U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended October 31, 1996.
----------------
[ ] 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 1700
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 9,
1996 was 4,613,547 Shares.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
Page 1 of 18
Exhibit on Page 18
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at October 31, 1996 3
Consolidated Statements of Operations for the three months
ended October 31, 1996 and 1995 and for the nine months
ended October 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine months
ended October 31, 1996 and 1995. 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 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - OCTOBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
October 31, 1996
----------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $1,771,444
Accounts receivable, less allowance for doubtful
accounts of $589,000 (Note 2) 7,613,462
Prepaid expenses and supplies 1,023,034
-----------
Total current assets 10,407,940
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $1,387,784 995,462
PROPERTY AND EQUIPMENT (net) 1,553,463
EXCESS OF PURCHASE PRICE OVER RELATED NET
ASSETS ACQUIRED 498,546
OTHER ASSETS 439,765
-----------
$13,895,176
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations under
capital leases (Note 2) $ 710,290
Accounts payable 1,219,171
Accrued liabilities (Note 3) 4,702,864
Deferred revenues 4,657,105
-----------
Total current liabilities 11,289,430
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
excluding current installments (Note 2) 218,599
DEFERRED REVENUES, net of current portion 12,211
-----------
Total liabilities 11,520,240
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 5)
Convertible Preferred stock, $.001 par value
2,000,000 shares authorized and none issued and outstanding -
Common stock $.001 par value, 10,000,000 shares authorized, 4,982,303
shares issued and 4,613,547 outstanding 4,057
Capital contributed in excess of par value 4,263,269
Accumulated deficit (1,888,825)
Less treasury stock, at cost 3,568 shares (3,565)
-----------
Stockholders' equity 2,374,936
-----------
$13,895,176
===========
</TABLE>
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,
------------------------------ -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Initial license fees $ 3,932,883 $ 2,648,379 $ 8,943,729 $ 5,982,637
Support fees, marketing services and material sales 3,779,793 2,171,709 8,856,980 5,806,219
------------ ------------ ----------- -----------
Total revenues 7,712,676 4,820,088 17,800,709 11,788,856
------------ ------------ ----------- -----------
OPERATING EXPENSES
Cost of license fees 1,061,151 829,314 2,198,181 1,351,362
Cost of support, marketing services and
materials sold 1,160,080 867,775 2,977,679 1,832,527
Selling, product support and development 3,444,351 2,244,076 9,096,463 6,570,366
General and administrative 574,217 343,550 1,736,105 1,297,893
Depreciation and amortization 317,684 240,057 853,810 641,721
Provision for doubtful accounts 110,000 78,000 240,000 149,500
------------ ------------ ----------- -----------
Total operating expenses 6,667,483 4,602,773 17,102,238 11,843,369
------------ ------------ ----------- -----------
Income (loss) before income taxes 1,045,193 217,316 698,471 (54,513)
Provision for income taxes (Note 4) (150,000) -- (150,000) --
------------ ------------ ----------- -----------
Net Income (Loss) $ 895,193 $ 217,316 $ 548,471 $ (54,513)
============ ============ =========== ===========
Net income (loss) per common share (*) $ .15 $ 0.05 $ .10 $ (0.01)
============ ============ =========== ===========
WEIGHTED AVERAGE SHARES 5,807,817 4,825,084 5,663,708 3,793,640
OUTSTANDING (*) ============ ============ =========== ===========
</TABLE>
(*)Adjusted to reflect a two for one stock split completed in January 1996.
