<PAGE> 1
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 April 30, 1997
[ NO FEE REQUIRED]
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file Number 33-9396-LA
National Health Enhancement Systems, Inc.
(Name of small business issuer in its charter)
Delaware 86-0460312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
17th Floor
3200 North Central Avenue
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 602-230-7575
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of the Registrant's common stock issued and outstanding was
5,462,387 at May 05, 1997.
Transitional Small Business disclosure format (check one): Yes [ ] No [X].
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of April 30, 1997 3
Consolidated Statements of Operations for the three months
ended April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three months
ended April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 3,998,117
Accounts receivable, net of allowance
for doubtful accounts of $890,329 (Notes 2 and 3) 9,364,655
Prepaid expenses, deferred costs and supplies (Note 2) 2,206,162
------------
Total current assets 15,568,934
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $3,584,791 (Note 2) 1,398,009
PROPERTY AND EQUIPMENT,
net of accumulated depreciation (Notes 2 and 3) 2,371,448
EXCESS OF COST OVER
FAIR VALUE OF NET ASSETS ACQUIRED (Notes 1 and 2) 460,682
OTHER ASSETS (Note 2) 342,987
------------
$ 20,142,060
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital
leases (Notes 1 and 3) $ 793,581
Accounts payable 2,383,389
Accrued liabilities (Note 5) 4,977,538
Deferred revenue (Note 2) 6,214,407
------------
Total current liabilities 14,368,915
------------
OBLIGATIONS UNDER CAPITAL LEASES,
net of current installments (Note 3) 366,760
------------
DEFERRED REVENUE, net of current portion (Note 2) 12,323
------------
COMMITMENTS AND CONTINGENCIES (Notes 1,3 and 4)
STOCKHOLDERS' EQUITY (Note 1):
Common stock, $.001 par value,10,000,000
shares authorized, 5,877,672 shares issued
and 5,462,387 shares outstanding 169,527
Capital contributed in excess of par value 6,617,436
Accumulated deficit (1,389,336)
Less: treasury stock, 3,565 shares, at cost (3,565)
------------
5,394,062
------------
$ 20,142,060
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
3
<PAGE> 4
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES (Note 2):
License fees and computer hardware $ 2,970,505 $3,635,559
Support fees, marketing services,
material sales and other 4,599,176 2,292,635
----------- ----------
Total revenues 7,569,681 5,928,194
----------- ----------
OPERATING EXPENSES:
Cost of initial license fees
and computer hardware 873,339 1,185,833
Cost of support, marketing services
and materials sales 1,506,383 974,002
Product and other development 737,593 554,248
Sales and marketing 2,708,779 2,224,187
General and administrative 916,916 546,942
Depreciation and amortization 443,927 313,090
Provision for doubtful accounts 51,369 55,000
----------- ----------
Total operating expenses 7,238,307 5,853,302
----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 331,374 74,892
PROVISION FOR INCOME TAXES (116,482) --
----------- ----------
NET INCOME $ 214,892 $ 74,892
=========== ==========
NET INCOME AVAILABLE
FOR COMMON STOCKHOLDERS $ 214,892 $ 74,892
=========== ==========
NET INCOME PER
COMMON SHARE (Note 2) $ .03 $ .01
=========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2) 6,478,326 5,954,696
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 214,892 $ 74,892
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 443,927 313,090
Provision for doubtful accounts 51,369 55,000
Changes in assets and liabilities-
Accounts receivable 1,504,825 (307,172)
Prepaid expenses, deferred costs and supplies (684,410) (233,198)
Accounts payable 161,624 (172,067)
Accrued liabilities 24,563 397,760
Deferred revenue (408,917) 308,748
----------- -----------
Net cash provided by operating activities 1,307,873 781,187
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (289,030) (137,354)
Payments for capitalized software
development costs (406,762) (152,272)
Increase in other assets (29,017) (31,010)
----------- -----------
Net cash used in investing activities (724,809) (320,636)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- --
Proceeds from exercise of stock options 43,959 65,819
Net proceeds (payments) on line of credit 341,344 (1,378,632)
Principal payments on capital leases (139,310) (77,537)
Purchase of Treasury Stock (5,000) (6,974)
----------- -----------
Net cash provided by financing activities 240,993 (1,397,324)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 824,057 (936,773)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,174,060 1,479,525
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,998,117 $ 542,752
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 56,442 $ 24,641
=========== ===========
Cash paid for income taxes $ 252,000 $ 20,500
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property and equipment acquired
under capital leases $ 16,000 $ 148,513
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
National Health Enhancement Systems, Inc. (the Company) was incorporated in July
1983 as AHI Limited for the purpose of developing, licensing and marketing
health evaluation programs to hospitals, medical groups, clinics and physicians.
