FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment 1
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended July 31, 1995 .
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 Commission file number for the transition period from
_________________ to ____________
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 86-0460312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 1750
3200 North Central Avenue
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 230-7575
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ].
The number of shares of the Issuer's Common Stock outstanding at September 8,
1995 was 2,081,818 Shares.
Page 1 of 16
Exhibit on Page 16
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at July 31, 1995 3
Consolidated Statements of Operations for the three months
ended July 31, 1995 and 1994 and for the six months
ended July 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the six months
ended July 31, 1995 and 1994. 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
ITEM 4. Submission of Matters to Vote of Security Holders 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET- JULY 31, 1995
(Unaudited)
ASSETS
July 31 ,1995
-------------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,407,602
Accounts receivable, less allowance for doubtful
accounts of $ 612,432 (Note 2) 3,431,855
Prepaid expenses and supplies 823,838
---------
Total current assets 5,663,296
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $ 813,966 832,184
PROPERTY AND EQUIPMENT (net) 957,332
EXCESS OF PURCHASE PRICE OVER RELATED NET
ASSETS ACQUIRED 593,204
OTHER ASSETS 166,715
---------
$ 8,212,731
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations
under capital leases (Note 2) $ 1,642,616
Accounts payable 943,296
Accrued liabilities (Note 3) 2,446,393
Deferred revenues 2,406,383
---------
Total current liabilities 7,438,688
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES,
excluding current installments (Note 2) 296,377
DEFERRED REVENUES , net of current portion 273,164
STOCKHOLDERS' EQUITY
Convertible Preferred stock, $.001 par value 2,000,000 shares
authorized and 125,000 issued and outstanding - liquidation
preference over common stockholders of $2.40 per share (Note 2) 125
Common stock, $.001 par value, 10,000,000
shares authorized, 4,163,636 shares issued
and 3,791,220 outstanding 3,791
Capital contributed in excess of par value 3,440,301
Accumulated deficit (3,236,150)
Less treasury stock, 3,568 shares at cost (3,565)
---------
Stockholders' equity 204,502
---------
$ 8,212,731
=========
See accompanying notes to the consolidated financial statements.
3
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Initial license fees $ 1,655,395 $ 1,403,471 $ 3,334,258 $ 3,292,385
Support, marketing services and material sales 1,808,721 1,759,768 3,634,510 3,462,902
--------- --------- --------- ---------
Total revenues 3,464,116 3,163,239 6,968,768 6,755,287
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of license fees 276,382 345,878 822,048 911,799
Cost of marketing services and materials sold 370,657 409,354 664,751 845,872
Selling, product support and development 2,054,347 1,820,155 4,326,291 3,589,263
General and administrative 563,450 447,842 954,343 783,455
Depreciation and amortization 221,792 124,293 401,664 203,146
Provision for doubtful accounts 26,500 66,422 71,500 122,822
--------- --------- --------- ---------
Total operating expenses 3,513,128 3,213,944 7,240,596 6,456,357
Income (loss) before income taxes (49,012) (50,705) (271,828) 298,930
--------- --------- --------- ---------
Income taxes - - - -
--------- --------- --------- ---------
NET INCOME (LOSS) $ (49,012) $ (50,705) $ (271,828) $ 298,930
========= ========= ========= =========
Net income (loss) per common share ($0.01) ($0.01) ($0.07) $0.06
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING(*) 3,791,220 3,780,346 3,791,220 4,945,384
========= ========= ========= =========
</TABLE>
(*) Adjusted to reflect a two for one stock split completed in January 1996.
See accompanying notes to the consolidated financial statements.