4
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 548,471 $ (54,513)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 853,810 641,721
Provision for doubtful accounts 240,000 149,500
(Increase) decrease in accounts receivable (2,087,784) (1,512,214)
(Increase) decrease in prepaid expenses and supplies (311,725) (117,210)
Increase (decrease) in accounts payable 221,329 (200,875)
Increase (decrease) in accrued liabilities 1,625,518 864,773
Increase (decrease) in deferred revenues 1,136,332 419,655
------------ ------------
Net cash provided by operating activities 2,225,951 190,837
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in capitalized software development costs (356,762) (147,625)
Purchases of property and equipment (752,306) (508,377)
(Increase) decrease in other assets (165,227) 351,988
------------ ------------
Net cash used in investing activities (1,274,295) (304,014)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 52,239 --
Principal (payments)/proceeds from line of credit (1,206,093) 250,000
Payments from notes payable and capital leases (254,127) (405,140)
Proceeds from sale of stock 750,000 --
------------ ------------
Net cash used in financing activities (657,981) (155,140)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 293,675 (268,317)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,477,769 1,480,765
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,771,444 $ 1,212,448
============ ============
</TABLE>
5
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
October 31, 1996
Note 1
- ------
In connection with the preparation of the Company's financial statements for the
fiscal 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 is as follows:
<TABLE>
<CAPTION>
Quarter Ended October 31, Nine Months Ended October 31,
-----------------------------------------------------------
1995 1995
-----------------------------------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 4,338,174 $ 4,820,088 $ 12,673,189 $ 11,788,856
Income (loss) before
provision for income taxes $ 176,660 $ 217,316 $ 545,642 $ (54,513)
Net income (loss) $ 176,660 $ 217,316 $ 545,642 $ (54,513)
Income (loss) per share(*) $ .03 $ .05 $ .11 $ (.01)
</TABLE>
(*) After giving effect for 2 for 1 stock split 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 in accordance with generally accepted
accounting principles for interim financial information and the rules and
regulations of the Securities and Exchange Commission specifically to Form
10-QSB. Accordingly they do not include all the financial information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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, 1996
with the Securities and Exchange Commission.
The results of operations for the three and nine month periods ended October 31,
1996 are not necessarily indicative of the results to be expected for the full
fiscal year.
6
<PAGE>
Note 2
- ------
Notes payable and obligations under capital leases at October 31, 1996:
<TABLE>
<S> <C>
Revolving line of credit, advances not to exceed the lesser of the $ 400,000
calculated borrowing base, as defined, or $2,500,000, interest at
Wall Street Journal prime rate plus 2.0% (10.75% at October 31, 1996),
matures October 1997, secured by substantially all assets of the Company,
including eligible accounts receivable, as defined. The Company has an
additional $500,000 line of credit available with the same lender, which matures in
November 1996, interest at Wall Street Journal prime rate, secured by
accounts receivable and equipment which the Company elected not to renew.
Obligations under capital leases, interest rates ranging from 11% to
28%, maturities through November 1999, secured by computer
and other equipment 528,889
-----------
928,889
Less - current installments (710,290)
-----------
$ 218,599
===========
</TABLE>
The line of credit agreement requires the Company to maintain compliance with
certain covenants including, among others, a debt-to-net worth ratio, a minimum
quick ratio, and a minimum tangible net worth requirement, as defined in the
agreement. As of October 31, 1996 the Company was in compliance with these
covenants.
Future maturities of notes payable and obligations under capital leases are as
follows as of October 31, 1996:
Notes Payable Capital Leases
------------- --------------
1997 $ 400,000 $ 316,940
1998 - 174,665
1999 - 81,926
2000 - 14,384
--------- ----------
$ 400,000 $ 587,915
Less amount representing interest - (59,026)
--------- ----------
$ 400,000 $ 528,889
========= =========
The Company has made certain capital commitments of approximately $85,000
related to certain equipment.
7
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 3
- ------
Accrued liabilities at October 31, 1996 consist of the following:
Accrued product cost of sales $ 1,560,261
Accrued payroll and commissions 1,350,304
Accrued royalties 1,380,310
Other accrued liabilities 411,989
------------------
$ 4,702,864
=================
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.
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>
1996 1995
---- ----
<S> <C> <C> <C>
Expected income tax expense (benefit) at 34% $ 103,000 $ 152,000
Reconciling items:
State income taxes, net of federal income tax benefit 35,000 40,000
Amortization of excess purchase price and other 40,000 40,000
Increase in valuation allowance - -
Other, including effect of utilizing net operating
loss carryforwards in accordance with SFAS No. 109 (28,000) (232,000)
--------- ----------
Current provision for income taxes, of which
$115,000 is federal and $35,000 is state in 1996 $ 150,000 $ -0-
========= ==========
</TABLE>
The components of deferred taxes as of October 31, 1996 are as follows:
Allowance for doubtful accounts $ 276,000
Tax depreciation in excess
of book depreciation ( 75,000)
Capitalized software costs (398,000)
Accrued liabilities 403,000
Deferred revenues 235,000
Net operating loss carry forward 27,750
Valuation allowance (468,750)
-----------
$ - 0 -
===========
A valuation allowance is provided when it is uncertain that some or all of the
deferred tax asset will be recognized. As of October 31, 1996, the decrease in
the valuation allowance results from changes in temporary differences and net
operating loss carry forwards.