In October 1986, the Company changed its name to National Health Enhancement
Systems, Inc. and reincorporated in the state of Delaware. The Company presently
distributes proprietary, software-supported Medical Call Center products and
services designed to enable health care providers to reduce the costs associated
with inappropriate utilization of health care and improve service to their
customers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, First Strategic Group, Ltd. (FSG), NHE
Systems, Inc. (NHE), Expert Systems, Inc. (ESI), and Health Enhancements
International, Inc. (HEI) which is 90% owned by the Company. All significant
inter-company transactions have been eliminated in consolidation.
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
ACQUISITION OF EXPERT SYSTEMS, INC.
On February 18, 1997 the Company completed the acquisition of Expert Systems,
Inc. (Expert), a developer and distributor of telephone and database
technologies to create voice features for computer telephone applications. Under
the terms of the acquisition, accounted for as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16, the Company issued
465,299 restricted shares, and 59,701 options to purchase shares, of the
Company's common stock for all of Expert's outstanding shares and options at an
exchange rate of .09537 shares of the Company's common stock for each share of
Expert's stock. Of the shares issued in the transaction, 46,529 are escrowed
securing an indemnity obligation in favor of the Company.
The results of operations of the Company and ESI were combined as of the date of
acquisition and all prior periods presented have been restated to give effect to
the acquisition, as if it occurred at the beginning of each period presented.
6
<PAGE> 7
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFERRED COSTS
The costs incurred by the Company to provide post-contract customer support,
primarily royalties required to maintain the medical technical data included in
the Company's software products, are deferred and recognized over the period
benefited. Deferred costs totaled $674,481 at April 30, 1997. Amortization of
such deferred costs totaled $347,744 and $237,432 for the periods ended April
30, 1997 and 1996, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, capitalization of software development costs begins upon
the establishment of technological feasibility of the product. Development costs
incurred before the product is demonstrated to be technologically feasible are
expensed. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenues, estimated economic product lives
and changes in software and hardware technology. The capitalized development
costs, which include primarily salaries, are amortized using either the
revenue-ratio method or the straight-line method over the product's remaining
estimated useful life of three years, whichever yields the greatest amount of
amortization. Software development costs capitalized for the periods ended April
30, 1997 and 1996, respectively, totaled $406,762 and $255,873. Amortization of
capitalized software totaled $170,169 and $171,966 for the period ended April
30, 1997 and 1996, respectively; and, total development costs expensed for the
periods ended April 30, 1997 and 1996, respectively, were $357,596 and $209,238.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets of three to five years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful lives of the
assets.
At April 30, 1997, property and equipment consisted of the following:
<TABLE>
<S> <C>
Computer equipment $ 1,347,096
Office furniture and equipment 1,080,113
Assets held under capital leases,
primarily computer equipment 1,704,737
Leasehold improvements 213,172
-----------
4,345,118
Accumulated depreciation (1,973,670)
-----------
$ 2,371,448
===========
</TABLE>
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of the cost over the fair value of net assets acquired resulted from
the acquisition of FSG, and is being amortized over ten years using the
straight-line method. Amortization expense was approximately $19,000 for each of
the quarters ended April 30, 1997 and 1996.
OTHER ASSETS
Other assets include approximately $60,000 of accounts receivable from customers
with terms in excess of one year. These accounts are generally due over periods
ranging from 18 to 36 months. Interest has been imputed on these amounts at 10%.
7
<PAGE> 8
REVENUE RECOGNITION
Revenue is recognized in accordance with Statement of Position 91-1, Software
Revenue Recognition. Accordingly, revenue from software licensing is recognized
when delivery of the software has occurred, a signed noncancellable license
agreement has been received from the customer and any remaining obligations
under the license agreement are insignificant. Revenue related to
insignificant obligations is deferred and recognized as the obligations are
fulfilled. Revenue from software license fees related to the Company's
obligation to provide certain post-contract customer support without charge for
the first year of the license is unbundled from the license fee at its fair
value and is deferred and recognized straight-line over the contract support
period. Revenue from annual or other renewals of maintenance contracts
(including long-term contracts) is deferred and recognized straight-line over
the term of the contracts. Revenue from professional services is generally
billed on a time and materials basis. Professional services do not involve
significant customization, modification or production of the licensed software.
Such professional services fees are recognized as the related services are
provided.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments With Off-Balance Sheet Risk and Financial Investments With
Concentrations of Credit Risk, consist primarily of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
high quality financial institutions and limits the amount of credit exposure to
any one financial institution.
The Company sells its products and services to customers in the health care
industry throughout the United States. Concentrations of credit risk with
respect to accounts receivable are limited due to the geographic diversity and
large number of customers comprising the Company's customer base. The Company
performs credit evaluations of its customers, but does not require collateral to
support receivable balances. An allowance for doubtful accounts has been
established based on factors surrounding the credit risk of specific borrowers,
historical trends and other information.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments as defined by SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying value of
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to the short maturity of these instruments. The Company's notes
payable bear interest at rates indexed to the prime rate; therefore, the
carrying amounts approximate fair value.
