U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment - 1
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1995
--------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from N/A to
Commission file Number 33-9396-LA
National Health Enhancement Systems, Inc.
(Name of small business issuer 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 602-230-7575
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK $.001 PAR VALUE
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 [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ X ].
Issuer's revenues for its most recent fiscal year: $ 13,350,268
As of March 31, 1995, the aggregate market value of Registrant's voting shares
held by non-affiliates of shares, based upon the average between the closing bid
and asked prices of such stock as quoted on NASDAQ, was approximately
$1,746,663.
The number of shares of the Registrant's common stock issued was 4,163,636 and
3,791,220 outstanding at March 31, 1995.
The Registrant's definitive Proxy Statement to be filed pursuant to Regulation
14A with the Securities and Exchange Commission not later than May 31, 1995 is
incorporated by reference into Part III, Items 9 through 12.
JTZ3414
<PAGE>
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Description of Business 1
Item 2. Description of Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder 10
Matters
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7. Financial Statements 15
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 30
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16(a) of 30
the Exchange Act 30
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial
Owners and Management 30
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
<PAGE>
National Health Enhancement Systems, Inc. has restated its consolidated
financial statements for the fiscal year ended January 31, 1995 and for the
quarterly periods in the fiscal years ended January 31, 1996 and 1995. See Part
II, Item 6, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART I
Item 1. Description of Business
Business Development
National Health Enhancement Systems, Inc. (the "Company"), originally
incorporated in July 1983 as an Arizona corporation named AHI Limited, was
formed for the purpose of developing, licensing and marketing health evaluation
programs to healthcare providers, including hospitals, medical groups, clinics
and physicians. On October 7, 1986, the Company was reincorporated in Delaware
by merger into a Delaware corporation formed for that purpose.
In 1983, the Company commenced marketing a single proprietary,
software-supported health evaluation system designed to assist a healthcare
provider to assess an apparently "well" individual's overall fitness and risk of
incurring cardiovascular disease. This product, the Personal Fitness Profile,
helped healthcare providers to generate additional direct revenue and refer
consumers to other programs, departments or physicians for remedial or
preventive care. The Company's business strategy has since evolved, and the
Company's current business objective is to become the leading supplier of
medical call center system products and services that enable healthcare
providers to reduce costs associated with inappropriate utilization of
healthcare while improving service and quality.
In April 1993, the Company acquired by merger into a newly formed Company
subsidiary, all the assets and business of First Strategic Group, Ltd. ("FSG"),
a California corporation. FSG is a consulting firm which specializes in the
development of healthcare marketing and advertising strategies. FSG services
include providing healthcare marketing consulting services and strategies,
development of creative marketing and/or advertising materials (such as direct
mail pieces and print ad materials) as requested by its clients. FSG services do
not include the placement of media or advertising. The Company believes that
FSG's business supports the Company's short and long term strategic goals, and
enhances the range of services available to existing and prospective clients and
increases revenue, thereby reducing the Company's dependence on initial fee
revenue from licensed products.
Healthcare expenditures in the United States currently exceed 13% of the gross
national product. The need to slow the growth of healthcare costs has served as
a catalyst for healthcare reform. The escalating costs of healthcare and the
focus healthcare has received have caused many changes to occur in the
healthcare market. In the Company's view, one of the most significant changes is
the rapid and accelerating growth of managed care in both the private and public
sector. As the focus shifts from fee-for-service to capitation, managed care
programs are becoming more prevalent, and will begin to have a tremendous impact
on how business is done in the healthcare industry. The Company believes this
trend will create a marketplace where healthcare providers maximize
profitability by improving or reducing utilization and managing health risk more
directly than in the past, i.e. by keeping people healthy and providing the most
cost-effective care should they become sick.
According to the United States General Accounting Office, an estimated 90
million emergency department visits occurred in 1992, approximately 40% of these
emergency department visits were unnecessary. The cost to diagnose and treat
acute and chronic conditions that are not truly emergencies, in an emergency
department, are far more expensive than the cost to treat such conditions in a
physician's office.
The Company's strategy focuses upon the opportunity to assist healthcare
providers redirect these costly and unnecessary emergency room visits, and
similar inefficient utilization patterns to more cost-effective settings, by
offering medical call center products and services which can be implemented or
used by healthcare providers. The Company has "coined" the phrase "medical call
center" to represent a part of the solution to improve service and reduce
healthcare costs in this context. These medical call centers are staffed by
registered nurses, who field calls from people with health questions,
24-hours-a-day, seven days a week. Nurses provide callers with access to the
right information at the right time and direct them to the most cost-effective
and appropriate level of care. Callers then become actively involved in managing
their own health, and are better equipped to make informed healthcare decisions.
The information callers receive helps them to make better decisions and helps
them avoid unnecessary or inappropriate emergency or physician office visits.
Ultimately, the Company believes this reduces healthcare costs and increases
satisfaction and loyalty within the healthcare delivery system. The typical
medical call center offers the following capabilities:
1. Assists people in evaluating their health symptoms.
2. Enables people to better understand and manage serious healthcare
episodes.
3. Provides assistance in administering at-home remedies.
4. Offers educational information on a wide variety of health topics.
5. Offers assistance to find a physician, class or program to meet the
callers needs.
As managed care and capitation continue to change the healthcare industry, the
focus continues to shift. The Company believes that healthcare providers, to
succeed, will seek to increase access to information while concurrently managing
access to quality healthcare services, and that this shift toward demand
management will require greater reliance on three components of healthcare: self
care, patient education and telephone triage. Medical call centers can guide
nurses in triaging adult and pediatric patients to the most appropriate and cost
effective levels of care. Success for hospitals, primary care physicians, HMO's
and other alliances will, in the Company's opinion, depend upon the degree to
which these organizations are able to effectively educate patients and
subscribers regarding appropriate utilization of the healthcare system. Medical
call centers will support demand management strategies by delivering information
to patients and subscribers that will help them make intelligent, well-informed
decisions about their health.
The Company's software products provide the foundation to implement medical call
centers and systems operated by or for healthcare providers to assist healthcare
providers in reducing healthcare costs and help them improve the quality of
service to their customers. During the past three years the Company has also
expanded its product line from primarily software-based products to include
strategic healthcare consulting services. The Company's services focus on
assisting healthcare providers meet the marketing challenges they are facing in
a changing healthcare industry. The Company's management believes that
successful healthcare providers will continue to market themselves in an
environment where consumers will have some opportunity to make choices for
delivery of healthcare. The Company currently distributes its products and
services through Company-employed sales representatives primarily to hospitals,
and plans to expand distribution to medical groups, clinics, physicians,
self-insured employers and managed care organizations. The Company continues to
evaluate alternative distribution methods for its products and services and will
continue to evaluate expanding its current products and services.
Products and Services
The Company's products have expanded over the past few years to include certain
services and software-based products with prices ranging between $2,500 and
$250,000. The Company's base of users now includes over 600 hospitals. The
Company's management believes that this network of healthcare providers is a
base that will facilitate the Company's distribution of new products.
The Company's core software-based products are:
- Centramax (R)
- Centramax. MTM
- Centramax PlusTM
- Centramax. M PlusTM
- VoicemaxTM
- Voicemax PlusTM
- Referral One (R)
The Company's products also include value-added products or services such as:
- The Professionals
- HealthFone
- Profit Acceleration System
- Health Direct
- Healthcare Marketing Services
Centramax and Centramax. M. In December 1989, the Company released Centramax
(R), a DOS-based software system that is designed to manage consumer contacts
through a centralized database. With Centramax, the healthcare provider or other
end user can capture and store information on the caller, and subsequently
market directly to this and other consumers based on specific information or
needs obtained from the caller; access, analyze and report on information
contained in the database; and track revenues generated from marketing
campaigns. The Company believes that Centramax enables a healthcare organization
to improve its customer service function and more effectively manage the
marketing function through the management of information. For example, the
inbound telephone functions of Centramax are initiated when an operator receives
a call. The Centramax operator then retrieves a particular script and follows
the directions given. The system enables the operator to cross-sell other
programs offered by the healthcare provider which may not have been motivating
factors behind the original call but which may be of interest to the caller. For
example, a pregnant caller may ask for a referral to an OB/GYN. The Centramax
software will remind the operator to mention the healthcare providers prenatal
classes. With one keystroke the operator can access the schedule and then
register the caller.
In January 1995 the Company released its Centramax. M product which is a
Windows-based product that has all the capabilities of Centramax including
enhanced reporting and graphic capabilities.
Centramax and Centramax. M are offered to healthcare providers under a
non-exclusive license at an initial license fee plus an annual license and
support fee. The user is entitled to ongoing software support, maintenance and
enhancements during the term of the license.
Centramax Plus and Centramax. M Plus. Centramax Plus combines the Centramax
software product with certain medically-based health information guidelines,
known as the Health Reference Information System(TM) ("HRIS"), that enable
nurses to answer health-related questions on incoming calls. Centramax Plus
assists a nurse to respond to callers' questions, answering a wide range of
medical and health related questions, and directing callers to appropriate
medical resources thereby providing the caller with greater access to
information to make an informed decision and the healthcare provider with an
opportunity to direct the caller to the most appropriate cost effective care.
Each Centramax Plus user is granted a non-exclusive license. The Company charges
an initial license fee and an annual support and license fee, which entitles the
Centramax Plus user to continue to license the product and to ongoing software
updates, support, maintenance, enhancements and updates to the HRIS for the term
of the license.
The Company initially developed the HRIS internally through research of
available current consumer health information and medical texts. In March 1990,
the Company transferred the ownership rights in the HRIS to a third party,
retaining the right to distribute the HRIS for a period of time. Under the
agreement the third party is responsible for the accuracy, currency and medical
appropriateness of the HRIS, including additional HRIS developed thereunder by
the Company. Provided certain performance criteria are met, the Company has the
right to be the exclusive world-wide distributor of the HRIS for the term of the
agreement. Under certain circumstances the Company is granted the right to
purchase all rights to the HRIS.