8
<PAGE>
Note 5
- ------
Stockholders' Equity
On July 23, 1996, the Company completed a private placement where the Company
sold and issued 166,667 shares of restricted common stock at $4.50 per share to
two investors and received proceeds of $750,000. The investors have certain
demand and piggyback registration rights. The investors are affiliates of Beech
Street Corporation ("Beech Street"). On July 21, 1996, the Company entered into
a distribution agreement and a call center services management agreement with
Beech Street. The distribution agreement enables Beech Street to distribute the
Company's personal health management services to Beech Street customers. Under
the call center services agreement, the Company will provide certain call center
services over a 12-month period to Beech Street for $1,245,000. On August 22,
1996 the Board of Directors of the Company elected one of the investors to serve
on the Company's Board and granted certain options in conjunction with the
election to the Company's Board.
In June 1996 the holder of the Company's preferred stock converted 125,000
shares into 500,000 shares of common stock.
9
<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
fiscal 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 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 for the quarter and nine months ended October 31, 1995.
Background and Recent Developments
- ----------------------------------
During the fiscal year ended January 31, 1996, and continuing through the period
ended October 31, 1996 the Company continued to invest resources to expand and
improve its sales function and also invested to support its product development
efforts and the recently launched personal health management service bureau call
center (see discussion below). 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 continuing investment in the sales
function, product development and personal health management service bureau call
center 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 industry. Nonetheless, and while there
are no assurances, the Company's management believes that its competitive
strengths will permit it to continue to compete in its targeted market and that
the Company is positioned favorably to take advantage of future opportunities in
the healthcare market. The Company's management believes that healthcare reform
will continue to shift to a managed care environment. 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. 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.
In July 1996, the Company launched its personal health management service bureau
call center. The personal health management service bureau is a telephone advice
line whereby eligible participants are able to access, through a toll-free
telephone number, nurses or pre-recorded information to answer or obtain
information on health related issues. The Company operates this call center
service bureau twenty-four (24) hours a day, seven (7) days a week, by staffing
the call center service bureau with the Company's own nurses and proprietary
technology. Establishment and operation of the medical call center service
bureau involves numerous risks, including risks associated with launching a new
venture, diversion of management's attention from other business concerns, loss
of capital, risks of entering markets in which the Company has limited or no
direct prior experience and competition in a market where there is at least one
established competitor with significantly greater resources than the Company.
There are no assurances the Company will be able to successfully penetrate the
market and grow the medical call center service bureau business. Successful
operation of the newly launched medical call center service bureau is dependent
on a number of factors, including the Company maintaining adequate capital to
continue to fund the medical call center service bureau's operations, growth and
working capital needs.
10
<PAGE>
On July 21, 1996, the Company entered into a distribution agreement and a call
center services management agreement with Beech Street Corporation ("Beech
Street"). The distribution agreement enables Beech Street to distribute the
Company's personal health management services to Beech Street customers. Under
the call center services management agreement, the Company will provide certain
call center services and expertise over a 12-month period to Beech Street for
$1,245,000. The Company is receiving payments for the services provided and the
revenue under the contract is recognized based on a percent of completion. As of
October 31,1996 approximately $478,000 had been recognized which is included in
the Company's marketing services revenue.
On July 23, 1996, the Company completed a private placement where the Company
issued 166,667 shares of restricted common stock to two investors and received
proceeds of $750,000. The investors are affiliates of Beech Street. The
investors have certain demand and piggyback registration rights.
On December 22, 1995 the Company entered into a development and distribution
agreement with Pfizer Health Solutions Inc., ("Pfizer") a subsidiary of Pfizer
Inc. Under the agreement the Company was to provide certain development services
and products to Pfizer for $1,375,000. As of October 31, 1996 the Company
received all payments due under the agreement and delivered on all its
obligations.
Results of Operations
- ---------------------
Three Months Ended October 31, 1996 vs. Three Months Ended October 31, 1995
- ---------------------------------------------------------------------------
Income. For the quarter ended October 31, 1996, the Company had net income of
$895,193 compared to net income of $ 217,316 for the quarter ended October 31,
1995.
Revenues and operating results depend primarily on the volume and timing of
orders received during each fiscal quarter, which are difficult to forecast.
Because a significant portion of the Company's operating expenses are relatively
fixed with personnel levels and other expenses based upon anticipated revenues,
the Company may not be able to reduce expenditures in response to sales
shortfalls or delays. These factors could cause variations in operating results
from quarter to quarter.
