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 October 31, 1995 .
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 Commission file number for the transition period from
_________________ to ____________
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 86-0460312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 1750
3200 North Central Avenue
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 230-7575
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ].
The number of shares of the Issuer's Common Stock outstanding at December 8,
1995 was 2,081,818 Shares.
Page 1 of 17
Exhibit on Page 17
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB/A
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at October 31, 1995 3
Consolidated Statements of Operations for the three
months ended October 31, 1995 and 1994 and for
the nine months
ended October 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the nine months
ended October 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET- OCTOBER 31, 1995
(Unaudited)
ASSETS
October 31
1995
---------
CURRENT ASSETS:
Cash and cash equivalents ( Note 2) $1,212,448
Accounts receivable, less allowance for doubtful
accounts of $ 486,733 (Note 2) 4,723,624
Prepaid expenses and supplies 530,498
---------
Total current assets 6,466,570
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $ 528,786 941,344
PROPERTY AND EQUIPMENT (net) 1,001,876
EXCESS OF PURCHASE PRICE OVER RELATED NET
ASSETS ACQUIRED 574,272
OTHER ASSETS 116,980
---------
$9,101,042
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations $1,450,324
under capital leases (Note 2)
Accounts payable 1,122,751
Accrued liabilities (Note 3) 2,842,466
Deferred revenues 2,496,648
---------
Total current liabilities 7,962,189
---------
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES,
excluding current installments (Note 2) 303,278
DEFERRED REVENUES , net of current portion
222,757
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 4) 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 (2,777,835)
Less treasury stock, 3,568 shares at cost (3,565)
---------
Stockholders' equity 662,818
---------
$9,101,042
=========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Initial license fees $2,648,379 $1,650,588 $5,982,637 $4,942,973
Support, marketing services and material sales 2,171,709 1,876,929 5,806,219 5,339,831
--------- --------- --------- ---------
Total revenues 4,820,088 3,527,517 11,788,856 10,282,804
OPERATING EXPENSES
Cost of license fees 1,152,372 688,909 1,974,420 1,600,708
Cost of marketing services and materials sold 544,718 548,366 1,209,469 1,394,238
Selling, product support and development 2,244,076 1,821,630 6,570,366 5,410,893
General and administrative 343,550 413,160 1,297,893 1,196,615
Depreciation and amortization 240,057 115,687 641,721 318,833
Provision for doubtful accounts 78,000 71,000 149,500 193,822
--------- --------- --------- ---------
Total operating expenses 4,602,773 3,658,752 11,843,369 10,115,109
--------- --------- --------- ---------
Income ( loss ) before income taxes 217,316 (131,235) (54,513) 167,695
Income taxes - - - -
--------- --------- --------- ---------
NET INCOME (LOSS) $217,316 ($131,235) ($54,513) $167,695
========= ========= ========= =========
Net Income (loss) per common share* $0.05 ($0.03) ($0.01) $0.03
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING(*) 4,825,084 3,780,346 3,793,640 4,932,238
========= ========= ========= =========
</TABLE>
(*) Adjusted to reflect a two for one stock split completed January 1996.
See accompanying notes to the consolidated financial statements.
4
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (54,513) $ 167,695
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 641,721 318,833
Provision for doubtful accounts 149,500 193,822
(Increase) decrease in accounts receivable (1,512,214) (2,039,301)
(Increase) decrease in prepaid expenses and supplies (117,210) (221,999)
Increase (decrease) in accounts payable (200,875) (93,101)
Increase (decrease) in accrued liabilities 864,773 1,009,492
Increase (decrease) in deferred revenues 419,655 17,070
(Increase) decrease in other assets 351,988 -
--------- ---------
Net cash provided by (used in) operating activities 542,825 (647,489)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in capitalized software development costs (147,625) (47,595)
Purchases of property and equipment (508,377) (362,154)
--------- ---------
Net cash used in investing activities (656,002) (409,749)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 14,375
Proceeds from line of credit - 1,000,000
Principal payments on line of credit (500,000) -
Principal payments on notes payable (405,140) (285,052)
Proceeds from note payable 750,000 100,000
--------- ---------
Net cash provided by (used in) financing activities (155,140) 829,323
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (268,317) (227,915)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,480,765 1,199,597
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,212,448 $ 971,682
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
October 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 these
matters. 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 nine month period ended October 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Quarter Ended October 31, Nine Months Ended October 31,
- ----------------- -----------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------
As Reported As Restated As Reported As Restated As Reported As Restated As Reported As Restated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 4,338,174 $ 4,820,088 $ 3,881,797 $ 3,527.517 $ 12,673,189 $ 11,788,856 $ 10,698,155 $10,282,804
Income (loss) $ 176,660 $ 217,316 $ 100,360 $ (131,235) $ 545,642 $ (54,513) $ 441,611 $ 167,695
before
provision
for income
taxes
Net income (loss) $ 176,660 $ 217,316 $ 100,360 $ 131,235 $ 545,642 $ (54,513) $ 441,611 $ (167,695)
Income (loss) per
share(*) $ .03 $ .05 $ .02 $ (.03) $ .11 $ (.01) $ .09 $ .03
- ----------------- -----------------------------------------------------------------------------------------------------------------
</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 the financial
position, results of operations, and cash flows for the periods presented.
