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 October 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 December 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 October 31, 1995 3
Consolidated Statements of Operations for the three
months ended October 31, 1995 and 1994 and for
the nine months ended October 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the nine months
ended October 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
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - OCTOBER 31, 1995
Unaudited
ASSETS October 31,
1995
-----------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,212,448
Accounts receivable, less allowance for doubtful
accounts of $486,733 (Note 2) 6,435,712
Prepaid expenses and supplies 558,686
-----------
Total current assets 8,206,846
-----------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $ 528,786 941,344
-----------
PROPERTY AND EQUIPMENT:
Computer equipment 497,888
Office furniture and equipment 397,533
Leasehold improvements 41,502
Assets held under capital leases 1,010,566
-----------
Total property and equipment 1,947,489
Less-accumulated depreciation and amortization (945,613)
-----------
Net property and equipment 1,001,876
-----------
Excess purchase price over the cost of net
assets acquired, net (Note 4) 574,272
-----------
Other Assets 116,980
-----------
$10,841,318
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations
under capital leases (Note 2) $ 1,450,715
Accounts payable 1,122,360
Accrued liabilities (Note 3) 3,628,413
Deferred revenues 2,345,773
-----------
Total current liabilities 8,547,261
-----------
NOTES PAYABLE and obligations under capital leases
excluding current installments (Note 2) 303,278
DEFERRED REVENUES, Net of current portion 222,757
STOCKHOLDERS' EQUITY (Note 4)
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, 2,020,784 shares issued and outstanding 1,896
Capital contributed in excess of par value 3,442,196
Accumulated deficit (1,672,630)
Less treasury stock, 1,784 shares at cost (3,565)
-----------
Stockholders' equity 1,768,022
-----------
$10,841,318
===========
See accompanying notes to the financial statements.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------- ----------------------------
1995 1994 1995 1994
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Initial license fees $2,474,074 $2,067,368 $7,426,345 $5,545,824
Support, material, services 1,864,100 1,814,429 5,246,844 5,152,331
----------- ---------- ----------- -----------
Total revenues 4,338,174 3,881,797 12,673,189 10,698,155
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Cost of license fees 790,444 776,541 2,176,127 1,701,733
Cost of materials & service revenue 544,718 548,366 1,209,469 1,394,238
Selling, product support and development 2,164,745 1,856,683 6,652,837 5,451,303
General and administrative 343,550 413,160 1,297,893 1,196,615
Depreciation and amortization 240,057 115,687 641,721 318,833
Provision for doubtful accounts 78,000 71,000 149,500 193,822
----------- ---------- ----------- -----------
Total operating expenses 4,161,514 3,781,437 12,127,547 10,256,544
----------- ---------- ----------- -----------
Income before income taxes 176,660 100,360 545,642 441,611
Income taxes (Note 5) -- -- -- --
----------- ---------- ----------- -----------
NET INCOME $176,660 $100,360 $545,642 $441,611
=========== ========== =========== ===========
PRIMARY EARNINGS PER SHARE
Net income per common share $0.07 $0.04 $0.23 $0.18
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,412,542 2,451,631 2,370,579 2,466,119
=========== ========== =========== ===========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended October 31,
----------------------------
1995 1994
CASH FLOW FROM OPERATING ACTIVITIES: ---------- -----------
Net income $ 545,642 $ 441,611
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 641,721 318,833
Provision for doubtful accounts 149,500 193,822
(Increase) decrease in accounts receivable (2,219,673) (2,443,403)
(Increase) decrease in prepaid expenses
and supplies (267,358) (221,999)
Increase (decrease) in accounts payable (200,875) (93,101)
Increase (decrease) in accrued liabilities 1,299,100 1,150,928
Increase (decrease) in deferred revenues 242,780 5,820
(Increase) decrease in other assets 351,988 --
---------- ----------
Net cash provided by (used in)
operating activities 542,825 (647,489)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (147,625) (4,7595)
Increase in capitalized software
development costs (508,377) (362,154)
---------- ----------
Net cash used in investing activities (656,002) (409,749)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on lines of credit (500,000) 1,000,000
Principal payments on notes payable (405,140) (285,052)
Proceeds from note payable 750,000 100,000
Proceeds from exercise of options 0 14,375
---------- ----------
Net cash provided by (used in)
financing activities (155,140) 829,323
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (268,317) (227,915)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,480,765 1,199,597
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,212,448 $ 971,682
========== ==========
0
Supplemental information.
In Fiscal 1995 and 1994 the Company acquired certain computer and office
equipment for approximately $ 167,000 and $ 256,000 respectively, under capital
leases.
See accompanying notes to the financial statements.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
October 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 the financial
position, results of operations, and cash flows for the periods presented.