Centramax. M Plus, which was released in January 1995, is a Windows-based
software product that combines all the features included in Centramax Plus with
improved and enhanced reporting and graphic capabilities and the pediatric
guidelines not offered in the Centramax Plus DOS product. The pediatric
guidelines are provided through an exclusive agreement with Barton Schmitt,
M.D., Professor of Pediatrics at the University of Colorado School of Medicine
and a recognized pioneer in pediatric telephone triage. In September 1994 the
Company entered into an agreement with Dr. Schmitt, pursuant to which the
Company acquired certain exclusive rights to distribute the pediatric guidelines
developed by Dr. Schmitt to medical call centers or for use in software used in
medical call centers. The pediatric guidelines have been used for the past six
(6) years in the "After Hours Program" established at the Denver Children's
Hospital. The Company has included the pediatric guidelines in certain of its
medical call center products, and the Company is obligated to pay a royalty
based on the sales of the pediatric guidelines by the Company on a standalone or
bundled basis.
Centramax. M Plus and Centramax Plus are the base products for the Company's
medical call center offering and are offered to healthcare providers under a
non-exclusive license at an initial license fee plus an annual license and
support fee. Users are entitled to ongoing software support, maintenance and
enhancements during the term of the license.
The Professionals. The Professionals was originally released to include the
Centramax software, the HRIS and a marketing package. The Company has recently
changed its strategy regarding The Professionals. Currently the Company only
includes the marketing package, which is intended to create awareness of
targeted services, and to generate incoming consumer calls, thereby helping to
build the awareness of a healthcare providers medical call center operations.
The Company believes that healthcare providers will continue to purchase
marketing tools in order to assist them to compete among other providers for
managed care and other opportunities.
The marketing component is a strategic integration package that is a customized
turn-key marketing campaign which is designed to position the end user as a
leading resource center for medical and health information in its market. The
Company believes that this customized marketing campaign provides the hospital
with a sophisticated, state-of-the-art set of marketing materials at an
economical price. The Company believes it would cost a hospital two to three
times more than the total license fee for The Professionals to develop a
comparable customized marketing campaign on its own.
Each user of The Professionals is granted a five-year renewable license with an
exclusive geographic service area in which it is the only healthcare provider in
that service area that has been granted the right to use The Professionals
service mark and customized marketing package. The Company charges each licensee
of The Professionals an initial license fee and an annual license and support
fee, which entitles the user to have continued geographic exclusivity and annual
updates to the marketing package, during the term of the license.
Interactive Voice Response System. The Company's interactive voice response
product line includes Voicemax, and Voicemax Plus. Introduced in September 1992,
these products permit a licensee to provide health information to consumers via
use of a touch-tone telephone, 24 hours a day, 7 days a week, 365 days a year.
These products, which operate using The Brite Voice Systems hardware platform,
allow callers to anonymously access health information (up to 950 health
categories), physician referrals, class information or other information that
can be programmed or customized by the licensee. The HealthFone marketing
product is a strategic product which offers an exclusive name brand to assist in
generating call volume for the Voicemax and Voicemax Plus products.
The Company believes that the benefits of its interactive voice response system
enable a licensee to improve utilization of existing resources, increase
visibility and improve profitability. Each user of the Voicemax and Voicemax
Plus products is granted a non-exclusive license. Each HealthFone user is
granted a five-year renewable license with an exclusive geographic service area
in which the user is the only healthcare provider in that service area that has
been granted the right to use the HealthFone tradename and marketing materials.
The Company charges each user of the interactive voice products an initial fee
and an annual license and support fee, which entitles the user to annual updates
to the health information, software support and enhancements to the interactive
voice response products.
The Profit Acceleration System. The Profit Acceleration System ("PAS") combines
nine proprietary, software-supported health screening products designed to
assess an individual's overall fitness and risk of incurring certain kinds of
disease. The nine products are: "The Heart TestTM", "The Health TestTM", "The
Cancer TestTM", "Double CheckTM", "The Diabetes TestTM", "The Woman's Health
TestTM" and "The Woman's Health CheckTM", "The Life Test TM" and the "Custom
Profile". The PAS also includes a follow-up referral system linked to the PAS
programs called "The Healthcare Telemarketing ProgramTM" (The PAS components are
referred to herein as the "Programs".) Healthcare providers deliver the Programs
as part of a lead generation system or risk assessment system that permits them
to refer consumers to other programs, physicians or departments for remedial or
preventive care and thereby generate additional revenue. The PAS is offered with
territorial exclusivity and includes proprietary software, confidential
instruction manuals for implementing and distributing the Programs as part of a
marketing campaign or strategy; and additional standard promotional and
marketing materials. The software supporting the Programs can also produce group
summary reports analyzing a group's cardiovascular risk factors, cancer risk
factors, health assessment results, diabetes risk factors and levels of interest
in specific intervention programs.
The "Custom Profile", the ninth software-supported health assessment in the PAS,
was launched in December of 1994. This new profile is a flexible risk management
tool that allows users to obtain information from their markets and follow-up
with other disease specific assessments. The Custom Profile is designed to be
completely customizable in order to meet the needs of physician groups, managed
care contracts, direct contracts and support case management efforts, as they
transition from fee-for-service to managed care and capitation.
The current standard PAS agreement grants each new PAS user up to a five-year
license with a geographic service area within which it has the exclusive right
among healthcare providers to use the software supporting the Programs. The
initial fee paid by a PAS user depends primarily on the population of the
service area, the number of hospitals in the service area, the number of
physicians in a service area and the economic environment of the area. The
Company evaluates increasing the initial PAS user fee as additional programs are
developed. In addition, the standard PAS license agreement requires that each
PAS licensee pay the Company a monthly support fee.
Due to the geographic exclusivity of the PAS, the number of available markets
has decreased as the Company increased its PAS customer base. Presently, the
Company believes markets remain available and that in the foreseeable future
initial license fee revenue will continue to be generated from the available
markets. In addition, the revenues from PAS renewal fees, support fees and
material sales will continue to provide the Company with ongoing future
revenues.
Health Direct. On April 9, 1991, the Company entered into a distribution
agreement with McMurry Publishing Company (formerly Vim & Vigor, Inc.) to be the
exclusive distributor for a specialized publication now known as Health Direct.
Health Direct is an eight-page, direct response publication (direct response
marketing system) designed primarily to promote hospital services while
providing health information. The Health Direct contains thirty to forty "quick
read" health related articles that can be customized by each licensee. The
Company charges the Health Direct licensee an initial license fee and grants
geographic exclusivity to distribute the Health Direct product (generally within
a certain zip code area). In addition, the Company requires each Health Direct
licensee to purchase a minimum number of copies of Health Direct per quarter.
The Company is obligated to pay McMurry Publishing a portion of the initial fee
received from Health Direct licensees.
Healthcare Marketing Services. FSG provides healthcare strategic and marketing
services to existing and prospective clients. FSG services include providing
healthcare marketing consulting services and strategies, development of creative
marketing and/or advertising materials (such as direct mail pieces, print ad
materials) as requested by the clients. FSG services do not include the
placement of media.
Other Products and Services. In May 1988, the Company introduced a physician
referral system ("Referral One"), which is a proprietary, software-supported
product distributed and marketed primarily to hospitals through non-exclusive
software license agreements. Referral One is to be used as a referral and
follow-up system for referring interested individuals to specific physicians.
The Personal Fitness Profile (the "Profile"), was the Company's first product,
which it commenced marketing in July 1983. The Profile is a proprietary,
software-supported health evaluation system designed to permit a healthcare
provider to assess an apparently "well" individual's overall fitness and risk of
incurring cardiovascular disease. Revenues generated from the Referral One and
the Profile during the last three fiscal years were less than 5% of the
Company's total revenue and there are no immediate plans by the Company to
devote a significant amount of resources to distribute these products beyond the
current level.
New Products. In January 1995 the Company introduced Centramax. M and Centramax.
M Plus. While the Company believes that these products are being well-received
in the market, there are no assurances that these products will be successful.
The Company intends to develop or acquire, and to market to its current clients
and others, additional products and services which may or may not be similar to
its existing products. The Company's future growth in revenue is dependent on
the Company's ability to acquire or develop and successfully market new products
in the changing healthcare market. There are no assurances the Company will be
able to do so. The Company's future success also depends upon its ability to
sell its current products to, and acquire or develop new products for, managed
care and similar organizations. The managed care market is changing rapidly, the
Company's historical business has not been in the managed care market and there
are no assurances that the Company will be able to compete successfully in the
managed care market.
Research and Development. The Company's development staff presently consists of
a senior vice president of software development, ten computer systems analysts
and two research and development specialists. Management estimates that during
the two most recent fiscal years, the Company spent approximately $1,136,000 on
company-sponsored research and development activities (which includes
enhancements and upgrades to the Company's products).
Liability in the Healthcare Industry. In recent years, participants in the
healthcare industry, including physicians, nurses and other healthcare
professionals, have become subject to an increasing number of lawsuits alleging
malpractice, product liability and related legal theories, many of which involve
large claims and significant defense costs. Although the Company does not
provide healthcare services directly to consumers, medical malpractice, product
liability or similar claims against the Company's customers relating to delivery
and use of the Company's products may also be made against the Company. Due to
the nature of its business, the Company could become involved in litigation with
the attendant risk of adverse publicity, significant defense costs and
substantial damage awards. As of April 15, 1995, no such claims had been made
against the Company. However, there can be no assurance that claims will not be
brought against the Company. Even if such claims ultimately prove to be without
merit, defending against them can be time consuming and expensive, and any
adverse publicity associated with such a claim could have an adverse effect on
the Company. The Company is in no position to determine the probability of such
claims being made.
The Company has taken certain steps to minimize the risk of potential claims.
Delivery and use of the Company's products is the responsibility of the
licensee, and each licensee is required to indemnify the Company against third
party claims arising out of use of the products by the licensee. In addition,
the agreement with the third party for use of the HRIS provides that the Company
shall be indemnified and held harmless from third party claims arising from the
accuracy, currency or completeness of the information contained in the HRIS
reviewed by the third party. The Company also presently maintains professional
errors and omissions liability insurance which it believes to be adequate. There
can be no assurance, however, that claims in excess of the Company's insurance
coverage will not arise or that all claims would be covered by such insurance.
In addition, although the Company has not experienced difficulty in obtaining
insurance coverage in the past, there can be no assurance that the Company will
be able to maintain existing insurance coverage or obtain increased insurance
coverage on acceptable terms or at all. The Company expects to seek increased
insurance coverage as its business grows.