4
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (271,828) $ 298,930
------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 401,664 203,146
Provision for doubtful accounts 71,500 122,822
(Increase) decrease in accounts receivable 177,554 (1,540,616)
(Increase) decrease in prepaid expenses and supplies (410,550) (46,512)
Increase (decrease) in accounts payable (379,939) (245,785)
Increase (decrease) in accrued liabilities 468,700 501,615
Increase (decrease) in deferred revenues 138,794 252,267
(Increase) decrease in other assets
------- ---------
Net cash provided by (used in) operating activities 195,895 (454,133)
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in capitalized software development costs (77,481) (26,668)
Purchases of property and equipment (268,410) (135,519)
Increases in other assets (18,562) -
------- ---------
Net cash used in investing activities (364,453) (162,187)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - -
Proceeds from line of credit - 750,000
Principal payments on line of credit (500,000) -
Principal payments on notes payable (154,604) (197,539)
Proceeds from note payable 750,000
------- ---------
Net cash provided by (used in) financing activities 95,396 552,461
------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (73,162) (63,859)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,480,765 1,199,597
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,407,603 $ 1,135,738
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
July 31, 1995
Note 1
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 its software
products and related services did not comply in all instances with the technical
requirements and interpretations of Statement of Position 91-1, "Software
Revenue Recognition." Accordingly, the Company has reevaluated and revised its
revenue recognition for the affected transactions and has restated its
previously reported accumulated deficit for the cumulative effect of this
matter. Additionally, the Company's fiscal 1995 annual consolidated financial
statements and fiscal 1996 quarterly consolidated financial statements have also
been restated. The effect of the change on the Company's operating results for
the quarter and six month period ended July 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Quarter Ended July 31, Six Months Ended July 31,
- ------------------------------------------------------------------------------ ----------------------------------------------------
1995 1994 1995 1994
---------------------------- ------------------------------ ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As Reported As Restated As Reported As Restated As Reported As Restated As Reported As Restated
Total revenues $ 4,107,220 $ 3,464,116 $ 3,547,484 $ 3,163,239 $ 8,335,015 $ 6,968,768 $ 6,816,358 $ 6,755,287
Income (loss) $ 200,863 $ (49,012) $ 200,367 $ (50,705) $ 368,982 $ (271,828) $ 341,251 $ 298,930
before provision
for income taxes
Net income (loss) $ 200,863 $ (49,012) $ 200,367 $ (50,705) $ 368,982 $ (271,828) $ 341,251 $ 298,930
Income (loss) per
share(*) $ .05 $ (.01) $ .04 $ (.01) $ .08 $ (.07) $ .07 $ .06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) After giving effect for 2 for 1 stock split completed in January 1996.
The consolidated financial statements, which include the accounts of National
Health Enhancement Systems, Inc. and its wholly owned subsidiaries (collectively
the "Company"), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, the
accompanying unaudited financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly financial
position, results of operations, and cash flows for the periods presented.
Certain financial statement items from prior periods have been reclassified to
be consistent with the current period financial statement presentation. It is
suggested that these financial statements be read in conjunction with the
financial statements and the related disclosures contained in the Company's
Annual Report on Form 10-KSB/A filed for the fiscal year ended January 31, 1995
with the Securities and Exchange Commission.
The results of operations for the six month period ended July 31, 1995 are not
necessarily indicative of the results to be expected for the full fiscal year.
6
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Note 2
Notes Payable and Obligations Under Capital Leases:
<S> <C>
July 31,1995
Bank line of credit, interest at the bank's prime rate payable
monthly (see below) $500,000
Note payable, interest at prime rate plus
5% with a floor of 14% (see below) 750,000
Note payable to bank, interest at the bank's prime rate plus 3.0%,
matures October 1995, guaranteed by two officers of FSG, secured
by, FSG accounts receivable and equipment 3,200
Note payable to preferred stockholder, interest at 12% matures October
1995, unsecured 84,151
Obligations under capital leases, interest rates ranging from 11% to 28%,
maturities through November 1999, secured by computer and other equipment 601,642
---------
1,938,993
Less Current installments (1,642,616)
---------
$296,377
==========
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At January 31, 1995, the Company was not in compliance with certain covenants
under its two $500,000 lines of credit agreements with its bank. The bank waived
compliance with these covenants through the maturity dates of these agreements
(May 1995). As a result the aggregate amount available under the two lines of
credit was reduced from $1 million at January 31, 1995 to $500,000 at July 31,
1995 due to expiration of one of the lines. The remaining line of credit bears
interest at prime plus 1% (with a 7.5% floor) payable monthly, and is due on
demand. The bank line of credit is collateralized by a $500,000 deposit with the
bank. The deposit is included in cash and cash equivalents in the accompanying
consolidated financial statements.
In July 1995 the Company issued a promissory note to a third party lender in the
amount of $750,000. The note bears interest at prime plus 5% with a floor of
14%. Monthly principal payments of $93,750 plus interest payments are due and
payable beginning September 15, 1995. The note is secured by accounts
receivable.