Revenues. Total revenues increased approximately 60% to $7,712,676 for the
quarter ended October 31, 1996 from $4,820,088 for the quarter ended October 31,
1995. The increase is primarily attributed to increases in revenues generated
from both initial license fees and support fees which included revenues of
approximately $550,000 of initial license fee revenues from Pfizer Health
Solutions Inc. and approximately $300,000 of service fee revenues from Beech
Street.
Initial license fees primarily represent revenues from the initial sale of the
Company's medical call center products such as Centramax Plus and voice response
products. Revenue from initial license fees increased to $3,932,883 for the
quarter ended October 31, 1996, from $2,648,379 for the quarter ended October
31, 1995. Approximately $800,000 of the initial fee revenue was attributable to
contracts which were delayed from the second quarter to the third. As a result
initial license fee revenue and corresponding net income for the quarter ended
October 31, 1996 were higher than in prior quarters.
Support, marketing services and material revenues were $3,779,793 for the
quarter ended October 31, 1996 compared to $2,171,709 for the quarter ended
October 31, 1995. 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. Historically, the support fees
began within six to twelve months after a customer executed a license agreement.
The Company has recently modified the support fee terms to begin on the contract
date. Revenue generated from support fees increased approximately $1 million for
the quarter ended October 31, 1996 compared to the quarter ended October 31,
1995, 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. Revenues generated from the sale of materials represent the sale of
printed questionnaires and reports from the Company's Patient Assessment System
("PAS") and Health Direct products. The revenue from the sale of materials for
the quarter ended October 31, 1996 increased approximately $132,000 from the
quarter ended October 31, 1995. For the remainder of its current fiscal year,
the Company does not expect any significant increase or decrease in future
revenues associated with the PAS and Health Direct products. Marketing services
represents revenue from strategic and creative services provided and generated
by the Company's subsidiary First Strategic Group ("FSG") and other consulting
services. Revenues from marketing services for the quarter ended October 31,
1996 were approximately $500,000 higher of which $300,000 is from Beech Street
than the quarter ended October 31, 1995 due primarily to an increase in new FSG
consulting engagements and other consulting and management services provided by
the Company.
11
<PAGE>
Operating Expenses. Total operating expenses increased approximately 45% to
$6,667,483 for the quarter ended October 31, 1996 from $4,602,773 for the
quarter ended October 31, 1995. Total operating expenses increased primarily due
to an increase in expenses associated with selling, product support and
development and variable expenses associated with the increase in initial
license fee and support fee revenue.
Cost of License Fees, Materials and Service Revenues. The cost of initial
license fees increased to $1,061,151 for the quarter ended October 31, 1996 from
$829,314 for the quarter ended October 31, 1995. The increase is primarily due
to costs associated with increased sales of voice response products and the
increased costs of health information royalties.
Cost of support marketing services and materials revenues, which includes the
cost of royalties, printed report forms and questionnaires sold to PAS
licensees, the costs of materials associated with the Health Direct product and
costs associated with FSG services revenue, increased to $1,160,080 for the
quarter ended October 31, 1996 from $867,775 for the quarter ended October 31,
1995. The increase is primarily a result of costs associated with the increased
health information royalty and marketing service revenues from FSG.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $3,444,351 for the quarter ended October 31,
1996 from $2,244,076 for the quarter ended October 31, 1995. The increase is
primarily attributable to increases in the Company's sales, product support and
development staffs, and the expansion of the technical support staff as well as
increased costs associated with supporting these increased staffing levels and
expenses associated with the launch of the personal health management call
center service bureau.
General and Administrative. General and administrative expenses increased to
$574,217 for the quarter ended October 31, 1996 from $343,550 for the quarter
ended October 31, 1995. The increase is primarily attributable to increases in
professional service fees and other general operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $317,684 for the quarter ended October 31, 1996 from $240,057 for the quarter
ended October 31, 1995. This increase is due to the increased depreciation
expense from additional equipment purchases and amortization expense associated
with the additional software development costs.
Provision for Doubtful Accounts. The provision for doubtful accounts was
$110,000 for the quarter ended October 31, 1996 compared to $78,000 for the
quarter ended October 31, 1995. The increase is attributed to the Company's
increase in its allowance for doubtful accounts to adequately reserve for
potential uncollectible accounts receivable.