Regulatory Matters
Government Regulation. The healthcare industry is subject to extensive and
evolving government regulation at both the Federal and state level regarding the
provision, marketing and reimbursement of healthcare services and products,
including Medicare/Medicaid anti-kickback regulations and requirements governing
the provisions of healthcare information services. Specific sections of the
Social Security Act authorize the exclusion of an individual or entity from
reimbursement and/or participation in state health programs and Medicare
programs if it has violated the Social Security Act. In July 1991, regulations
outlined certain payment practices which would not be subject to criminal
prosecution. These regulations, commonly referred to as "safe harbor"
regulations, effect the manner in which hospitals make physician referrals. The
Company's software product accommodates the entry of the information required
under the "safe harbor" regulations provided that the appropriate policies and
procedures are followed by the users of the Company's products. The Company has
no reason to believe that its business violates any Federal or state statutes or
regulations.
Franchise Matters. Effective October 21, 1979, the Federal Trade Commission (the
"FTC") adopted a franchise rule (the "FTC Rule") which, except for exemptions
therefrom in particular instances, requires a franchiser to give to each
prospective franchisee at specified times a written disclosure document
containing certain information about the franchise and complete copies of the
franchise agreement and any related agreements.
In addition, approximately 30 states regulate the offer and sale of franchises
or "business opportunities" (which may include franchises) or both, by requiring
registration of franchises or business opportunities prior to their sale or
special disclosure documents regarding the sale thereof, or both. Also, a number
of states have unfair trade practices or "little FTC" acts that typically
contain general prohibitions against unfair or deceptive acts or practices, and
in many such states, violation of the federal franchise regulations may also
constitute violations of the state "little FTC" acts. In addition to regulation
of offers and sales of franchises and business opportunities, distribution
programs are subject to, or potentially subject to, a number of other laws,
including state laws concerning termination and renewal of franchises and
federal and state antitrust laws.
From 1986 to 1993, the Company registered the Profile and the PAS as a franchise
or business opportunity in certain states where the Company believed such
registration was prudent under the franchise or business opportunity law of that
state, and also marketed the PAS and the Profile only to hospitals or healthcare
providers that met requirements of an available exemption under the FTC Rule.
The Company believes that the mix and emphasis of the products that it markets
to hospitals has changed substantially. The Profile is no longer the focal point
of the Company's marketing efforts. Furthermore, in marketing its products, the
Company is no longer promoting the Profile and the PAS as products that offer a
potential direct revenue stream through sale of fitness assessments and reports
to the general public. Instead, the Company's marketing efforts now emphasize
the usefulness of the Company's products in a hospital's own marketing and cost
containment efforts. The Company markets the Programs as questionnaires that can
be distributed to the general public free of charge for the purpose of
stimulating interest in health-related issues and the various services offered
by the hospital. The Profile is now offered as an option that can be included in
this system. In light of the foregoing, the Company believes it is no longer
required to register the offer and sale of the PAS and the Profile, and in 1993
the Company discontinued registration of the PAS or Profile as a franchise.
Trademarks and Proprietary Rights
The Company claims proprietary rights in the software that supports its
products, as well as in confidential training and promotion manuals, the
questionnaires and report forms used with the PAS, the input forms used in
connection with the Profile, the packaging and presentation of the Company's
products and their representative components and related protectable materials.
The Company has registered software source code copyrights for all of its
DOS-based software products and intends to register its source code for its
newly developed Windows-based software products. In addition, the Company's
current agreements prohibit its customers from decoding, reproducing or copying
the software (except for the customer's own use in machine readable form). Those
agreements also require customers to take reasonable and appropriate actions to
protect and preserve the Company's rights in the software and other proprietary
materials. Subject to certain conditions, the Company will indemnify and defend
a customer with respect to claims brought by third parties against the customer
for infringement of patents, copyrights and trademarks, or misappropriation of
trade secrets or other proprietary rights relating to the products of the
Company licensed by its customers.
The Company is not aware of any such claims.
The Company holds registered trademarks for the Centramax, The Professionals,
HealthFone and Referral One names with the United States Patent and Trademark
Office.
Market Conditions and Competition
The healthcare industry in general is extremely competitive. Healthcare
expenditures are currently approximately 13% of the gross national product. Many
changes in the industry that began in the 1980's will continue through this
decade and will transform the way healthcare providers function and the types of
healthcare services they provide. The following trends among others, are
anticipated to have a strong influence on healthcare in the 1990's:
- Rising national healthcare expenditures.
- Reduced reimbursement levels.
- Increasing competition among providers.
- Shifting healthcare delivery patterns.
- Aging population with an increased demand for healthcare services.
- Hospital mergers and realignments.
Within the healthcare industry, the Company and its clients are competing
directly and indirectly for the business of individuals and businesses
interested in healthcare services. The Company believes that hospitals, clinics,
group practices, managed care organizations and other healthcare providers are
seeking new ways to reduce healthcare costs and to market their services more
effectively. Healthcare providers are particularly interested in products which
assist in reducing healthcare costs and improve the quality and service of
healthcare delivery.
There are a number of software-based systems, health promotion programs, and
wellness services being offered to healthcare providers that are perceived by
the Company to be direct competitors because they have software systems or
services capable of providing health information, database information and
producing reports that contain health information similar to the Company's
reports or providing benefits similar to the Company's software products.
The barriers to entry into this market are relatively low, consisting primarily
of the means to develop or otherwise acquire supporting software and medical
assessment information; a product responsive to the healthcare providers'
particular needs; and a distribution system for the products. In addition,
development of similar programs by healthcare providers for use in their own
facilities may provide competition for the Company's programs.
The Company believes that much of its competitive strength lies in its user
network and in its ability and experience in providing quality products and
services to its market. The Company's user network of healthcare providers
affords it a means of quickly reaching a group of healthcare providers who have
a proven interest in the types of products the Company supplies and who are
familiar with the quality of the products and services the Company supplies. The
Company believes that it has demonstrated ability and experience in providing
products that are (1) useful in decreasing overall healthcare costs and in
improving healthcare service and quality; (2) effective in improving operating
efficiency and increasing a healthcare provider's return on expenditures; (3)
well supported by the Company's technical expertise; and (4) easy for the
healthcare provider to use. The Company believes that these attributes are
likely to be attractive to healthcare providers without significant
reconfiguration of the products. To the extent the Company offers new products
or services or offers its existing products and services in new markets, it
expects to face increased competition from competitors with potentially greater
financial, marketing or technical resources than the Company. No assurance can
be given that the Company will continue to compete successfully.
The business of the Company is and will continue to be affected by general
economic conditions and is dependent upon both a continued interest to reduce
healthcare costs and a continued competitive environment for healthcare
providers. In addition, the success of the Company will depend upon its ability
to identify and develop sources of revenue in addition to the initial and
recurring maintenance and support fees payable from its customers, such as the
future development or acquisition and distribution of new products.
Employees
As of March 31, 1995, the Company employed a total of approximately 115
full-time employees. None of the Company's employees are covered by a collective
bargaining agreement, and the Company believes its relations with its employees
are good. As the Company's operations expand, it will hire additional personnel
as the Company deems necessary.
Item 2. Description of Properties
The Company's corporate offices are located in a twenty-one story office
building. The Company occupies approximately 10,600 square feet of leased space,
for which the lease term for this space expires on December 15, 1995. The
Company is currently concluding negotiating its existing lease with the present
landlord to extend the lease term and believes it will secure an extended lease
term. The Company also has an option under certain conditions to lease an
additional 3,000 square feet of office space. The Company believes that its
existing office space, along with the options to expand its space, will be
sufficient to meet its needs for the foreseeable future. The Company also leases
certain office space in Whittier, California which is used by FSG.
Item 3. Legal Proceedings
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's certificate of incorporation authorizes 5,000,000 shares of Common
Stock. On December 3, 1986, the Company successfully concluded the initial
public offering of 700,000 shares of Common Stock at $5.00 per share. Net
proceeds to the Company from the offering were $2,640,443 after deducting a 10%
commission to the underwriter and other issuance expenses of $509,557. The
Company's common stock commenced trading in the over-the-counter market (NASDAQ
Symbol: NHES) on November 25, 1986, and is quoted on the NASDAQ system.
Approximately 941,290 shares of the Company's outstanding common stock are held
by Dr. Diethrich, the Company's former Chairman of the Board, and Mr. Petras,
the Company's President, and may not be sold except pursuant to an effective
registration statement filed by the Company or an applicable exemption
(including Rule 144 promulgated under the Securities Act of 1933).
The following table of market price information sets forth the range of high and
low bid prices for the Company's Common Stock (based on pre-split stock prices)
during the past two fiscal years as quoted on NASDAQ. These quotations reflect
interdealer prices, without retail markups, mark-downs or commissions, and may
not reflect actual transactions.
Market Price
YEAR ENDED: January 31, 1995
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
HIGH 5-1/2 4-5/8 4-3/8 4
LOW 3-1/2 3-3/4 2-7/8 2-3/4
YEAR ENDED: January 31, 1994
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
HIGH 6-1/8 3-3/8 3 5
LOW 2-1/4 2-1/4 2-1/8 2-1/2
The Company has not declared or paid any dividends on its common stock to date
and does not plan to do so in the foreseeable future. On January 31, 1995, there
were approximately 250 shareholders of record and approximately 750 to 1,000
total shareholders.
The Company has 1,000,000 shares of authorized 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. Through January 31, 1994, the
Company was required to pay a quarterly dividend equal to a certain percent of
the Company's gross quarterly revenue (the cumulative percentage based dividend
as defined in the Preferred Stock Agreement) beginning with the first quarter of
the fiscal year ending January 31, 1994. By amendment of the applicable
Certificate of Designation effective June 14, 1994, the right to receive
dividends on the Preferred Stock (including all accrued but unpaid dividends)
was eliminated.