Future maturities of notes payable and obligations under capital leases are as
follows as of July 31, 1995:
Notes Payable Capital Leases
------------- --------------
1996 $1,056,101 $360,266
1997 281,250 236,796
1998 - 70,662
1999 - 34,415
2000 and later - 23,953
---------- --------
$1,337,351 $726,092
Less amount representing - (124,450)
interest ---------- ---------
$1,337,351 $601,642
========== ========
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
7
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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. The amendment
eliminated all rights to receive dividends subsequent to the effective date.
8
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Note 3
Accrued Liabilities consist of the following:
July 31,1995
------------
Accrued product cost of sales 633,572
Accrued commissions 237,618
Accrued royalties 981,979
Other accrued liabilities 593,224
====================
$2,446,393
====================
Note 4
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires deferred income tax assets and liabilities to be computed
based upon cumulative temporary differences in financial reporting and taxable
income, carry forwards available and enacted tax law.
The components of deferred taxes as of July 31, 1995 are as follows:
Allowance for doubtful accounts $244,973
Tax depreciation in excess
of book depreciation (78,000)
Capitalized software costs (332,874)
Accrued liabilities 256,000
Deferred revenues 570,617
Net operating loss carry forward 452,000
Valuation allowance (1,112,716)
---------
$ - 0 -
============
A valuation allowance is provided when it is uncertain that some or all of the
deferred tax asset will be recognized. As of July 31, 1995 the decrease in the
valuation allowance results from changes in temporary differences and net
operating loss carry forwards.
9
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Restatement of 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 instances with the technical
requirements and interpretations of Statement of Position 91-1, "Software
Revenue Recognition." Accordingly, the Company has reevaluated and revised its
revenue recognition for the affected transactions and has restated this
previously reported accumulated deficit for the cumulative effect of this
matter. Additionally, the Company's fiscal 1995 annual consolidated financial
statements and its 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
Three Months Ended July 31, 1995 vs. Three Months Ended July 31, 1994.
Income. For the quarter ended July 31, 1995, the Company had net loss of $49,012
compared to net loss of $50,705 for the quarter ended July 31, 1994.
During the past fiscal year ended January 31, 1995, and continuing through the
quarter ended July 31, 1995 the Company invested resources to expand and improve
its sales and client services functions and also invested to support its product
development efforts, which were primarily focused on the development of its new
Windows(TM)-based Centramax and Centramax Plus products, development of an
expanded interactive voice response product line and a Pediatric product line.
As a result, operating expenses increased and are expected to continue at
current or increasing levels. The Company believes it will be necessary to
continue to invest resources to support the Company's growth plans and client
obligations. The investment in the sales and client services functions (which
are designed to enable the Company to improve product sales to its existing
client network) and the investment in product development is part of
management's strategy to increase revenues. While management believes this
strategy will result in increased revenues, there are no assurances that future
revenues will increase.
The Company's operations are also currently being affected by consolidation,
alliances and mergers in the healthcare market. Nonetheless, and while there are
no assurances, the Company's management believes that its competitive strengths
will
10
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permit it to continue to compete in its targeted market and that the Company is
positioned favorably to take advantage of future opportunities in the healthcare
market. The Company's management believes that healthcare reform will result in
a shift to managed care at the local level. The Company's management also
believes its products help healthcare providers improve their services and also
help reduce healthcare costs by providing objective information on healthcare
issues to individuals thereby enabling them to make informed choices about when,
where and how to seek healthcare services and reduce healthcare costs while
providing healthcare providers with a favorable return on their investment in
the Company's products. Nonetheless, the Company's operations may be materially
and adversely affected by continuing consolidation, alliances and mergers in the
healthcare industry, healthcare reform in the private or public sector, and by
future economic conditions.
Revenues and operating results depends primarily on the volume and timing of
orders received during each fiscal quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
license revenues in the last month of each fiscal quarter, frequently in the
last week. Because a significant portion of the Company's operating expenses are
relatively fixed with personnel levels and other expenses based upon anticipated
revenues, a substantial portion of which may not be generated until the end of
each fiscal quarter, the Company may not be able to reduce spending in response
to sales shortfalls or delays. These factors could cause variations in operating
results from quarter to quarter.