It is suggested that these financial statements be read in conjunction with the
financial statements and the related disclosures contained in the Company's
Annual Report on Form 10-KSB/A filed for the fiscal year ended January 31, 1995
with the Securities and Exchange Commission.
The results of operations for the nine month period ended October 31, 1995 are
not necessarily indicative of the results to be expected for the full fiscal
year.
6
<PAGE>
Note 2
<TABLE>
<CAPTION>
Notes Payable and Obligations Under Capital Leases:
<S> <C>
October 31,1995
Bank line of credit, interest at the bank's prime rate payable
monthly (see below) $ 500,000
Note payable, interest at prime rate plus
5% with a floor of 14% paid in full in November 1995 (see below) 562,500
-------
Note payable to preferred stockholder, interest at 12% unsecured
paid in November 1995 84,151
Obligations under capital leases, interest rates ranging from 11% to
28%, maturities through November 1999, secured by computer and
other equipment 606,951
----------
1,753,602
Less Current installments (1,450,324)
-----------
$ 303,278
===========
</TABLE>
The line of credit bears interest at prime plus 1% (with a 7.5% floor) payable
monthly, and is due on demand. The bank line of credit is collateralized by a
$500,000 deposit with the bank. The deposit is included in cash and cash
equivalents in the accompanying consolidated financial statements.
In July 1995 the Company issued a promissory note to a third party lender in the
amount of $750,000. The principal balance at October 31, 1995 was $562,500. The
note bears interest at prime plus 5% with a floor of 14%. Monthly principal
payments of $93,750 plus interest payments are due and payable beginning
September 15, 1995. The note matures April 15, 1996, is secured by accounts
receivable and is subject to early payment under certain conditions.
On November 13, 1995 the Company obtained a revolving line of credit providing
up to $2,000,000. The revolving line of credit bears interest at prime plus
2.5%, is secured by accounts receivable and matures on November 13, 1996. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants as defined in
the agreement. The Company also obtained a line of credit of $500,000, from the
same lender. The $500,000 line of credit is secured by cash balances equal to
the amount borrowed. Interest is paid monthly on the unpaid balance at an annual
rate of one percentage point above the bank's prime rate. The line matures
November 1996.
Future maturities of notes payable and obligations under capital leases are as
follows as of October 31, 1995:
7
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Notes Payable Capital Leases
------------- --------------
1996 $1,146,651 $ 365,225
1997 - 219,173
1998 - 75,850
1999 - 34,415
2000 and later - 15,237
---------- ---------
1,146,651 709,900
Less amount representing interest - (102,949)
---------- ---------
$1,146,651 $ 606,951
========== =========
8
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Note 3
Accrued Liabilities consist of the following:
October 31, 1995
----------------
Accrued product cost of sales $ 651,303
Accrued commissions 748,742
Accrued royalties 761,229
Other accrued liabilities 681,192
----------
$2,842,466
==========
Note 4 Convertible Preferred Stock
On August 18, 1992 the Company issued 125,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock)" at $2.40 per share. Each share of the
Preferred Stock shall be, at the option of the holder, convertible into four
shares of the Company's common stock. In addition, the holder of the Preferred
Stock is entitled to four vote for each share of Preferred stock. Upon
liquidation or dissolution of the Company, the holder of the Preferred Stock
shall have liquidating preferences equal to $2.40 per share. The Preferred Stock
does not pay dividends.
Note 5
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires deferred income tax assets and liabilities to be computed
based upon cumulative temporary differences in financial reporting and taxable
income, carry forwards available and enacted tax law.
The components of deferred taxes as of October 31, 1995 are as follows:
Allowance for doubtful accounts $194,693
Tax depreciation in excess
of book depreciation (78,000)
Capitalized software costs (353,653)
Accrued liabilities 256,000
Deferred revenues 551,348
Net operating loss carry forward 452,000
Valuation allowance (1,022,388)
---------
$ 0
=========
A valuation allowance is provided when it is uncertain that some portion or all
of the deferred tax asset will be recognized.