Effective June 14, 1994, each share of the Preferred Stock is convertible, at
the option of the holder, into four shares of the Company's Common Stock. In
addition, the holder of the Preferred Stock is entitled to one votes for each
share of Common Stock into which the Preferred Stock is convertible. Upon
liquidation or dissolution of the Company, the holder of the Preferred Stock
shall have liquidating preferences as to payment for any accrued or unpaid
dividends and a fixed amount equal to $2.40 per share. Effective June 14, 1994
the Preferred Stock is no longer redeemable. Accrued and unpaid preferred
dividends are no longer payable due to the amendment described above. As a
result of the amendment, the Preferred Stock is now considered a common stock
equivalent for purposes of determining the primary earnings per share.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except as noted herein, all references in this Item 6 to the Company include the
Company and its subsidiaries consolidated.
Restated Financial Statements
In connection with the preparation of the Company's financial statements for the
year ended January 31, 1996, the Company determined that the application of its
accounting policy regarding recognizing revenues on its sales of software
products and related services did not comply in all respects with the technical
requirements and interpretations of Statement of Position 91-1, "Software
Revenue Recognition." Accordingly, the Company has conformed its revenue
recognition for the affected transactions and has restated its previously
reported accumulated deficit for the cumulative effect of this change.
Additionally, the Company's fiscal 1995 quarterly and annual consolidated
financial statements and fiscal 1996 quarterly consolidated financial statements
have also been restated. See Note 1 of Notes to Consolidated Financial
Statements. The information in the following discussion is presented after
restatement of the financial statements.
Results of Operations
For the fiscal year ended January 31, 1995, the Company had a net loss available
for common stockholders of $775,727 compared with a net income available for
common stockholders of $180,133 for the fiscal year ended January 31, 1994.
During the past fiscal year, 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 and 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
the current or at increasing levels. The investment in the sales and client
services functions (which are designed to enable to 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.
During the fourth quarter the Company was expecting to finalize a significant
agreement with a large hospital organization to assist it to establish in-house
medical call centers for its constituent hospitals. The Company had been
initially selected as the preferred vendor by this organization and therefore
directed significant selling efforts to its constituents hospitals in
anticipation of reaching final agreement in January. A final agreement was not
signed by the end of January 1995, and the Company has since been informed by
the organization that it has elected to create a service bureau to meet its call
center needs and therefore declined to enter into any relationship with the
Company. The Company is no longer anticipating any revenues from this
opportunity, yet it does not preclude the Company from selling its products and
services to constituent hospitals. As a result of the Company's efforts to
finalize this agreement and generate potential sales with this organization and
its constituents hospitals, the Company believes it experienced "lost
opportunity" with respect to potential business it believes it could have
obtained from others had it not directed the resources toward the relationship
with this organization. The second non-recurring event which adversely impacted
the Company's operations was the write-off of certain accounts receivable
related to the Company's distribution strategy to penetrate the Northeast market
(primarily New York and New Jersey). The Company entered into agreements with
three organizations whereby the organizations agreed to purchase certain of the
Company products and utilize the products to establish service contracts with
hospitals. The purchasers defaulted on their obligations in the fourth quarter
and the Company wrote-off these accounts, which resulted in $543,240 in bad debt
expense. The Company has discontinued this strategy.
The Company's operations are also currently being affected by consolidation,
alliances and mergers in the healthcare market. The Company continued to
experience that certain prospective clients delayed or froze expenditures during
the fiscal year, consequently delaying or precluding the purchase of the
Company's products. 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 industry.
While there continue to be uncertainties associated with healthcare reform, the
Company's management believes that the November 1994 congressional elections
have decelerated healthcare reform at the federal government level; however, the
Company 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 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.
Revenues and operating results 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. Revenues for fiscal year 1995 increased approximately 24% to
$13,350,268, compared to $10,794,076 in fiscal year 1994. The increase in net
revenues in fiscal year 1995 from fiscal year 1994 is the result of increased
revenues from initial license and support fees, materials sales revenues and
marketing service revenues from FSG.
License fees represent revenues primarily from the initial sale of the Company's
products. The Company's existing product lines consist of its Profit
Acceleration System(TM) ("PAS") (which includes nine health screening and
education products), Centramax, Centramax Plus, Referral One(TM), Health
Direct(TM), Health Information Library and its interactive voice response
products. In the fourth quarter the Company introduced Windows-based Centramax.
M and Centramax. M Plus, and the ninth PAS product.
Revenue generated from license fees of the Company's products accounted for
approximately 50% of the Company's total revenues in fiscal year 1995 compared
to 51% in fiscal year 1994. Revenue from support, materials and services
accounted for 50% of the Company's total revenue in fiscal year 1995 compared to
49% in fiscal year 1994. The Company's management believes that revenues from
initial license fees will continue to provide a significant amount of the
Company's future revenues. The Company is exploring and will continue to explore
opportunities to increase recurring revenue and decrease the reliance of
operating results on initial fee revenues.
License fees increased to $6,647,145 for fiscal year 1995 from $5,488,566 in
fiscal year 1994. The increase in license fee revenue in fiscal year 1995 from
fiscal year 1994 is due to revenue generated from the Company's medical call
center products such as Centramax Plus, Centramax. M Plus and the interactive
voice response products. Certain of the Company's products--PAS, The
Professionals, Health Direct and HealthFone--are offered on an exclusive basis
and therefore as the Company places these products, the number of available
markets decreases. The Company's management believes that there are still an
adequate number of markets available for all of its exclusive products and
therefore these products will continue to generate license fee revenue in the
foreseeable future, although there are no assurances in that regard.
Support fees, material and service revenue was $6,703,123 in fiscal year 1995,
compared to $5,305,510 in fiscal year 1994. Support fees represent charges to
customers, 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. Support fee revenue increased in fiscal year 1995
from fiscal year 1994 due to the increase in the number of customers. The
Company believes that as the number of customers it has for all products
increases, revenues generated from recurring support fees will continue to
increase. Revenues generated from the sale of materials in fiscal year 1995
remained at comparable levels to fiscal year 1994. Material sales represents the
sale of printed questionnaires and reports from the Company's PAS and quarterly
publication of the Health Direct product. The Company presently does not expect
any significant increase or decrease in future revenue from the Health Direct
product or material sales to PAS users. Service revenue (which represents
strategic and creative services revenue generated from FSG) was approximately $2
million for fiscal 1995 and increased $600,000 from fiscal 1994. The Company's
management believes that service revenue from FSG will continue to increase but
there are no assurances that service revenue from FSG will continue to increase.
Operating Expense. Total operating expenses incurred for fiscal year 1995
increased 36% to $14,153,758, compared to $10,433,695 for fiscal year 1994. The
primary reason for this increase in total operating expenses in fiscal year 1995
compared to fiscal year 1994 is due to the increased investment made by the
Company in selling, product development and support functions, one-time
write-off certain accounts receivable and increased expenses associated with FSG
operations.
Cost of Revenues. The cost of revenues includes the costs associated with
license fees to implement and install the products and costs of materials sold.
The cost of initial license fees increased to $1,900,102 in fiscal year 1995,
from $1,495,332 in fiscal year 1994. The increase in the cost of initial license
fees in fiscal year 1995, compared to fiscal year 1994, is due primarily to the
increase in costs associated with increased sales of the Centramax Plus and the
interactive voice response product lines.
The cost of materials sold, which represents the cost of printed questionnaires
and reports to PAS users and, the costs associated with the delivery of the
Health Direct product and variable cost of delivery of services by FSG,
increased to $1,854,255 in fiscal year 1995, from $1,335,405 in fiscal year
1994. The increase in the cost of materials in fiscal year 1995 compared to
fiscal year 1994, is due to the increased costs associated with the increased
revenue generated from the support fees and services of FSG.
Selling, Product Development and Support. Selling, product development and
support expenses were $7,355,514 in fiscal year 1995, compared to $5,307,705 in
fiscal year 1994. The increase in fiscal year 1995 from fiscal year 1994 is due
primarily to increased costs associated with the increase in the number of sales
and product support and development staff necessary to support the Company's
products. The Company will continue to invest in product development, service
support and sales staffs. In addition as the Company's customer and product
support obligations increase, it anticipates that additional staff and office
space will be needed. The Company believes that additional staffing and office
space will be needed during fiscal year 1996, which in turn will increase
operating expenses.
General and Administrative. General and administrative expenses were $ 1,762,454
in fiscal year 1995, compared to $1,766,521 in fiscal year 1994. The decrease in
general and administrative expense in fiscal year 1995 from fiscal year 1994 is
due primarily to a reduction of certain professional services expenses.
Depreciation and Amortization. Depreciation and amortization expenses were
$493,870 in fiscal year 1995, compared to $261,959 in fiscal year 1994. The
increase is due primarily to an increase in the amortization of capitalized
software development costs of certain products and amortization of goodwill
associated with the FSG acquisition.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $787,562 for fiscal year 1995, from $266,773 for the fiscal year 1994. The
change in the provision for doubtful accounts is adjusted by the Company to
reflect potentially uncollectible accounts receivable. The increase of $520,789
was a result of the one-time write-off of certain accounts as previously
discussed. The Company believes that the allowance for doubtful accounts is
adequate, given the amount of receivables, the payment terms and the Company's
history of collecting receivables.
Liquidity and Capital Resources.
As of January 31, 1995, the Company had a working capital deficit (current
assets minus current liabilities) of $1,704,367, compared to a working capital
deficit of $303,765 as of January 31, 1994. The decrease in working capital was
primarily caused by the Company's loss for the fiscal year. The Company's
accounts receivable balance increased to $3,681,724 (including long term amounts
of $320,815) at January 31, 1995 from $2,883,943 at January 31, 1994. During the
first nine months of the Company's fiscal year it continued to experience that
payment of the initial license fees was often deferred, on a negotiated basis,
for a period after the license agreements were executed. As a result during the
past fiscal year, the average payment of initial fee receivables increased to
approximately 200 days from 180 days a year earlier. The Company has taken steps
to reduce payment terms and as a result of these steps has experienced the
number of days to collect payment for the initial fees has begun to decrease. As
a result of shorter payment terms the Company expects that the trend of improved
cash receipts from initial fee receivables will continue in the foreseeable
future although there are no assurances.
The Company has two $500,000 lines of credit with a bank as of January 31, 1995.