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 nine month period ended October 31, 1995 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Note 2
- ------
Notes Payable and Obligations Under Capital Leases:
October 31,1995
---------------
Bank line of credit, interest at the bank's prime
rate payable monthly (see below) $ 500,000
Note payable, interest at prime rate plus 562,500
5% with a floor of 14% paid in full in
November 1995 (see below)
Note payable to preferred stockholder,
interest at 12% unsecured paid in November 1995 84,151
Obligations under capital leases, interest
rates ranging from 11% to 28%, maturities
through November 1999, secured by computer and
other equipment 606,951
----------
1,753,602
Less Current installments (1,450,324)
$ 303,278
==========
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The 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 principal balance at October 31, 1995 was $526,500. 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 April 15, 1996, is secured by accounts
receivable and is subject to early payment under certain conditions.
On November 13, 1995 the Company obtained a revolving line of credit providing
up to $2,000,000. The revolving line of credit bears interest at prime plus
2.5%, is secured by accounts receivable and matures on November 13, 1996. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants. The Company
also obtained a line of credit of $500,000, from the same lender. The $500,000
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. The line matures November 1996.
Future maturities of notes payable and obligations under capital leases are as
follows as of October 31, 1995:
Notes Payable Capital Leases
------------- --------------
1996 $1,146,651 $ 365,225
1997 -- 219,173
1998 -- 75,850
1999 -- 34,415
2000 and later -- 15,237
------------- --------------
1,146,651 709,900
Less amount representing interest -- (102,949)
------------- --------------
$1,146,651 $ 606,951
============= ==============
Note 3
Accrued Liabilities consist of the following:
October 31, 1995
----------------
Accrued product cost of sales $1,254,316
Accrued commissions 931,676
Accrued royalties 761,229
Other accrued liabilities 681,192
----------------
$3,628,413
================
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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. 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 Preferred Stock
does not pay dividends.
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 October 31, 1995 are as follows:
Allowance for doubtful accounts $ 194,693
Tax depreciation in excess
of book depreciation (78,000)
Capitalized software costs (353,653)
Accrued liabilities 256,000
Deferred revenues 109,266
Net operating loss carry forward 452,000
Valuation allowance (580,306)
---------
$ 0
=========
A valuation allowance is provided when it is uncertain that some portion or all
of the deferred tax asset will be recognized. The valuation allowance decreased
during the nine month period ended October 31, 1995 due to the nine month
operating results.
<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 October 31, 1995 vs. Three Months Ended October 31, 1994
- ---------------------------------------------------------------------------
Income. For the quarter ended October 31, 1995, the Company had net income of
$176,660 compared to net income of $100,360 for the quarter ended October 31,
1994.
During the past fiscal year ended January 31, 1995, and continuing through the
quarter ended October 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 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's future growth strategy includes
evaluating offering and/or establishing, directly or indirectly in cooperation
with third parties, one or more service bureaus for offering medical call center
services. The Company believes it will be necessary to continue to invest
resources to support the Company's obligations and future growth plans. 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 the Company's investments have
contributed to the recent increases in revenues, there are no assurances that
future revenues will increase.
The Company's operations have been and continue to be affected by consolidation,
alliances and mergers in the healthcare market. In addition, management believes
that the competition of offering medical call center products and services will
begin to increase and that there may be new entrants with substantially greater
financial and other resources than the Company which may adversely impact the
Company's ability to compete in this 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 is
resulting 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, increasing competition in the Company's market and by
future economic conditions.
The Company has little or no backlog, and revenues and operating results
therefore depend 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 12% to $4,338,174 for the
quarter ended October 31, 1995 from $3,881,797 for the quarter ended October 31,
1994. The increase is primarily attributed to increases in revenues generated
from initial license fees.
Initial license fees primarily represent revenues from the initial sale of the
Company's medical call center products, health information products, voice
response products and the pediatric product line. Revenue from initial license
fees increased to $2,474,074 for the quarter ended October 31, 1995, from
$2,067,368 for the quarter ended October 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 and the pediatric product
lines.
Support, marketing service and material revenues were $1,864,100 for the quarter
ended October 31, 1995 compared to $1,814,429 for the quarter ended October 31,
1994. The increase in support, marketing services and material revenues is
primarily attributed to an increase in support fee revenues which 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 $250,000 for the quarter
ended October 31, 1995 compared to the quarter ended October 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.
Marketing service revenue (which represents strategic and creative service
revenue generated from the Company's marketing service) and material revenue
decreased from the quarter ended October 31, 1995 compared to the quarter ended
October 31, 1994. The decrease is attributed to a decrease in subscriptions
revenue from the Health Direct publications and lower consulting and strategic
marketing services. The Company has placed additional focus in these areas and
while marketing service revenue and materials revenue are expected to remain at
current levels through the fiscal year ending January 31, 1996, management
believes marketing service and Health Direct publication revenue continue to
represent opportunities for future revenue growth.
Operating Expenses. Total operating expenses increased approximately 10% to
$4,161,514 for the quarter ended October 31, 1995 from $3,781,437 for the
quarter ended October 31, 1994. Total operating expenses increased primarily due
to an increase in costs associated with selling, product support and development
expenses.
Cost of License Fees, Materials and Service Revenues. The cost of initial
license fees (which includes accrued royalties, training and other related
costs) increased to $790,444 for the quarter ended October 31, 1995 from
$776,541 for the quarter ended October 31, 1994. The increase is due to an
increase in variable expenses associated with increased initial fee revenues .