Nine Months Ended October 31, 1996 vs. Nine Months Ended October 31, 1995
- -------------------------------------------------------------------------
Income/Loss. For the nine months ended October 31, 1996, the Company had net
income of $548,471 compared to a net loss of $54,513 for the nine months ended
October 31, 1995.
Revenue. Total revenue increased approximately 51% to $17,800,709 for the nine
months ended October 31, 1996 from $11,788,856 for the nine months ended October
31, 1995. The increase in revenue is due primarily to increases in both initial
license fee and support fee revenue.
Revenues from initial license fees increased to $8,943,729 for the nine months
ended October 31, 1996 from $5,982,637 for the nine months ended October 31,
1995. The increase is due to an increase in the initial license fee revenue from
the Company's medical call center product, Centramax. M Plus, and interactive
voice response products.
Support, marketing service and material revenue increased to $8,856,980 for the
nine months ended October 31, 1996 from $5,806,219 for the nine months ended
October 31, 1995. Revenue from support fees increased approximately $2.8 million
for the nine months ended October 31, 1996 from the nine months ended October
31, 1995 due to the increased customer base and related product license
agreements. Revenue generated from the sale of materials and services decreased
approximately $70,000 for the nine months ended October 31, 1996 from the nine
months ended October 31, 1995 due to a decrease in sale of printed questionnaire
and reports, and from decreased revenue from Health Direct subscriptions.
Revenues from
12
<PAGE>
marketing services for the nine months ended October 31, 1996 were higher than
the nine months ended October 31, 1995 due to an increase in new consulting
engagements from marketing services provided by FSG and from other consulting
services provided by the Company to Beech Street and Pfizer Health Solutions,
Inc.
Operating Expenses. Total operating expenses increased approximately 44% to
$17,102,238 for the nine months ended October 31, 1996 from $11,843,369 for the
nine months ended October 31, 1995. The increase is due primarily to an increase
in certain expenses associated with increases in sales and product development
activities and variable expenses associated with increased revenues.
Cost of License Fees, Materials and Service Revenues. The cost of license fees
increased to $2,198,181 for the nine months ended October 31, 1996, compared to
$1,351,362 for the nine months ended October 31, 1995. The increase is due to
variable costs associated with increased initial license fee revenues and
increased costs of health information royalties.
Cost of support, materials and service revenue increased to $2,977,679 for the
nine months ended October 31, 1996 from $1,832,527 for the nine months ended
October 31, 1995. The increase is due to the increased cost associated with
increased revenue from support fees.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $9,096,463 for the nine months ended October
31, 1996 from $6,570,366 for the nine months ended October 31, 1995. The
increase was due primarily to increased sales, product support and development
staffs and related expense to support the increased staffing levels, as well as
expenses associated with the launch of the Company's personal health management
call center service bureau. These increases in staff were, in management's
opinion, necessary to expand product distribution, support the Company product
development, and the launch of the medical call center service bureau as well as
expand the technical support function to service the Company's customers.
General and Administrative. General and administrative expenses increased to
$1,736,105 for the nine months ended October 31, 1996 from $1,297,893 for the
nine months ended October 31, 1995. The increase is primarily attributable to an
increase in professional service and other general operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $853,810 for the nine months ended October 31, 1996 from $641,721 for the
nine months ended October 31, 1995. This increase is due to the increased
depreciation expense from additional equipment purchases and amortization
expense associated with software development costs.
Provision for Doubtful Accounts. The provision for doubtful accounts was
$240,000 for the nine months ended October 31, 1996 compared to $149,500 for the
nine months ended October 31, 1995. The increase is attributed to the Company's
increase in its allowance for doubtful accounts to adequately reserve for
potential uncollectible accounts receivable.
13
<PAGE>
Liquidity and Capital Resources
- -------------------------------
As of October 31, 1996, the Company had a working capital deficit (current
assets minus current liabilities) of $881,490 compared to a working capital
deficit of $1,349,989 as of January 31, 1996. The Company's working capital
position improved as a result of improved operating income and the private
placement discussed below. The Company's accounts receivable balance increased
to $7,613,462 at October 31, 1996 from $5,735,778 at January 31, 1996. The
increase in accounts receivable resulted from the increased revenues associated
with both initial license fee revenue and support fees.