One of the $500,000 credit lines is secured by accounts receivable and the other
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. Borrowings against this credit line are
secured by accounts receivable. Due to the Company's fiscal 1995 operating loss
and resulting noncompliance with certain borrowing covenants, the bank has
reduced the line of credit secured by accounts receivable from $500,000 to
$325,000. This $325,000 line of credit expires on May 16, 1995 however, the
Company believes the bank will extend the line for an additional sixty days
based on the attainment of certain requirements. If the Company is not
successful in securing an extension on the line of credit and in obtaining an
increase in the line of credit, it would have to seek additional sources of
capital for general working capital purposes. The Company continues to seek
alternative sources to raise additional capital to support its general working
capital needs.
The Company is currently dependent on the established bank lines of credit for
its daily operating cash requirements. The Company is in the process of
evaluating opportunities to reduce the number of days it takes to collect the
initial fee accounts receivable. If the credit line is further reduced or
terminated or if the Company is not successful in reducing the number of days to
collect on its outstanding accounts receivable, additional capital will be
required. 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 a minimum of
$300,000 in cash from the prepayment 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, in the Company's
opinion based on historical trends, reduce cash outflows by approximately
$482,000 over the fiscal years ending January 31, 1995 and 1996. 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 amount 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 turnover in or nonperformance 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 believes that such
actions will help minimize the effect of circumstances which could adversely
affect the Company's operating performance.
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.
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 its operations and its existing bank line of credit. The
Company believes that while its current operations can be supported by available
resources, assuming adequate working capital arrangements are obtained, 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 obtaining a line of credit through asset-based financing of its
accounts receivables and a future secondary stock offering. Although management
believes that available borrowings coupled with cash flow from operations will
be adequate for its operating needs for fiscal 1996, there are no assurances the
Company will be successful at raising additional capital.
Item 7. Financial Statements
SEE ATTACHED
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
PART III
The information required here by Items 9, 10, 11 and 12 is incorporated by
reference to the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission no later than May 31,
1995.
Item 13. Exhibits and Reports on Form 8-K
A. 1. Financial Statement Pages Page or Method of Filing
(1) Report of Independent Accountants Page 17
(2) Financial Statements and notes to consolidated Pages 18 to 29
financial statements of the Company, including
Balance Sheets as of January 31, 1995 and
related Statements of Operations,
Stockholders' Equity and Cash Flows for each
of the years in the two-year period ended
January 31, 1995.
All other schedules have been omitted because of the absence of conditions under
which they are required or because the required material information is included
in the Financial Statements or Notes to the Financial Statements included
herein.
(1) Exhibits required by Item 601 of Regulation S-B are set forth on
the Exhibit Index to this report which is hereby incorporated
herein by this reference.
(2) Management contracts and compensatory plans required to be filed
as an exhibit list form.
(a) Employment Agreements with Dr. Larry Gettman and Jeffrey Zywicki.
Incorporated by Reference to Exhibit 10.9 of S-18 No. 33-9397-LA.
(b) Form of Stock Option Agreement with Key Employees and Officers.
Incorporated by Reference to Exhibit 10.32 to Form 10-K filed for
the year ended January 31, 1989.
(c) Form of Stock Option Agreement with Outside Directors.
Incorporated by Reference to Exhibit 10.33 to Form 10-K for
the year ended January 31, 1989.
(d) Key Executive Employment and Severance Agreements. Incorporated by
Reference to Exhibit 10.44 to Form 10KSB filed for the fiscal year
ended January 31, 1994.
(e) Employment Agreement with A. Neal Westermeyer. Incorporated by
Reference to Exhibit 10.46 to Form-10-KSB filed for the fiscal
year ended January 31, 1994.
B. Reports on Form 8-K for the fourth quarter of fiscal year 1994
NONE
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
authorized.
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Registrant)
By:
----------------------------------------
Gregory J. Petras
President, Chief Executive Officer
Date: May 15, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/Gregory J. Petras
- --------------------- President (Principal May 15, 1996
Gregory J. Petras Executive Officer) and
Director
/s/John Delmatoff
- --------------------- Director May 15, 1996
John Delmatoff
/s/Gardiner S. Dutton
- --------------------- Director May 15, 1996
Gardiner S. Dutton
/s/James W. Myers
- --------------------- Director May 15, 1996
James W. Myers
/s/Steven D. Wood, Ph.D.
- --------------------- Director May 15, 1996
Steven D. Wood, Ph.D.
/s/Jeffrey T. Zywicki
- --------------------- Senior Vice President-Finance, May 15, 1996
Jeffrey T. Zywicki Treasurer and Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
2.1 Plan of Reorganization and Incorporated by Reference
Agreement of Merger to Form 8-k filed July 13,
1994
3.1 Certification of Incorporation Incorporated by Reference
of the Company to
Exhibit 3.1 of S-18
No. 33-9396-LA
3.2 Bylaws of the Company Incorporated by Reference
to Exhibit 3.2 of S-18
No. 33-9396-LA
4.1 Specimen Certificate Incorporated by Reference
Representing $.001 par value to Exhibit 4.1 of S-18
Common Stock No. 33-9397-LA
4.2 Form of Warrant to the Incorporated by Reference
Underwriter to Exhibit 4.2 of
Amendment No. 2 to S-18
No. 33-9397-LA
4.3 Form of Warrant to the Incorporated by Reference
Advisor to Exhibit 4.3 of
Amendment No. 2 to S-18
No. 33-9397-LA
10.1 Confirmation of License and Incorporated by Reference
Agreement Regarding Purchase to Exhibit 10.1 of S-18
Option and related letter No. 33-9397-LA
agreement dated October 2, 1986
10.2 Franchising and Licensing Incorporated by Reference
Agreement with The Arizona to Exhibit 10.2 of
Heart Institute, Ltd. Amendment No. 1 to S-18
No. 33-9397-LA
10.3 Assignment of Rights to The Incorporated by Reference
Heart Test to Exhibit 10.3 of S-18
No. 33-9397-LA
10.4 Shareholders Contribution and Incorporated by Reference
Conversion Agreement as to Exhibit 10.4 of S-18
Amended, and related notes held No. 33-9397-LA
by Shareholders and Affiliated
10.5 Form of Outstanding Warrants Incorporated by Reference
to Exhibit 10.5 of S-18
No. 33-9397-LA
<PAGE>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
10.6 Promissory Notes in the Incorporated by Reference
Aggregate amount of $100,000 to Exhibit 10.6 of S-18
Principal No. 33-9397-LA
10.7 Lease for Company's Office Incorporated by Reference
Space dated August 22, 1986 to Exhibit 10.7 of S-18
No. 33-9397-LA
10.7.1 Amendment to Lease for Incorporated by Reference
Company's Office Space dated to Exhibit 10.7.1 to Form
August 22, 1986 10-K filed for the year
Ended January 31, 1987
10.8 Agreement and Plan of Merger Incorporated by Reference
Exhibit 10.8 of S-18
No. 33-9397-LA
10.9 Employment Agreements with Incorporated by Reference
Dr. Larry Gettman and Exhibit 10.9 of S-18
Jeffrey Zywicki No. 33-9397-LA
10.10 Line of Credit Documentation Incorporated by Reference
to Exhibit 10.10 of S-18
No. 33-9397-LA
10.11 Promissory Note in the Incorporated by Reference
Principal Amount of $25,801 to Exhibit 10.11 of S-18
No. 33-9397-LA
10.12 Company Indemnities Incorporated by Reference
to Exhibit 10.12 of S-18
No. 33-9397-LA
10.13.1 Forms of Franchise Incorporated by Reference
Agreement used in 1987 to Exhibit 10.13.1 to
Amendment No. 2 of S-18
No. 33-9397-LA
10.13.2 Forms of Franchise Incorporated by Reference
Agreement used in 1986 to Exhibit 10.13.2 to
Amendment No. 1 and
Amendment No. 2 to S-18
No. 33-9397-LA
10.13.3 Forms of Franchise Agreement Incorporated by Reference
used in 1985 to Exhibit 10.13.3 to S-18
No. 33-9397-LA
10.13.4 Forms of Franchise Agreement Incorporated by Reference
used in 1984 to Exhibit 10.13.4 to S-18
No. 33-9397-LA
<PAGE>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
10.13.5 Franchise Agreements Executed Incorporated by Reference
Agreement to Exhibit 10.13.5 of S-18
No. 33-9397-LA
10.13.6 Existing Area Franchise Incorporated by Reference
Agreement to Exhibit 10.13.6 of S-18
No. 33-9397-LA
10.13.7 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1987 to Form 10-K filed for
year ended January 31,
1988
10.13.8 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1988 to Form 10-K filed for the
year ended January 31,1989
10.13.9 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1989 to Form 10-K filed for the
year ended January 31,1990
10.14 Forms of Rescission offers Incorporated by Reference
to Exhibit 10.14 of S-18
No. 33-9397-LA
10.15 Rescission and Refund Responses Incorporated by Reference
for internal use of Programs to Exhibit 10.15 of S-18
No. 33-9396-LA
10.16 Agreements with Corporations Incorporated by Reference
for internal use of Programs to Exhibit 10.16 of S-18
No. 33-9397-LA
10.17 South Dakota and Wisconsin Incorporated by Reference
"No Action" letters and certain to Exhibit 10.17 of
related documents Amendment No. 1 to S-18
No. 33-9397-LA
10.18 Revised Exhibit A to Form of Incorporated by Reference
Stock Escrow Agreement required to Exhibit 10.18 of
by the Arizona Corporation Amendment No. 1 to S-18
Commission and Shareholder No. 33-9397-LA
lock-up agreements
10.19 Promissory Note in Principal Incorporated by Reference
Amount of $50,000 and related to Exhibit 10.19 of
materials Amendment No. 1 to S-18
No. 33-9397-LA
10.20 Agreement with Advisor Incorporated by Reference
to Exhibit 10.20 of
Amendment No. 1 to S-18
No. 33-9397-LA
<PAGE>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
10.21 Notification of Option to Incorporated by Reference
Purchase the Personal Fitness to Exhibit 10.21 to Form
Profile Software 10-K filed for the fiscal
year ended January 31, 1987
10.21.1 List of Subsidiaries Page 37
10.22 Promissory Note in Principal Incorporated by Reference
Amount of $75,000 for purchase to Exhibit 10.22 to Form
of Personal Fitness Profile 10-K filed for the fiscal
Software and related materials year ended January 31, 1987
10.23 Employment Agreement with Incorporated by Reference
James Wichterman to Exhibit 10.23 to Form
10-Q filed for the quarter
ended April 30, 1987
10.24 Term Note Payable in the Incorporated by Reference
Principal Amount of $75,000 to Exhibit 10.24 to Form
10-Q filed for the
quarter ended April 30, 1987
10.25 Software Customization and Incorporated by Reference
License Agreement with to Exhibit 10.25 to Form
Resource Center Enterprises, 10-Q filed for the
Inc. dated May 22, 1987 quarter ended July 31, 1987
10.26 Med Plus Corporation Distribution Incorporated by Reference
and Sales Agreement dated to Exhibit 10.26 to Form
September 19, 1987 10-Q filed for the quarter
ended October 31, 1987
10.27 Distribution Agreements Incorporated by Reference
for Marketing Consultants to exhibit 10.27 to Form
10-Q filed for the quarter
ended October 31, 1987
10.28 Consulting, Development Incorporated by Reference
and License Agreement with to Exhibit 10.28 to Form
Humana Inc., dated December 10-K filed for the year
31, 1987 ended January 31, 1988
10.29 Agreement with Healthscan, Inc. Incorporated by Reference
to discontinue use of Healthscan to Exhibit 10.29 to Form