Revenues. Total revenues increased approximately 10% to $3,464,116 for the
quarter ended July 31, 1995 from $3,163,239 for the quarter ended July 31, 1994.
The increase is primarily attributed to increases in revenues generated from
initial license fees.
Initial license fees primarily represent revenues from the initial sale of the
following Company products: Centramax, Centramax Plus, the Patient Acquisition
System (TM) ("PAS") (which includes eight health screening and education
products), and voice response products. Revenue from initial license fees
increased to $1,655,395 for the quarter ended July 31, 1995, from $1,403,471 for
the quarter ended July 31, 1994.
Support, marketing service and material revenues were $1,808,721 for the quarter
ended July 31, 1995 compared to $1,759,768 for the quarter ended July 31, 1994.
The increase in support, marketing services and material revenues is primarily
attributed to an increase in support fee revenues which represent charges to the
Company's licensees, as provided for in the Company's license agreements, for
continued use of the products and for ongoing software maintenance and
enhancements to the products. The support fees generally begin within six to
twelve months after a customer executes a license agreement. Revenue generated
from support fees increased approximately $274,000 for the quarter ended July
31, 1995 compared to the quarter ended July 31, 1994, primarily as a result of
the increase in the total number of product license agreements. The Company
believes that as the number of customers it has for all products increases,
revenues generated from support fees will continue to increase. Revenue from
material sales and marketing services decreased during the quarter as a result
of a decrease in revenue from the Company's Health Direct publication.
Operating Expenses. Total operating expenses increased approximately 9% to
$3,513,128 for the quarter ended July 31, 1995 from $3,213,944 for the quarter
ended July 31, 1994. Total operating expenses increased primarily due to an
increase in expenses associated with certain costs associated with selling,
product support and development expenses and depreciation expense associated
with the Windows product.
Cost of License Fees, Materials and Service Revenues. The cost of initial
license fees decreased to $276,382 for the quarter ended July 31, 1995 from
$345,878 for the
11
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quarter ended July 31, 1994. The decrease is due to lower variable costs
associated with sales of initial license fee revenue.
Cost of marketing services materials and materials revenues, which includes the
cost of printed report forms and questionnaires sold to PAS licensees, the costs
of materials associated with the Health Direct product and costs associated with
Marketing services revenue, decreased to $370,657 for the quarter ended July 31,
1995 from $409,354 for the quarter ended July 31, 1994. The decrease is a result
of lower costs associated with the lower service revenues generated from
Marketing services.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $2,054,347 for the quarter ended July 31, 1995
from $1,820,155 for the quarter ended July 31, 1994. The increase is primarily
attributable to increases in the Company's payroll and related payroll expense
as a result of an increase in the Company's sales staff, product support and
development staff and the expansion of the client management and client services
staffs.
General and Administrative. General and administrative expenses increased to
$563,450 for the quarter ended July 31, 1995 from $447,842 for the quarter ended
July 31, 1994. The increase is attributable to increases in professional service
and other general operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $221,792 for the quarter ended July 31, 1995 from $124,293 for the quarter
ended July 31, 1994. This increase is due to the increased amortization expense
associated with the Company's Windows(TM) based product, which the Company began
to amortize in its fiscal quarter ended January 31, 1995.
Six Months Ended July 31, 1995 vs. Six Months Ended July 31, 1994
Income. For the six months ended July 31, 1995, the Company had net loss of
$271,828 compared to net income of $298,930 for the six months ended July 31,
1994.
Revenue. Total revenue increased approximately 3% to $6,968,768 for the six
months ended July 31, 1995 from $6,755,287 for the six months ended July 31,
1994.
Revenues from initial license fees increased to $3,334,258 for the six months
ended July 31, 1995 from $3,292,385 for the six months ended July 31, 1994.
Support, marketing service and material revenue increased to $3,634,510 for the
six months ended July 31, 1995 from $3,462,902 for the six months ended July 31,
1994. Revenue from support fees increased approximately $570,000 for the six
months ended July 31, 1995 from the six months ended July 31, 1994 due to the
increased customer base and related product license agreements. Revenue
generated from the sale of materials and services decreased for the six months
ended July 31, 1995 from the six months ended July 31, 1994 due to a decrease in
sale of Health Direct subscriptions and a decrease in the service revenue from
marketing services.