NET INCOME PER COMMON SHARE
Net income per common share and common share equivalent is computed by dividing
the net income by the weighted average number of common shares and common share
equivalents assumed outstanding during the period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which supersedes Accounting Principal Board Opinion No. 15,
the existing authoritative guidance. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997
and requires restatement of all prior-period earnings per share data presented.
The new statement modifies the calculations of primary and fully diluted
earnings per share and replaces them with basic and diluted earnings per share.
The following table sets forth the pro-forma effect on net income per common
share for the first quarters of 1997 and 1996 assuming the Company had adopted
SFAS No. 128 on February 1, 1995:
<TABLE>
<CAPTION>
APRIL 30, 1997 APRIL 30, 1996
<S> <C> <C>
Basic $ .04 $ .02
Diluted $ .03 $ .01
</TABLE>
8
<PAGE> 9
(3) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES:
Notes payable and obligations under capital leases at April 30, 1997, were as
follows:
<TABLE>
<S> <C>
Revolving line of credit not to exceed
the stated borrowing bases defined in
the borrowing agreement or $2,500,000,
bearing interest at the lender's prime
rate (8.5% at April 30, 1997) plus 2%,
matures October 29, 1997, secured by
substantially all of the assets of the
Company, including eligible accounts
receivable defined in the borrowing
agreement. --
36 month amortizing loan bearing
interest at lender's prime rate plus 2%
secured by equipment 241,344
Revolving line of credit of 150,000,
bearing interest at the lender's prime
rate (8.75% at April 30, 1997) plus 2%,
matures May 15, 1997, secured by
Inventory and equipment 130,000
Obligations under capital leases bearing
interest at weighted average rate of
12.67%, maturities through November
1999, secured by computers and other
equipment 788,997
----------
1,160,341
Less: Current installments (793,581)
----------
$ 366,760
==========
</TABLE>
The lines of credit require the Company to maintain compliance with certain
covenants including certain financial ratios. At April 31, 1997, the Company was
in compliance with the financial ratios.
Future maturities of obligations under capital leases as of April 30, 1997 are
as follows:
<TABLE>
<CAPTION>
APRIL 30
<S> <C>
1998 $ 424,135
1999 299,522
2000 130,163
2001 39,291
---------
893,111
Less:
Amounts representing interest (104,114)
---------
$ 788,997
=========
</TABLE>
(4) COMMITMENTS:
The Company leases its office facilities and certain equipment under
noncancellable operating leases expiring through fiscal 2001. The leases include
options to extend for additional periods at the then prevailing market rates.
Rent expense was approximately $161,198 and $111,910 for the periods ended April
30, 1997 and 1996, respectively. Future minimum payments under these leases as
of April 30, 1997 are as follows:
<TABLE>
<CAPTION>
APRIL 30
<S> <C>
1998 $ 736,945
1999 689,849
2000 673,505
2001 604,619
2002 579,403
Thereafter 85,927
----------
$3,370,248
==========
</TABLE>
9
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The Company has entered into certain exclusive agreements with product support
vendors which require the payment of royalties on products sold and also require
minimum annual purchases of products to maintain the exclusivity associated with
these agreements.
Future minimum obligations under these agreements as of April 30, 1997 are as
follows:
<TABLE>
<CAPTION>
APRIL 30
<S> <C>
1998 $ 1,825,293
1999 2,148,213
2000 2,454,984
2001 2,757,566
2002 1,660,490
-----------
$10,846,546
===========
</TABLE>
(5) ACCRUED LIABILITIES:
Accrued liabilities as of April 30, 1997, are as follows:
<TABLE>
<S> <C>
Accrued product cost of sales $ 1,184,280
Accrued payroll and commissions 1,605,639
Accrued royalties 1,828,305
Other accrued liabilities 359,314
-----------
$ 4,977,538
===========
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except as noted herein, all references to the Company or National Health include
the Company and its consolidated subsidiaries.
National Health Enhancement Systems, Inc. (Nasdaq:NHES) is a leading provider of
technology, software and services designed to help managed care organizations,
hospitals and delivery systems, physician group practices and employer groups
provide affordable quality health care. National Health's Medical Call Center
products and services are used by over 700 health care organizations
nationwide to lower costs, improve consumer access to care and improve quality.
National Health's capability to link software, technology, health information
and strategic consulting services helps health care organizations, including
employers, promote wellness behavior, educate members, increase access to
appropriate services and lower costs without compromising care.
National Health implements installed onsite programs which are housed at the
client's location and staffed and managed by the client. The Company's clients
can also outsource programs for in-bound and out-bound calls to National
Health's Medical Call Center, typically on a per-member, per-month basis.