10-K filed for the year
ended January 31, 1988
10.30 Stock Option Letter with Incorporated by Reference
Jim Wichterman to Exhibit 10.30 to Form
10-K filed for the year
ended January 31, 1988
<PAGE>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
10.31 Employment Agreement with Incorporated by Reference
Dan Bergman to Exhibit 10.31 to Form
10-K filed for the year
ended January 31, 1988
10.32 Form of Stock Option Agreement Incorporated by Reference
with Key Employees and Officers to Exhibit 10.32 to Form
10-K filed for the year
ended January 31, 1989
10.33 Form of Stock Option Agreement Incorporated by Reference
with Outside Directors to Exhibit 10.33 to form
10-K filed for the year
ended January 31, 1989
10.34 Severance Agreement with Incorporated by Reference
Gregory J. Petras to Exhibit 10.34 to Form
10-K filed for the year
ended January 31, 1989
10.35 $100,000 Installment Note Incorporated by Reference
Payable to Three Carollo to Exhibit 10.35 to Form
Partnership 10-Q filed for the quarter
ended July 31, 1989
10.36 Purchase, Consulting and Incorporated by Reference
Distribution Agreement with to Exhibit 10.36 to Form
Micromedex, Inc. 10-K filed for the fiscal
year ended January 31, 1991
10.37 $125,000 Installment Note Incorporated by Reference
Payable to Gardiner S. Dutton to Exhibit 10.37 to Form
as Agent 10-Q for the quarter ended
July 31, 1990
10.38 Asset Purchase Agreement with Incorporated by Reference
Prentice Hall, Inc. to purchase to Exhibit 10.38 to Form
Riskscan July 31, 1990
10.39 Lease for Company's Office Space Incorporated by Reference
dated October 1990 to Exhibit 10.39 to Form 10-K
filed for the fiscal year
ended January 31, 1991
10.40 Exclusive Distributor Agreement Incorporated by Reference to
with Vim & Vigor, Inc. Exhibit 10.40 to Form 10-K
filed for the fiscal year
ended January 31, 1992.
10.41 Exclusive Agency Agreement Incorporated by Reference to
with Joseph Stevens Group, Inc. Exhibit 10.41 to Form 10-K
filed for the fiscal year
ended January 31, 1992
<PAGE>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
10.42 Development and Distribution Incorporated by Reference to
Agreement with Parlay Exhibit 10.42 to Form 10-KSB
International Communication, Inc. filed for fiscal year ended
January 31, 1993
10.43 Amended and Restated Purchase, Incorporated by Reference to
Consulting and Distribution Exhibit 10.43 to From 10-KSB
Agreement with Micromedex, Inc. filed for fiscal year ended
January 31, 1993
10.44 Employment Agreement with Gregory J. Incorporated by Reference to
Petras and Form Other key Executives the Form 10-KSB filed for the
fiscal year ended January 31,
1993
10.45 1988 Stock Option Plan Incorporated by Reference to
1988 Proxy statement
10.46 Employment Agreement with Incorporated by Reference to
A. Neal Westermeyer Exhibit 10.46 to Form 10-KSB
filed for fiscal year ended
January 31, 1994
10.47 Amendment and Restated Certificate Incorporated by Reference to
of Designation Agreement of Series A the Form 10-QSB filed for the
Preferred Stock dated, June 14, 1994 fiscal quarter ended April
30, 1994
10.48 Pediatric Protocol Publishing Incorporated by Reference to
Agreement with Barton D. Schmitt Exhibit 10.48 to Form 10-KSB
M.D. for the fiscal year ended
January 31, 1995
10.49 Consulting Agreement with Incorporated by Reference to
Steven Poole, M.D. Exhibit 10.49 to Form 10-KSB
for the fiscal year ended
January 31, 1995
10.50 First Amendment to Amended and Incorporated by Reference to
Restated Purchase, Consulting and Exhibit 10.50 to Form 10-KSB
Distribution Agreement for the fiscal year ended
January 31, 1995
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Health Enhancement Systems, Inc.:
We have audited the accompanying consolidated balance sheet of NATIONAL HEALTH
ENHANCEMENT SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of
January 31, 1995 (as restated - see Note 1), and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended January 31, 1995 (as restated - see
Note 1). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Health Enhancement
Systems, Inc. and subsidiaries as of January 31, 1995 (as restated-See Note 1),
and the results of their operations and their cash flows for each of the two
years in the period ended January 31, 1995 (as restated-See Note 1), in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
May 14, 1996.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1995 (AS RESTATED - SEE NOTE 1)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and 3) $ 1,480,765
Accounts receivable, net of allowance for doubtful accounts
of $567,000 (Notes 2 and 3) 3,360,909
Prepaid, deferred expenses and supplies (Note 2) 413,288
-------------
Total current assets 5,254,962
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization of $604,000 (Note 2) 749,370
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 825,939
EXCESS OF PURCHASE PRICE OVER RELATED NET ASSETS
ACQUIRED (Notes 1 and 2) 631,067
OTHER ASSETS (Note 2) 468,968
------------
$ 7,930,306
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations under
capital leases (Notes 1 and 3) $ 1,390,813
Accounts payable 1,323,235
Accrued liabilities (Note 5) 1,977,692
Deferred revenue (Note 2) 2,267,589
------------
Total current liabilities 6,959,329
------------
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL
LEASES, net of current installments (Note 3) 252,270
------------
DEFERRED REVENUE, net of current portion (Note 2) 273,161
------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3, 4, 6 and 8)
STOCKHOLDERS' EQUITY (Notes 1 and 6):
Series A convertible preferred stock, $.001 par value, 1,000,000 shares
authorized, 125,000 shares issued and outstanding;
liquidation preference over common stockholders of $2.40 per share 125
Common stock, $.001 par value, 5,000,000 shares authorized,
4,163,636 shares issued and 3,791,220 shares outstanding 3,792
Capital contributed in excess of par value 3,442,241
Accumulated deficit, as restated (Note 1) (2,997,047)
Less: treasury stock, 3,568 shares, at cost (3,565)
------------
445,546
------------
$ 7,930,306
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -------------
as restated as restated
(Note 1) (Note 1)
<S> <C> <C>
REVENUES (Note 2):
License fees $ 6,647,145 $ 5,488,566
Support fees, marketing services and material sales 6,703,123 5,305,510
------------- -------------
Total revenues 13,350,268 10,794,076
------------- -------------
OPERATING EXPENSES:
Cost of initial license fees 1,900,103 1,495,332
Cost of materials sold 1,854,255 1,335,405
Selling, product development and support 7,355,514 5,307,705
General and administrative 1,762,454 1,766,521
Depreciation and amortization 493,870 261,959
Provision for doubtful accounts 787,562 266,773
------------- -------------
Total operating expenses 14,153,758 10,433,695
------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (803,490) 360,381
PROVISION FOR INCOME TAXES (Note 7) - 12,000
------------- -------------
Net income (loss) $ (803,490) $ 348,381
============= =============
PREFERRED STOCK DIVIDENDS (Note 6) 27,763 (168,248)
------------- -------------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS $ (775,727) $ 180,133
============= =============
NET INCOME (LOSS) PER COMMON SHARE (Note 6) $ (.21) $ .04
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 6) 3,780,346 4,175,610
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994 (AS RESTATED-SEE NOTE 1)
<TABLE>
<CAPTION>
Capital
Series A Convertible Contributed
Preferred Stock Common Stock In Excess of
Shares Amount Shares Amount Par Value
------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1993, as previously
reported 125,000 $ 125 3,286,012 $ 3,286 $ 3,051,239
Less- Adjustment for the cumulative
effect of conforming the Company's
revenue recognition policy with AICPA
Statement of Position 91-1, "Software
Revenue Recognition" (Note 1) - - - - -
--------- --------- ----------- --------- -------------
BALANCE AT JANUARY 31, 1993, as restated
(Note 1) 125,000 125 3,286,012 3,286 3,051,239
Issuance of common stock - FSG
acquisition (Note 1) - - 311,112 311 242,816
Stock options exercised - - 35,000 35 16,681
Issuance of common stock (Note 8) - - 20,000 20 (10)
Net income, as restated (Note 1) - - - - -
Convertible preferred stock dividends - - - - -
--------- --------- ----------- --------- -------------
BALANCE AT JANUARY 31, 1994, as restated
(Note 1) 125,000 125 3,652,124 3,652 3,310,726
Stock options exercised - - 63,500 64 37,096
Shares released from escrow - FSG (Note 1) - - 75,596 76 94,419
Preferred dividends forgiven (Note 6) - - - - -
Net loss, as restated (Note 1) - - - - -
--------- --------- ----------- --------- -------------
BALANCE AT JANUARY 31, 1995, as restated
(Note 1) 125,000 $ 125 3,791,220 $ 3,792 $ 3,442,241
========= ========= =========== ========= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Treasury
Deficit Stock Total
---------------- ------------- ----------
<S> <C> <C> <C>
BALANCE AT JANUARY 31, 1993, as previously
reported $ (1,747,806) $ (3,565) $ 1,303,279
Less- Adjustment for the cumulative
effect of conforming the Company's
revenue recognition policy with AICPA
Statement of Position 91-1, "Software
Revenue Recognition" (Note 1) (653,647) - (653,647)
-------------- --------- -------------
BALANCE AT JANUARY 31, 1993, as restated
(Note 1) (2,401,453) (3,565) 649,632
Issuance of common stock - FSG
acquisition (Note 1) - - 243,127
Stock options exercised - - 16,716
Issuance of common stock (Note 8) - - 10
Net income, as restated (Note 1) 348,381 - 348,381
Convertible preferred stock dividends (168,248) - (168,248)
-------------- --------- -------------
BALANCE AT JANUARY 31, 1994, as restated
(Note 1) (2,221,320) (3,565) 1,089,618
Stock options exercised - - 37,160
Shares released from escrow - FSG (Note 1) - - 94,495
Preferred dividends forgiven (Note 6) 27,763 - 27,763
Net loss, as restated (Note 1) (803,490) - (803,490)
-------------- --------- -------------
BALANCE AT JANUARY 31, 1995, as restated
(Note 1) $ (2,997,047) $ (3,565) $ 445,546
============== ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- -----------
as restated as restated
(Note 1) (Note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (803,490) $ 348,381
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization 493,870 261,959
Provision for doubtful accounts 787,562 266,773
Changes in assets and liabilities-
Increase in accounts receivable (1,515,148) (1,107,080)
Decrease (increase) in prepaid, deferred expenses and supplies 61,052 (60,670)
Increase in accounts payable 312,594 38,921
Increase in accrued liabilities 213,280 495,644
Increase in deferred revenue 868,967 579,866
------------ ------------
Net cash provided by operating activities 418,687 823,794
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (90,447) (68,401)
Payments for capitalized software and other development costs (635,085) (271,501)
Increase in other assets (18,781) (93,007)
Cash paid for the acquisition of First Strategic Group and related costs - (94,058)
------------ ------------
Net cash used in investing activities (744,313) (526,967)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 37,160 16,716
Proceeds from issuance of notes payable 2,850,000 1,260,000
Principal payments on notes payable and capital leases (2,237,935) (1,295,823)
Payments of dividends on convertible preferred stock (42,431) (125,817)
------------ ------------
Net cash provided by (used in) financing activities 606,794 (144,924)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 281,168 151,903
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,199,597 1,047,694
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Notes 2 and 3) $ 1,480,765 $ 1,199,597
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 139,000 $ 55,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property and equipment acquired under capital leases $ 339,681 $ 263,465
============ ============
As part of the acquisition of First Strategic Group, in fiscal 1995 and
1994, the Company issued 75,596 and 311,112 shares, respectively, of
common stock to the former owners (Note 1).