Operating Expenses. Total operating expenses increased approximately 12% to
$7,240,596 for the six months ended July 31, 1995 from $6,456,357 for the six
months ended July 31, 1994. The increase is due primarily to an increase in
certain expenses associated with increases in sales and product development
activities and amortization expenses of the Windows based product.
12
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Cost of License Fees, Materials and Service Revenues. The cost of license fees
decreased to $822,048 for the six months ended July 31, 1995, compared to
$911,799 for the six months ended July 31, 1994. The decrease is due to lower
variable costs associated with initial license fee revenues.
Cost of materials and service revenue decreased to $664,751 for the six months
ended July 31, 1995 from $845,872 for the six months ended July 31, 1994. The
decrease is due to a decrease in the sales of materials associated with the
Health Direct product and variable costs associated with the lower service
revenue from marketing services.
Selling, Product Support and Development. Selling, product support and
development expense increased to $4,326,291 for the six months ended July 31,
1995 from $3,589,263 for the six months ended July 31, 1994. The increase was
due primarily to increased sales, product support and development staffs. These
increases in staff were, in management's opinion, necessary to expand product
distribution, support the Windows product as well as expand the client
management and client services function to properly service the Company's
customers.
General and Administrative. General and administrative expenses increased to
$954,343 for the six months ended July 31, 1995 from $783,455 for the six months
ended July 31, 1994. The increase is attributable to an increase in professional
service and other general operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $401,664 for the six months ended July 31, 1995 from $203,146 for the quarter
ended July 31, 1994. This increase is due to the increased amortization expense
associated with the Company's WindowsTM based product which the Company began to
amortize in its fiscal quarter ended January 31, 1995.
Liquidity and Capital Resources
As of July 31, 1995, the Company had a working capital deficit (current assets
minus current liabilities) of $1,775,392 compared to a working capital deficit
of $1,704,367 as of January 31, 1995. The decrease in working capital was
primarily caused by the Company's operating loss for the six months ended July
31, 1995. The Company's accounts receivable balance increased to $3,431,855 at
July 31, 1995 from $3,681,909 (which includes $321,000 in long term accounts
receivable) at January 31, 1995. During and prior to the fiscal year ended
January 31, 1995 the Company experienced that payment of the initial license
fees was often deferred, on a negotiated basis, for a period after the license
agreements were executed. The Company believes this trend will continue at a
decreasing rate. The Company has taken steps to reduce payment terms and the
number of days that is required to collect initial fee revenues.
The Company has a line of credit with a bank providing an aggregate amount of
$500,000 as of July 31, 1995. The line of credit is secured by cash balances
equal to the amount borrowed. Interest is paid monthly on the unpaid balance at
an annual rate of one percentage point above the bank's prime rate with a 7.5%
floor. The line of credit matures in May 1996.
In July 1995, the Company borrowed $750,000 from a third party lender in the
amount of $750,000. The note bears interest at prime plus 5% with a floor of
14%. Monthly principal payments of $93,750 plus interest payments are due and
payable beginning September 15, 1995. The note is secured by accounts receivable
and matures on April
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15, 1996. The note is subject to earlier payment if certain borrowing base
requirements are not met.
The Company is currently dependent on cash from operations and proceeds from the
$750,000 borrowing for its daily operational cash requirements. The Company is
in the process of evaluating opportunities to expand and increase the existing
capital available to it and is also evaluating opportunities to reduce the
number of days it takes to collect the initial fee accounts receivable. If the
existing credit facility is reduced or terminated, or if the Company is not
successful in reducing the number of days to collect on its outstanding accounts
receivable, additional working capital will be required. The Company continues
to seek alternative sources to raise additional capital to support its general
working capital needs. There are no assurances that the Company will be
successful in obtaining additional capital, and the failure to obtain additional
capital would have an adverse impact on the Company's ability to meet its
operating requirements and the Company would have to materially cut back its
operations.
In each of its fiscal years ending January 31, 1995 and 1994, the Company
offered a discount to its PAS users to prepay monthly support fees for a one
year period. In each of these fiscal years, the Company generated approximately
$300,000 in cash from the program. Cash from this prepayment program is
recognized as revenue over the period benefited, generally a 12-month period.