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 publication and costs associated with
marketing services revenue, decreased to $544,718 for the quarter ended October
31, 1995 from $548,366 for the quarter ended October 31, 1994. The decrease is a
result of lower costs associated with the lower service revenues generated from
marketing services and the publication product.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $2,164,745 for the quarter ended October 31,
1995 from $1,856,683 for the quarter ended October 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
decreased to $343,550 for the quarter ended October 31, 1995 from $413,160 for
the quarter ended October 31, 1994. The decrease is attributable to decreases in
outside consulting, temporary and professional services and other general
operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $240,057 for the quarter ended October 31, 1995 from $115,687 for the quarter
ended October 31, 1994. This increase is due to the increased amortization
expense associated with the Company's Windows based product, which the Company
began to amortize in its fiscal quarter ended January 31, 1995.
Nine Months Ended October 31, 1995 vs. Nine Months Ended October 31, 1994
- -------------------------------------------------------------------------
Income. For the nine months ended October 31, 1995, the Company had net income
of $545,642 compared to net income of $441,611 for the nine months ended October
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 existing and other healthcare markets. There are no assurances
that the Company will be able to achieve these goals.
Revenues. Total revenues increased approximately 19% to $12,673,189 for the nine
months ended October 31, 1995 from $10,698,155 for the nine months ended October
31, 1994. The increase is due primarily to increased revenues generated from
initial license fees.
Revenues from initial license fees increased to $7,426,345 for the nine months
ended October 31, 1995 from $5,545,824 for the nine months ended October 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 and the
pediatric product line.
Support, marketing service and material revenue increased to $5,246,844 for the
nine months ended October 31, 1995 from $5,152,331 for the nine months ended
October 31, 1994. Revenue from support fees increased approximately $750,000 for
the nine months ended October 31, 1995 from the nine months ended October 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 nine
months ended October 31, 1995 from the nine months ended October 31, 1994 due to
a decrease in subscriptions revenue from Health Direct and a decrease in the
marketing service revenue.
Operating Expenses. Total operating expenses increased approximately 18% to
$12,127,547 for the nine months ended October 31, 1995 from $10,256,544 for the
nine months ended October 31, 1994. The increase is due primarily to an increase
in variable costs associated with revenues from initial license fees and an
increase in 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 $2,176,127 for the nine months ended October 31, 1995, compared to
$1,701,733 for the nine months ended October 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 $1,209,469 for the nine
months ended October 31, 1995 from $1,394,238 for the nine months ended October
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 marketing
service revenue .
Selling, Product Support and Development. Selling, product support and
development expense increased to $6,652,837 for the nine months ended October
31, 1995 from $5,451,303 for the nine months ended October 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 and expand the client
management and client services function to properly service the Company's
customers.
General and Administrative. General and administrative expenses increased to
$1,297,893 for the nine months ended October 31, 1995 from $1,196,615 for the
nine months ended October 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 $641,721 for the nine months ended October 31, 1995 from $318,833 for the
nine months ended October 31, 1994. This increase is due to the increased
amortization expense associated with the Company's Windows based product which
the Company began to amortize in its fiscal quarter ended January 31, 1995.
Liquidity and Capital Resources
- -------------------------------
As of October 31, 1995, the Company had a working capital deficit (current
assets minus current liabilities) of $340,833 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 nine months ended
October 31, 1995 and a reclassification of certain long term receivables to
current. The Company's accounts receivable balance increased to $6,435,712 at
October 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.
On November 13, 1995 the Company obtained a revolving line of credit providing
up to $2,000,000. The revolving line of credit bears interest at prime plus
2.5%, is secured by accounts receivable and matures on November 13, 1996. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants. The Company
also obtained a line of credit of $500,000, from the same lender. The $500,000
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. The line matures in November 1996.
The Company also has a line of credit with a different bank providing an
aggregate amount of $500,000 as of October 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 was paid in full on November 13,
1995.
The Company is currently dependent on cash from operations and available
proceeds from the $2,000,000 line of credit 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. The Company will continue to seek alternative sources to
raise additional capital to support its future growth plans and there are no
assurances that the Company will be successful in obtaining additional capital
for its continued growth plans.
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.
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
principal balance of $84,151 was paid in November 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,
increase 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 expenditure commitments
outstanding as of October 31, 1995. However, the Company will continue to invest
in product and software developement which will require additional support staff
and related operating expenses. 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 line of credit. The Company believes that
while its current operations can be supported by available resources, 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. 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, including for
implementing its service bureau strategy. There are no assurances the Company
will be successful at raising additional capital to support planned growth.
<PAGE>
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
October 31, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirement 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: December 12, 1995 /s/ Gregory J. Petras
----------------- -------------------------------------
Gregory J. Petras, President and
Chief Executive Officer
Date: December 12, 1995 /s/ Jeffrey T. Zywicki
----------------- -------------------------------------
Jeffrey T. Zywicki
Sr. Vice President Finance
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