On July 23, 1996, the Company completed a private placement whereby the Company
issued 166,667 shares of common stock to two investors and received proceeds of
$750,000. The investors are affiliates of Beech Street. Subsequently on August
22, 1996 one of the investors was elected to the Company's Board of Directors.
The investors also received certain demand and piggyback registration rights.
On October 23, 1996, the Company renewed and increased its revolving line of
credit from $2,000,000 to $2,500,000. The revolving line of credit bears
interest at prime plus 2.0%, is secured by substantially all the Company's
assets and matures in October, 1997. The availability of borrowing on the
revolving line of credit is subject to available eligible accounts receivable
and certain other covenants. The Company also has a line of credit of $500,000,
from the same lender. The $500,000 line of credit is secured by accounts
receivable and equipment. Interest is paid monthly on the unpaid balance at an
annual rate of one percentage point above the prime rate. The $500,000 line
matured in November 1996 and the Company did not renew this line of credit. At
October 31, 1996, $400,000 was outstanding under those credit lines.
The Company is currently dependent on cash from operations and available
proceeds from its lines of credit for its daily operational cash requirements.
Successful operation of the personal health management services call center
service bureau is dependent upon, among other things, maintaining sufficient
capital to continue to fund the operations, growth and working capital needs of
the call center service bureau. The Company continues to evaluate opportunities
to expand and increase the existing capital available to it and continues to
evaluate opportunities to reduce the number of days it takes to collect the
initial fee accounts receivable. While the Company believes the recent private
placement, line of credit and cash flow from operations requirements will
provide the Company with its short term cash requirements for its current
operations and the operations of the recently launched medical call center
service bureau, the Company will continue to actively seek alternative sources
of capital to support its future growth, including the growth of the medical
call center service bureau. There are, however, no assurances that the Company
will be successful in obtaining additional capital.
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 seek to 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 recurring monthly
revenue from support fees, material sales and services is currently not
sufficient to maintain a break-even level at the Company's current operating
expense levels. The Company will continue to focus its efforts on improving cash
from operations, increasing recurring revenue, and increasing its operating
income.
The Company intends to continue to invest in product and software development,
which will require additional support staff and related operating expenses. The
Company has expanded its current office space and has leased an additional 5,000
square feet of office space for its recently launched medical call center
service bureau. In addition, the Company has made certain capital commitments of
approximately $85,000 related to certain equipment. The Company expects that
additional space will be taken and staff will be hired during its current fiscal
year (ending January 31, 1997) for its current operations and for the recently
launched medical call center service bureau and additional capital resources
will be needed to fund this growth and expansion.
14
<PAGE>
In the past, the Company has funded its growth primarily through cash from
operations and its line of credit. While the Company believes the recent private
placement, existing line of credit and cash flow from operations will provide
the Company with its short-term cash requirements for its current operations and
the operations of the recently launched medical call center service bureau, the
Company believes that additional capital will be necessary to support future
operations and planned growth in the coming fiscal year, including for expanding
its medical call center service bureau operations, and is actively seeking
sources of such capital. While the Company believes there are sufficient sources
to obtain capital, there are no assurances the Company will be successful in
raising additional capital to support planned growth.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
- --------------------------------------------------------------------------------
1995.
- ----
This Form 10-QSB includes statements which constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which are statements other than historical fact, that involve risks and
uncertainties. In addition to the factors discussed elsewhere herein, important
factors may cause the Company's actual results to differ materially from these
and any future forward looking statements by or on behalf of the Company. Those
factors include, among others, uncertainties and delays in the development,
commercialization and marketing of new products and services, particularly the
recently launched medical call center service bureau products and services,
demand and market acceptance risks, the Company's ability, or not, to obtain
additional financing, the impact of competitive products, services and pricing,
continued rapid change and consolidation in the healthcare market, general
changes in economic conditions not presently contemplated, and other factors
detailed in the Company's Securities and Exchange Commission filings.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is subject to certain legal proceedings and claims
that arise in the conduct of its business. In the opinion of
management, the amount of liability, if any, as a result of
the claims and proceedings is not likely to have a material
effect on the financial condition or results of operations of
the Company.
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, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
National Health Enhancement Systems, Inc.
(Registrant)
Date: December 12, 1996 /s/ Gregory J. Petras
--------------------- -------------------------------------
Gregory J. Petras
President and Chief Executive Officer
Date: December 12, 1996 /s/ Jeffrey T. Zywicki
--------------------- ------------------------------------
Jeffrey T. Zywicki
Sr. Vice President Finance
17
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