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(1) ORGANIZATION:
National Health Enhancement Systems, Inc. (the Company) was incorporated in July
1983 as AHI Limited for the purpose of developing, licensing and marketing
health evaluation programs to hospitals, medical groups, clinics and physicians.
In October 1986, the Company changed its name to National Health Enhancement
Systems, Inc. and reincorporated in the State of Delaware. The Company presently
distributes proprietary software-supported products and services designed to
assist healthcare providers reduce the cost of healthcare and improve service to
their customers.
At January 31, 1995, the Company had a working capital deficit. The deficit in
working capital was primarily caused by the Company's net loss during fiscal
1995. The Company has also experienced an increase in its accounts receivable at
January 31, 1995 compared to January 31, 1994, due to extended payment terms
offered to certain customers. The Company is currently dependent on its bank
lines of credit (Note 3) for its daily operating cash requirements. Due to the
Company's net loss in fiscal 1995, the bank reduced the aggregate available
borrowings under the lines of credit from $1 million at January 31, 1995, to
$825,000. The lines of credit expire in May 1995. Renewal of the lines is
subject to certain conditions which are described in Note 3. If the Company is
not successful in securing an extension of the lines of credit, it will have to
seek additional sources of capital. The Company has taken steps to reduce the
time required to collect accounts receivable, primarily by reducing payment
terms. In addition, the borrowings under the lines of credit were paid in full
subsequent to year-end. Although management believes the lines of credit will be
renewed, the Company continues to seek alternative sources of capital for its
working capital needs. Management believes that available borrowings coupled
with cash flows from operations will be adequate for its operating needs for
fiscal 1996.
Fourth Quarter Operating Results
During the fourth quarter of fiscal 1995, the Company had a net loss of
approximately $950,000 (as restated-see below). The net loss resulted primarily
from the write-off of certain accounts receivable due from three separate
organizations who defaulted on their obligations during the fourth quarter in
the amount of approximately $543,000. In addition, during the fourth quarter,
the Company was negotiating a significant agreement with a large national
hospital organization that had initially selected the Company as its preferred
vendor. The Company directed significant selling efforts towards finalizing this
agreement which ultimately did not materialize. As a result of the Company's
efforts to finalize this agreement, management believes it experienced lost
opportunity with respect to other potential sales the Company might have
otherwise pursued.
<PAGE>
-2-
Acquisition of First Strategic Group, Ltd.
In April 1993, the Company acquired, by merger into a newly formed Company
subsidiary, all of the assets and business of First Strategic Group, Ltd. (FSG),
a California corporation. The Company paid $50,000 in cash, issued a note
payable of $250,000 and issued 755,556 shares of common stock of the Company in
exchange for all of the issued and outstanding capital stock of FSG. The note
was paid in full during 1993. Of the common stock issued by the Company, 311,112
shares were issued at the time of the merger and 75,596 shares were issued
effective February 1, 1994, upon FSG meeting their fiscal 1994 performance
target. The remaining shares are held in escrow and will be delivered to the
former owners of FSG upon meeting certain performance targets as specified in
the agreement. The shares held in escrow are not included in the earnings per
share computation as such shares are not deemed outstanding.
The following represents the unaudited pro forma statement of operations for the
fiscal year ended January 31, 1994 (as restated - see below), of the Company
and FSG as if the acquisition occurred on February 1, 1993. The unaudited
results have been prepared for comparative purposes only and do not purport to
be indicative of the results of operations which actually would have resulted
had the merger been in effect as of February 1, 1993, (amounts in 000's except
per share amounts):
Revenues $ 10,806
Net income $ 210
Net income available for common stockholders $ 42
==========
Net income per common share $ .01
==========
Weighted average shares outstanding 4,254
==========
FSG maintains a market position as healthcare marketing and advertising
strategists and emphasizes the role of strategic planning in the healthcare
market. The Company believes that the acquisition of FSG supports the Company's
short- and long-term strategic goals.
Restatement of Previously Issued Financial Statements
In connection with its fiscal 1996 year-end closing, the Company determined that
the application of its accounting policy regarding recognizing revenues on its
sales of software products and related services did not comply, in all respects,
with the technical requirements and interpretations of AICPA Statement of
Position 91-1, "Software Revenue Recognition" (SOP 91-1). Accordingly, the
Company has conformed its accounting policy and has retroactively restated its
previously issued financial statements for fiscal 1994 and 1995 to give effect
to full compliance with SOP 91-1. The cumulative effect of $653,647, has been
reflected as an adjustment to the accumulated deficit balance of $1,747,806, as
of January 31, 1993, as previously reported. Additionally, the Company's fiscal
1995 quarterly consolidated financial statements have also been restated.
<PAGE>
-3-
The effect of the change on the Company's fiscal 1994 and 1995 operating results
is as follows:
<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1995
------------------------------- --------------------------
As Reported As Restated As Reported As Restated
--------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 11,216,526 $ 10,794,076 $ 13,061,898 $ 13,350,268
Income (loss) before
provision for income
taxes 634,973 360,381 (985,680) (803,490)
Net income (loss) 622,973 348,381 (985,680) (803,490)
Income (loss) available for
common stockholders 454,725 180,133 (957,917) (775,727)
Income (loss) per share .11 .04 (.26) (.21)
Accumulated deficit (1,293,081) (2,221,320) (2,250,998) (2,997,047)
Stockholders' equity 2,017,857 1,089,618 1,191,595 445,546
</TABLE>
On January 12, 1996, the Board of Directors authorized a two-for-one stock split
of the Company's common stock in the form of a 100% stock dividend to those
shareholders of record as of January 25, 1996. All share and per share amounts
have been restated for all periods to reflect this split.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents consist primarily of investments in bank money market funds.
The Company considers investments with initial maturities of three months or
less to be cash equivalents. Cash and cash equivalents include $500,000 which
serves as collateral for a bank line of credit (Note 3).
Capitalized Software Development Costs
The Company capitalizes software development costs incurred in connection with
the development of its software. Amortization expense is provided using the
straight-line method over the software's estimated economic life of three years.
All research and development costs incurred by the Company prior to establishing
technological feasibility are expensed as incurred. Total research and
development costs expensed during the years ended January 31, 1995 and 1994,
were approximately $593,000 and $543,000, respectively.
<PAGE>
-4-
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets of three to five years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful lives of the
assets.
At January 31, 1995, property and equipment consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment $ 394,138
Office furniture and equipment 235,963
Assets held under capital leases, primarily computer equipment 871,246
Leasehold improvements 37,272
------------
1,538,619
Accumulated depreciation (712,680)
------------
$ 825,939
============
Excess of Purchase Price Over Related Net Assets Acquired
</TABLE>
The excess of purchase price over related net assets acquired resulted from the
acquisition of FSG described in Note 1, and is being amortized over ten years
using the straight-line method. Amortization expense was approximately $77,000
and $49,000 for the years ended January 31, 1995 and 1994, respectively.
Other Assets
Other assets include approximately $320,000 representing accounts receivable
from customers with terms in excess of one year. These accounts are generally
due over periods ranging from 18 to 36 months. Interest has been imputed on
these amounts at 10%.
Revenue Recognition
Revenue on sales of the Company's software products and related services is
recognized in accordance with Statement of Position 91-1, Software Revenue
Recognition. Accordingly, initial license fees are recognized as revenue when
the Company receives an executed license agreement and all material services and
conditions (primarily delivery of the software) relating to the sale have been
substantially performed. Revenue from software license fees related to the
Company's obligation to provide certain post-contract customer support without
charge is unbundled from the license fee at its fair value and is deferred and
recognized over the contract support period. The associated costs incurred by
the Company related to providing such support, primarily royalty fees incurred
to maintain the currency of medical technical data included in the Company's
software products, is also deferred and recognized over the period benefited.