9
<PAGE>
As of October 31, 1995 the decrease in the valuation allowance results from
changes in temporary differences and net operating loss carry forward.
10
<PAGE>
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 its
previously reported accumulated deficit for the cumulative effect of these
matters. Additionally, the Company's fiscal 1995 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
Three Months Ended October 31, 1995 vs. Three Months Ended October 31, 1994
Income. For the quarter ended October 31, 1995, the Company had net income of
$217,316 compared to net loss of $131,235 for the quarter ended October 31,
1994.
During the past fiscal year ended January 31, 1995, and continuing through the
quarter ended October 31, 1995 the Company invested resources to expand and
improve its sales and client services functions and also invested to support its
product development efforts, which were primarily focused on the development of
its new Windows based Centramax and Centramax Plus products, development of an
expanded interactive voice response product line and a Pediatric product line.
As a result, operating expenses increased and are expected to continue at
current or increasing levels. The Company's future growth strategy includes
evaluating offering and/or establishing, directly or indirectly in cooperation
with third parties, one or more service
11
<PAGE>
bureaus for offering medical call center services. The Company believes it will
be necessary to continue to invest resources to support the Company's
obligations and future growth plans. The investment in the sales and client
services functions (which are designed to enable the Company to improve product
sales to its existing client network) and the investment in product development
is part of management's strategy to increase revenues. While management believes
the Company's investments have contributed to the recent increases in revenues,
there are no assurances that future revenues will increase.
The Company's operations have been and continue to be affected by consolidation,
alliances and mergers in the healthcare market. In addition, management believes
that the competition of offering medical call center products and services will
begin to increase and that there may be new entrants with substantially greater
financial and other resources than the Company which may adversely impact the
Company's ability to compete in this market. Nonetheless, and while there are no
assurances, the Company's management believes that its competitive strengths
will permit it to continue to compete in its targeted market and that the
Company is positioned favorably to take advantage of future opportunities in the
healthcare market. The Company's management believes that healthcare reform is
resulting in a shift to managed care at the local level. The Company's
management also believes its products help healthcare providers improve their
services and also help reduce healthcare costs by providing objective
information on healthcare issues to individuals thereby enabling them to make
informed choices about when, where and how to seek healthcare services and
reduce healthcare costs, while providing healthcare providers with a favorable
return on their investment in the Company's products. Nonetheless, the Company's
operations may be materially and adversely affected by continuing consolidation,
alliances and mergers in the healthcare industry, healthcare reform in the
private or public sector, increasing competition in the Company's market and by
future economic conditions.
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. Total revenues increased approximately 37% to $4,820,088 for the
quarter ended October 31, 1995 from $3,527,517 for the quarter ended October 31,
1994. The increase is primarily attributed to increases in revenues generated
from initial license fees.
Initial license fees primarily represent revenues from the initial sale of the
Company's medical call center products, health information products, voice
response products and the pediatric product line. Revenue from initial license
fees increased to $2,648,379 for the quarter ended October 31, 1995,
12
<PAGE>
from $1,650,588 for the quarter ended October 31, 1994. This increase is
primarily attributable to an increase in the number of licenses granted for the
Company's medical call center products, such as Centramax Plus and the pediatric
product lines.
Support, marketing service and material revenues were $2,171,709 for the quarter
ended October 31, 1995 compared to $1,876, 929 for the quarter ended October 31,
1994. The increase in support, marketing services and material revenues is
primarily attributed to an increase in support fee revenues. The support fees
generally begin within six to twelve months after a customer executes a license
agreement. Revenue generated from support fees increased for the quarter ended
October 31, 1995 compared to the quarter ended October 31, 1994, primarily as a
result of the increase in the total
13
<PAGE>
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 marketing service revenue (which
represent strategies and creative service revenue from the Company's First
Strategic Group subsidiary) and material revenue from the Company's Health
Direct publication decreased for the quarter ended October 31, 1995 compared to
the quarter ended October 31, 1994. The Company believes that these areas of
marketing service revenue and materials revenue are expected to remain at
current levels through the fiscal year ending January 31, 1996, management
believes marketing service and Health Direct publication revenue continue to
represent opportunities for future revenue growth.
Operating Expenses. Total operating expenses increased approximately 26% to
$4,602,773 for the quarter ended October 31, 1995 from $3,658,752 for the
quarter ended October 31, 1994. Total operating expenses increased primarily due
to an increase in costs associated with the increase in inital license fees
revenue and expenses associated with selling, product support and development
expenses.