Effective June 14, 1994 the Company amended the applicable Certificate of
Designation, which eliminated the Company's obligation to pay preferred
dividends on the Series A Convertible Preferred Stock, including all accrued and
unpaid dividends. Elimination of the preferred dividends will reduce cash
outflows by approximately $285,000 in future periods. The amendment also
increased the number of common shares into which each preferred share is
convertible from one share to two shares and eliminated the Company's redemption
right.
On October 7, 1994 the Company issued a promissory note to the Series A
Convertible Preferred Stockholder in the amount of $100,000. The outstanding
balance of $84,151 is due and payable on October 16, 1995. The interest rate is
twelve percent (12%) per annum, and the note is unsecured. The note was issued
to fund advance royalties to a third party to secure the distribution rights to
certain pediatric triage guidelines.
The Company's operating results continue to be inconsistent on a month-to-month
basis and are dependent upon retention and performance of the Company's sales
staff, long product sales cycles related in part to pricing of the Company's
products and customer budget requirements, and to other factors, such as
uncertainties associated with the healthcare market and economic conditions,
beyond the control of the Company. The Company, however, will continue to
evaluate methods to improve and increase its product distribution channels and
to enhance or expand its current product lines.
The Company has expanded, and will continue to improve and enhance, its product
lines in order to be more responsive to the market. The Company's management
believes that quarterly operating results are dependent, and will continue to be
dependent, on the initial license fee revenues in the foreseeable future. The
Company will continue to focus its efforts on improving cash from operations,
recurring revenue and increasing its operating income. The recurring monthly
revenue from support fees, material sales and services is currently not
sufficient to maintain a break-even level of the Company's current operating
expense levels.
14
<PAGE>
The Company has no significant or material capital expenditures commitments
outstanding as of July 31, 1995. However, additional support staff requirements
and related operating expenses will be dependent on sales levels of the
Company's products. The Company expects that additional space will be taken and
staff will be hired during its current fiscal year (ending January 31, 1996) and
additional capital resources will be needed to fund this growth and expansion.
In the past the Company has funded its growth primarily through cash from
operations and its existing bank line of credit. The Company believes that while
its current operations can be supported by available resources, provided that
adequate working capital financing arrangements continue, growth of the
Company's business may no longer be funded solely by internal operations. The
Company is currently evaluating ways to generate additional sources of capital,
including extending or expanding the current asset-based credit line and a
future equity offering. Although management believes that available borrowings,
coupled with cash flow from operations will be adequate for its operating needs
for fiscal 1996, the Company believes that additional capital will be necessary
to support operations and planned growth in the coming fiscal year. There are no
assurances the Company will be successful at raising additional working capital.
15
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 14, 1995, the Company held its annual meeting of stockholders. In
addition to electing directors at the annual meeting, the stockholders approved
an amendment to the Company's 1988 Stock Option Plan, (the "Plan") which
provides for an increase in the number of stock options available under the Plan
from 700,000 to 800,000 (1.6 million options after giving effect for the two for
one stock split) stock options. Of the common stock outstanding 1,315,721 shares
were voted in favor to amend the Plan, 9,125 shares were voted against and 1,315
shares abstained from voting. In addition the, stockholders approved an
amendment of the Company's Certificate Incorporation to increase the number of
authorized shares of the Company's common stock, $.001 par value, from 5,000,000
to 10,000,000 shares and to increase the number of shares of preferred stock,
$.001 par value, from 1,000,000 to 2,000,000 shares. Of the common stock
outstanding 1,316,521 shares were voted in favor to amend the Certificate of
Incorporation, 7,725 shares were voted against and 1,915 shares abstained from
voting.
All the nominee's for directors as listed in the proxy
statement were elected.
Directors Votes For Votes With Held
--------- --------- ---------------
John Delmatoff 1,323,411 2,750
Gardiner Dutton 1,323,411 2,750
James Myers 1,323,411 2,750
Greg Petras 1,323,411 2,750
Steve Wood 1,323,411 2,750
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 31, 1995.
16
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Health Enhancement Systems, Inc.
(Registrant)
Date: May 14, 1996 /s/ Gregory J. Petras
-------------------- ----------------------
Gregory J. Petras
President and Chief Executive Officer
Date: May 14, 1996 /s/ Jeffrey T. Zywicki
-------------------- -----------------------
Jeffrey T. Zywicki
Sr. Vice President Finance
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