Deferred expenses totaled $122,000 at January 31, 1995. Revenues for annual
renewals of support contracts are recognized over the term of the related
contracts, generally 12 months. Revenue for strategic plans and marketing
projects performed by FSG is recognized on the percentage-of-completion method.
The percentage complete is determined by relating costs incurred to the
estimated total costs at completion. When the estimate for a specific service
indicates a loss, the entire loss is recognized. Deferred revenue includes
amounts which
<PAGE>
-5-
represent the excess of billings to date over the amount of costs and profit
recognized on the remaining jobs in progress. Deferred revenue also reflects the
prepayment of support fees and materials by licensees.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
"Disclosure of Information About Financial Instruments With Off-Balance Sheet
Risk and Financial Investments With Concentrations of Credit Risk," consist
primarily of cash and cash equivalents and accounts receivable. The Company
places its cash and cash equivalents with high quality financial institutions
and limits the amount of credit exposure to any one financial institution.
The Company sells its products and services to customers in the healthcare
industry throughout the United States. Concentrations of credit risk with
respect to accounts receivable are limited due to the geographic diversity and
large number of customers comprising the Company's customer base. The Company
performs credit evaluations of its customers, but does not require collateral to
support receivable balances. An allowance for doubtful accounts has been
established based on factors surrounding the credit risk of specific borrowers,
historical trends and other information.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, include cash and cash equivalents, accounts receivable, accounts
payable and notes payable. The carrying value of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these instruments. The Company's notes payable bear interest at
rates indexed to the prime rate; therefore, the carrying amounts approximate
fair value.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121), which is required to be adopted by the Company in fiscal 1997,
requires that long-lived assets be reviewed for impairment whenever events or
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of expected future cash flows (undiscounted and without
interest charges) from an asset to be held and used in operations is less than
the carrying value of the asset, an impairment loss must be recognized in the
amount of the difference between
<PAGE>
-6-
the carrying value and the fair value. Currently, management does not expect the
adoption of SFAS No. 121 to have a material effect on the Company's financial
position or results of operations.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), is required to be adopted by the Company in fiscal
1997. As permitted by SFAS No. 123, the Company will continue to account for
stock transactions with its employees pursuant to Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Therefore, this
statement is not expected to have a material effect on the Company's financial
position or results of operations. SFAS No. 123 requires companies which do not
choose to account for the effects of stock based compensation in the financial
statements to disclose the pro forma effects on earnings and earnings per share
as if such accounting had occurred.
(3) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES:
Notes payable and obligations under capital leases at January 31, 1995, were as
follows:
Bank lines of credit, interest at the bank's prime rate
plus 1% with a 7.5% floor (7.5% at January 31, 1995),
secured by accounts receivable and a cash collateral
requirement as described below; the lines mature May
1995 $ 1,000,000
Note payable to bank, interest at the bank's prime rate
plus 1.5% with an 8.0% floor (8.0% at January 31,
1995); unsecured 45,562
Note payable to bank, interest at the bank's prime rate
plus 3% (9.5% at January 31, 1995), matures October
1995, guaranteed by two officers of FSG, secured by
accounts receivable and equipment 8,200
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 computers and other equipment 505,170
-------------
1,643,083
Less- Current installments (1,390,813)
-------------
$ 252,270
=============
The lines of credit and note payable agreements require the Company to maintain
compliance with certain covenants including the maintenance of working capital
and debt to equity ratios as defined in the agreements. At January 31, 1995, the
Company was not in compliance with certain covenants under these agreements.
Although the bank has waived compliance with these covenants through the
maturity dates of these agreements (May 1995), renewal of the agreements is
subject to the Company meeting certain renewal requirements, including, among
other things, receipt of, or commitment of, additional capital, as defined, of
$1,500,000 and attaining $175,000 of net income for the Company's first quarter
of operations ending April 30, 1995. As a result of the events of noncompliance,
the amount available under the lines were reduced
<PAGE>
-7-
from $1 million at January 31, 1995, to $825,000. The bank lines of credit are
collateralized by a $500,000 deposit with the bank (Note 2) and accounts
receivable. The deposit is included in cash and cash equivalents in the
accompanying consolidated financial statements.
Future maturities of notes payable and obligations under capital leases are as
follows as of January 31, 1995:
Notes Capital
Fiscal Year Payable Leases
------------- -------------
1996 $ 1,137,913 $ 305,216
1997 - 232,730
1998 - 70,207
1999 - 6,288
2000 - 5,240
------------- -------------
1,137,913 619,681
Less - Amounts representing interest - (114,511)
------------- -------------
$ 1,137,913 $ 505,170
============= =============
(4) COMMITMENTS:
The Company leases its office facilities and certain equipment under
noncancelable operating leases expiring through fiscal 2001. The leases include
options to extend for additional periods at the then prevailing market rates.
Rent expense was approximately $296,000 and $227,000 for the years ended January
31, 1995 and 1994, respectively. Future minimum payments under these leases are
as follows as of January 31, 1995:
Fiscal Year
1996 $ 281,261
1997 84,957
1998 69,359
1999 66,864
2000 66,864
Thereafter 22,288
-------------
$ 591,593
=============
<PAGE>
-8-
The Company has entered into certain exclusive agreements with product support
vendors which require the payment of royalties on products sold and also require
minimum annual purchases of products to maintain the exclusivity associated with
these agreements. Future minimum obligations under these agreements are as
follows as of January 31, 1995:
Fiscal Year
1996 $ 1,576,000
1997 1,251,000
1998 1,363,000
1999 1,487,000
2000 1,581,000
Thereafter 3,461,000
---------------
$ 10,719,000
===============
(5) ACCRUED LIABILITIES:
Accrued liabilities at January 31, 1995, were as follows:
Accrued product cost of sales $ 253,097
Accrued payroll and commissions 511,173
Accrued royalties (Note 4) 760,686
Other accrued liabilities 452,736
-------------
$ 1,977,692
=============
(6) STOCKHOLDERS' EQUITY:
Stock Option Plan
During the fiscal year ended January 31, 1989, the Company adopted the 1988
Stock Option Plan (the Plan). The Plan, as amended, will terminate in May 1998
and provides for the grant of 700,000 incentive and 700,000 nonqualified stock
options. The Company has reserved 1,400,000 shares of common stock for exercise
of options under the Plan. Key employees are eligible for both incentive and
nonqualified stock options. Officers and outside directors are eligible only for
nonqualified stock options. The Board of Directors, within the limits of the
provisions of the Plan, shall determine the period over which granted options
become exercisable.
<PAGE>
-9-
A summary of stock option activity under the Plan for the two years ended
January 31, 1995, follows:
<TABLE>
<CAPTION>
Options Outstanding
Options ----------------------------------
Available Exercise
For Grant Shares Price Range
------------ ------------- -------------
<S> <C> <C> <C>
Balance at January 31, 1993 591,500 711,000 $.13 - $.79
Granted (392,000) 392,000 $1.32 - $1.44
Exercised - (35,000) $.45 - $.72
------------ -------------
Balance at January 31, 1994 199,500 1,068,000 $.13 - $1.44
Granted (317,000) 317,000 $1.31 - $1.81
Exercised - (63,500) $.44 - $.77
Canceled 232,000 (232,000)
------------ -------------
Balance at January 31, 1995 114,500 1,089,500 $.13 - $1.81
============ =============
</TABLE>
Options for 865,000 shares were exercisable at January 31, 1995.
Series A 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 four shares of the Company's common stock. In addition,
the holder of the Preferred Stock is entitled to four votes 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
of Preferred Stock. The amendment eliminated all rights to receive dividends
subsequent to the effective date. The amount of accrued and unpaid dividends of
$27,763 at January 31, 1994, was reclassified to retained earnings.
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) available
for common stockholders by the weighted average number of common shares
outstanding. The number of weighted average shares of common stock outstanding
during 1995 does not include certain common stock equivalents (Preferred Stock
and options) as their effect on earnings per share would be antidilutive. Fully
diluted earnings per share is not presented for fiscal 1994 as the effect of
converting the Company's convertible preferred stock would be anti-dilutive.
<PAGE>
-10-
(7) INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). SFAS No. 109 requires deferred income tax assets and liabilities to be
computed based upon cumulative temporary differences between financial reporting
and taxable income, carryforwards available and enacted tax law.
Income tax expense differs from the amount computed by applying the U.S. federal
income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1995 1994
------------- --------
<S> <C> <C>
Expected income tax expense (benefit) at 34% $ (273,000) $ 123,000
Reconciling items:
State income taxes, net of federal income tax benefit (50,000) 21,000
Amortization of excess purchase price and other 53,000 -
Alternative minimum tax - 2,000
Increase in valuation allowance 270,000 110,000
Other, including effect of utilizing a net operating
loss carryforward in accordance with SFAS No. 109 - (244,000)
------------- -------------
Current provision for income taxes, of which
$2,000 is federal and $10,000 is state in 1994 $ - $ 12,000
============= =============
</TABLE>
The components of net deferred taxes as of January 31, 1995, are as follows:
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 227,000
Accrued liabilities 256,000
Deferred revenue 421,000
Net operating loss and AMT credit carryforwards 452,000
Capitalized software costs (297,000)
Tax depreciation in excess of book depreciation (78,000)
Valuation allowance (981,000)
-------------
$ -
=============
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 increased
during the year ended January 31, 1995, due to the operating history of the
Company.
In fiscal 1994, the Company utilized approximately $640,000 of net operating
losses carried forward from prior years to offset pretax income. As of January
31, 1995, the Company had remaining net operating loss carryforwards for federal
income tax purposes of approximately $1 million to offset future taxable income,
expiring through the year 2007.
<PAGE>
-11-
(8) RELATED PARTY TRANSACTIONS:
During fiscal 1994, in connection with the issuance of the convertible preferred
stock described in Note 6, the Company issued 20,000 shares of common stock to a
company of which a board member is an owner and a member of management. The
shares were issued in exchange for professional services rendered.