Cost of License Fees, Materials and Service Revenues. The cost of initial
license fees (which includes accrued royalties, training and other related
costs) increased to $1,152,372 for the quarter ended October 31, 1995 from
$688,909 for the quarter ended October 31, 1994. The increase is due to an
increase in variable expenses associated with increased initial fee revenues .
Cost of materials and service revenues, which includes the cost of printed
report forms and questionnaires sold to PAS licensees, the costs of materials
associated with the Health Direct publication and costs associated with
marketing services revenue, decreased to $544,718 for the quarter ended October
31, 1995 from $548,366 for the quarter ended October 31, 1994. The decrease is a
result of lower costs associated with the lower service revenues generated from
marketing services and the publication product.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $2,244,076 for the quarter ended October 31,
1995 from $1,821,630 for the quarter ended October 31, 1994. The increase is
primarily attributable to increases in the Company's payroll and related payroll
expense as a result of an increase in the Company's sales staff, product support
and development staff and the expansion of the client management and client
services staffs.
General and Administrative. General and administrative expenses decreased to
$343,550 for the quarter ended October 31, 1995 from $413,160 for the quarter
ended October 31, 1994. The decrease is attributable to decreases in outside
consulting, temporary and professional services and other general operating
expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $240,057 for the quarter ended October 31, 1995 from $115,687 for the quarter
ended October 31, 1994. This increase is due to the increased amortization
expense associated with the Company's Windows based
14
<PAGE>
product, which the Company began to amortize in its fiscal quarter ended January
31, 1995.
Nine Months Ended October 31, 1995 vs. Nine Months Ended October 31, 1994
Income. For the nine months ended October 31, 1995, the Company had a net loss
of $54,513 compared to net income of $167,695 for the nine months ended October
31, 1994.
15
<PAGE>
Revenues. Total revenues increased approximately 15% to $11,788,856 for the nine
months ended October 31, 1995 from $10,282,804 for the nine months ended October
31, 1994. The increase is due to increased revenues generated from both initial
license fees and support fees.
Revenues from initial license fees increased to $5,982,637 for the nine months
ended October 31, 1995 from $4,942,973 for the nine months ended October 31,
1994. The increase is due primarily to an increase in the number of licenses for
the Company's medical call center products, such as Centramax Plus and the
pediatric product line.
Support, marketing services and material revenue increased to $5,806,219 for the
nine months ended October 31, 1995 from $5,339,831 for the nine months ended
October 31, 1994. Revenue from support fees increased approximately $750,000 for
the nine months ended October 31, 1995 from the nine months ended October 31,
1994 due to the increased customer base and related product license agreements.
Revenue generated from the sale of materials and services decreased for the nine
months ended October 31, 1995 from the nine months ended October 31, 1994 due to
a decrease in subscriptions revenue from Health Direct and a decrease in the
marketing service revenue.
Operating Expenses. Total operating expenses increased approximately 17% to
$11,843,369 for the nine months ended October 31, 1995 from $10,115,109 for the
nine months ended October 31, 1994. The increase is due primarily to an increase
in variable costs associated with revenues from initial license fees and an
increase in expenses associated with increases in sales and product development
activities.
Cost of License Fees, Materials and Service Revenues. The cost of license fees
increased to $1,974,420 for the nine months ended October 31, 1995, compared to
$1,600,708 for the nine months ended October 31, 1994. The increase is due
primarily to an increase in variable costs associated with increased initial
license fee revenues.
Cost of materials and service revenue decreased to $1,209,469 for the nine
months ended October 31, 1995 from $1,394,238 for the nine months ended October
31, 1994. The decrease is due to a decrease in the sales of materials associated
with the Health Direct product and variable costs associated the lower marketing
service revenue .
Selling, Product Support and Development. Selling, product support and
development expense increased to $6,570,366 for the nine months ended October
31, 1995 from $5,410,893 for the nine months ended October 31, 1994. The
increase was due primarily to increased sales, product support and development
staffs. These increases in staff were, in management's opinion, necessary to
expand product distribution, support the Windows product and expand the client
management and client services function to properly service the Company's
customers.
General and Administrative. General and administrative expenses increased to
$1,297,893 for the nine months ended October 31, 1995 from $1,196,615 for the
nine months ended October 31, 1994. The increase is
16
<PAGE>
attributable to an increase in professional service and other general operating
expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $641,721 for the nine months ended October 31, 1995 from $318,833 for the
nine months ended October 31, 1994. This increase is due to the increased
amortization expense associated with the Company's Windows based product which
the Company began to amortize in its fiscal quarter ended January 31, 1995.
