steps to reduce payment terms and the number of days that is required
to collect initial fee revenues.
The Company has a line of credit with a bank providing an aggregate amount of
$500,000 as of July 31, 1995. The line of credit is secured by cash balances
equal to the amount borrowed. Interest is paid monthly on the unpaid balance at
an annual rate of one percentage point above the bank's prime rate with a 7.5%
floor. The line of credit matures in May 1996.
In July 1995, the Company borrowed $750,000 from a third party lender in the
amount of $750,000. The note bears interest at prime plus 5% with a floor of
14%. Monthly principal payments of $93,750 plus interest payments are due and
payable beginning September 15, 1995. The note is secured by accounts receivable
and matures on April 15, 1996. The note is subject to earlier payment if certain
borrowing base requirements are not met.
The Company is currently dependent on cash from operations and proceeds from the
$750,000 borrowing for its daily operational cash requirements. The Company is
in the process of evaluating opportunities to expand and increase the existing
capital available to it and is also evaluating opportunities to reduce the
number of days it takes to collect the initial fee accounts receivable. If the
existing credit facility is reduced or terminated, or if the Company is not
successful in reducing the number of days to collect on its outstanding accounts
receivable, additional working capital will be required. The Company continues
to seek alternative sources to raise additional capital to support its general
working capital needs. There are no assurances that the Company will be
successful in obtaining additional capital, and the failure to obtain additional
capital would have an adverse impact on the Company's ability to meet its
operating requirements and the Company would have to materially cut back its
operations.
In each of its fiscal years ending January 31, 1995 and 1994, the Company
offered a discount to its PAS users to prepay monthly support fees for a one
year period. In each of these fiscal years, the Company generated approximately
$300,000 in cash from the program. Cash from this prepayment program is
recognized as revenue over the period benefited, generally a 12-month period.
Effective June 14, 1994 the Company amended the applicable Certificate of
Designation, which eliminated the Company's obligation to pay preferred
dividends on the Series A Convertible Preferred Stock, including all accrued and
unpaid dividends. Elimination of the preferred dividends will reduce cash
outflows by approximately $140,000 in future periods. The amendment also
increased the number of common shares into which each preferred share is
convertible from one share to two shares and eliminated the Company's redemption
right.
On October 7, 1994 the Company issued a promissory note to the Series A
Convertible Preferred Stockholder in the amount of $100,000. The outstanding
balance of $84,151 is due and payable on October 16, 1995. The interest rate is
twelve percent (12%) per annum, and the note is unsecured. The note was issued
to fund advance royalties to a third party to secure the distribution rights to
certain pediatric triage guidelines.
The Company's operating results continue to be inconsistent on a month-to-month
basis and are dependent upon retention and performance of the Company's sales
staff, long product sales cycles related in part to pricing of the Company's
products and customer budget requirements, and to other factors, such as
uncertainties associated with the healthcare market and economic conditions,
beyond the control of the Company. The Company, however, will continue to
evaluate methods to improve and increase its product distribution channels and
to enhance or expand its current product lines.
The Company has expanded, and will continue to improve and enhance, its product
lines in order to be more responsive to the market. The Company's management
believes that quarterly operating results are dependent, and will continue to be
dependent, on the initial license fee revenues in the foreseeable future. The
Company will continue to focus its efforts on improving cash from operations,
recurring revenue and increasing its operating income. The recurring monthly
revenue from support fees, material sales and services is currently not
sufficient to maintain a break-even level of the Company's current operating
expense levels.
The Company has no significant or material capital expenditures commitments
outstanding as of July 31, 1995. However, additional support staff requirements
and related operating expenses will be dependent on sales levels of the
Company's products. The Company expects that additional space will be taken and
staff will be hired during its current fiscal year (ending January 31, 1996) and
additional capital resources will be needed to fund this growth and expansion.
In the past the Company has funded its growth primarily through cash from
operations and its existing bank line of credit. The Company believes that while
its current operations can be supported by available resources, provided that
adequate working capital financing arrangements continue, growth of the
Company's business may no longer be funded solely by internal operations. The
Company is currently evaluating ways to generate additional sources of capital,
including extending or expanding the current asset-based credit line and a
future equity offering. Although management believes that available borrowings,
coupled with cash flow from operations will be adequate for its operating needs
for fiscal 1996, the Company believes that additional capital will be necessary
to support operations and planned growth in the coming fiscal year. There are no
assurances the Company will be successful at raising additional working capital.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On June 14, 1995, the Company held its annual meeting of stockholders.
In addition to electing directors at the annual meeting, the
stockholders approved an amendment to the Company's 1988 Stock Option
Plan, (the "Plan") which provides for an increase in the number of
stock options available under the Plan from 700,000 to 800,000 stock
options. Of the common stock outstanding 1,315,721 shares were voted in
favor to amend the Plan, 9,125 shares were voted against and 1,315
shares abstained from voting. In addition, the stockholders approved an
amendment of the Company's Certificate Incorporation to increase the
number of authorized shares of the Company's common stock, $.001 par
value, from 5,000,000 to 10,000,000 shares and to increase the number
of shares of preferred stock, $.001 par value, from 1,000,000 to
2,000,000 shares. Of the common stock outstanding 1,316,521 shares were
voted in favor to amend the Certificate of Incorporation, 7,725 shares
were voted against and 1,915 shares abstained from voting.
All the nominee's for directors as listed in the proxy
statement were elected.
Directors Votes For Votes With Held
--------- --------- ---------------
John Delmatoff 1,323,411 2,750
Gardiner Dutton 1,323,411 2,750
James Myers 1,323,411 2,750
Greg Petras 1,323,411 2,750
Steve Wood 1,323,411 2,750
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-B.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 31, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Health Enhancement Systems, Inc.
(Registrant)
Date: September 12, 1995 /s/ Gregory J. Petras
-------------------------- -----------------------------------------
Gregory J. Petras, President and
Chief Executive Officer
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