17
<PAGE>
Liquidity and Capital Resources
As of October 31, 1995, the Company had a working capital deficit (current
assets minus current liabilities) of $1,445,619 compared to a working capital
deficit of $1,704,367 as of January 31, 1995. The improvement in working capital
was primarily caused a reclassification of certain long term receivables to
current. The Company's accounts receivable balance increased to $4,723,624 at
October 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.
On November 13, 1995 the Company obtained a revolving line of credit providing
up to $2,000,000. The revolving line of credit bears interest at prime plus
2.5%, is secured by accounts receivable and matures on November 13, 1996. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants. The Company
also obtained a line of credit of $500,000, from the same lender. The $500,000
line of credit is secured by cash balances equal to the amount borrowed.
Interest is paid monthly on the unpaid balance at an annual rate of one
percentage point above the bank's prime rate. The line matures in November 1996.
The Company also has a line of credit with a different bank providing an
aggregate amount of $500,000 as of October 31, 1995. The line of credit is
secured by cash balances equal to the amount borrowed. Interest is paid monthly
on the unpaid balance at an annual rate of one percentage point above the bank's
prime rate with a 7.5% floor. The line of credit matures in May 1996.
In July 1995, the Company borrowed $750,000 from a third party lender in the
amount of $750,000. The note bears interest at prime plus 5% with a floor of
14%. Monthly principal payments of $93,750 plus interest payments are due and
payable beginning September 15, 1995. The note was paid in full on November 13,
1995.
The Company is currently dependent on cash from operations and available
proceeds from the $2,000,000 line of credit for its daily operational cash
requirements. The Company is in the process of evaluating opportunities to
expand and increase the existing capital available to it and is also evaluating
opportunities to reduce the number of days it takes to collect the initial fee
accounts receivable. The Company will continue to seek alternative sources to
raise additional capital to support its future growth plans and there are no
assurances that the Company will be successful in obtaining additional capital
for its continued growth plans.
In each of its fiscal years ending January 31, 1995 and 1994, the Company
offered a discount to its PAS users to prepay monthly support fees for a one
year period. In each of these fiscal years, the Company generated
18
<PAGE>
approximately $300,000 in cash from the program. Cash from this prepayment
program is recognized as revenue over the period benefited, generally a 12-month
period.
On October 7, 1994 the Company issued a promissory note to the Series A
Convertible Preferred Stockholder in the amount of $100,000. The outstanding
principal balance of $84,151 was paid in November 1995. The interest rate is
twelve percent (12%) per annum, and the note is unsecured. The note was issued
to fund advance royalties to a third party to secure the distribution rights to
certain pediatric triage guidelines.
The Company's operating results continue to be inconsistent on a month-to-month
basis and are dependent upon retention and performance of the Company's sales
staff, long product sales cycles related in part to pricing of the Company's
products and customer budget requirements, and to other factors, such as
uncertainties associated with the healthcare market and economic conditions,
beyond the control of the Company. The Company, however, will continue to
evaluate methods to improve and increase its product distribution channels and
to enhance or expand its current product lines.
The Company has expanded, and will continue to improve and enhance, its product
lines in order to be more responsive to the market. The Company's management
believes that quarterly operating results are dependent, and will continue to be
dependent, on the initial license fee revenues in the foreseeable future. The
Company will continue to focus its efforts on improving cash from operations,
increase recurring revenue and increasing its operating income. The recurring
monthly revenue from support fees, material sales and services is currently not
sufficient to maintain a break-even level of the Company's current operating
expense levels.
The Company has no significant or material capital expenditure commitments
outstanding as of October 31, 1995. However, the Company will continue to invest
in product and software developement which will require additional support staff
and related operating expenses. The Company expects that additional space will
be taken and staff will be hired during its current fiscal year (ending January
31, 1996) and additional capital resources will be needed to fund this growth
and expansion. In the past the Company has funded its growth primarily through
cash from operations and its existing line of credit. The Company believes that
while its current operations can be supported by available resources, growth of
the Company's business may no longer be funded solely by internal operations.
The Company is currently evaluating ways to generate additional sources of
capital. Although management believes that available borrowings, coupled with
cash flow from operations will be adequate for its operating needs for fiscal
1996, the Company believes that additional capital will be necessary to support
operations and planned growth in the coming fiscal year, including for
implementing its service bureau strategy. There are no assurances the Company
will be successful at raising additional capital to support planned growth.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
October 31, 1995.
20
<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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