Whether run by a client using the Company's tools or outsourced to the Company's
Call Center services as a "turnkey" program, licensed registered nurses and
voice technology are used to service patients, healthplan members or employee
groups, as defined by the client.
Results of Operations
For the quarter ended April 30, 1997, the Company had income from operations of
$331,374 compared with income from operations of $74,992 for the quarter ended
April 30, 1996, an increase of approximately 342%. Additionally, net income for
the quarter ended April 30, 1997 was $214,892 compared to net income of $74,922
for the quarter ended April 30, 1996, an increase of 187%. The quarter ended
April 30, 1996 benefited from a NOL carry forward, which was fully utilized
during the year ended January 31, 1997.
The Company's operations are affected by consolidation, alliances and mergers in
the health care market. 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 health care industry. The Company's
management also believes its products help health care providers improve their
services and also help reduce health care costs by providing objective
information on health care issues to individuals, thereby enabling them to make
informed choices about when, where and how to seek health care services and
reduce health care costs while providing providers with a favorable return on
their investment in the Company's products. Nonetheless, the Company's
operations may be materially and adversely affected by consolidation, alliances
and mergers in the health care industry, health care reform in the private or
public sector, and by future economic conditions.
Revenues and operating results depend primarily on the volume and timing of
orders received during each fiscal quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
license revenues in the last month of each fiscal quarter, frequently in the
last week. Because a significant portion of the Company's operating expenses are
relatively fixed with personnel levels and other expenses based upon anticipated
revenues, a substantial portion of which may not be generated until the end of
each fiscal quarter, the Company may not be able to reduce spending in response
to sales shortfalls or delays. These factors could cause variations in operating
results from quarter to quarter, which may result in volatility in the price of
the Company's common stock.
REVENUES. Total revenues for the period ended April 30, 1997 increased 28% to
$7,569,681 compared to total revenues of $5,928,194 for the period ended April
30, 1996. The increase can be attributed to an increase in support fees,
marketing services and other revenue which increased approximately $2.3 million
or 100% over the prior period. This is primarily related to an increase in
maintenance and support fees, Call Center Revenue for which there was no
corresponding amount in the prior period (a September 1996 start-up operation),
and consulting services. License fees and computer hardware revenues decreased
approximately 18% from the same quarter last year primarily due to efforts
focused on the Company's Medical Call Center. Management believes that this
decrease is primarily related to the Company's strategy of focusing sales
resources more heavily on developing Medical Call Center service contracts in
order to increase the Company's recurring revenue base, and does not evidence a
decrease in demand for the Company's core products. The Company is refocusing
its sales resources to more effectively sell core products and Call Center
services. Revenue from support, marketing services, materials sales and other
accounted for approximately 61% of the Company's total revenues for the period
ended April 30, 1997. Such revenue represents primarily post contract software
maintenance and support, creative marketing services, Call Center revenue and
consulting services.
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<PAGE> 12
Initial license fee revenue is derived primarily from the sales of the Company's
core software products -- Centramax.M(TM), Centramax.M Plus(TM), Pediatric
Triage and Advice System(TM), Parent Advice Line(TM), and Voicemax Plus(TM) --
and the Company's value-added products and services -- The Professionals(TM),
Healthfone(TM), Patient Assessment System(TM), Health Direct, and health care
marketing services. Revenues generated from the initial license fees of core and
value-added products and services accounted for approximately 39% of the
Company's total revenues for the period ended April 30, 1997.
OPERATING EXPENSE. Total operating expenses were $7,238,307 for the period ended
April 30, 1997, compared to $5,853,272 for the period ended April 30, 1996, an
increase of $1,385,035 or 24%. This increase is due primarily to an increase in
expenses associated with increases in sales and product development costs and
variable expenses associated with increased revenue.
COST OF INITIAL LICENSE FEES AND COMPUTER HARDWARE. These costs represent costs
incurred to implement and install the Company's core products, including
hardware costs and training. Initial license fees and computer hardware costs
decreased to $873,339 for the period ended April 30, 1997 from $1,185,833 for
the period ended April 30, 1996, a decrease of $312,494. The decrease in total
initial fee costs is the result of the decrease in initial license fee revenues.
COST OF SUPPORT, MARKETING SERVICES, MATERIALS SALES AND OTHER. These costs
represent costs associated with providing annual support fees including third
party license fees and technical assistance, variable costs associated with
services provided by FSG, printing costs associated with the Patient Assessment
System(TM) and Health Direct products. Cost of support, marketing services,
materials sales and other increased to $1,506,383 for the period ended April 30,
1997 compared to $974,002 for the period ended April 30, 1996, an increase of
$532,381. The increase is a direct result of the increase in corresponding
support revenues during the current fiscal quarter.
PRODUCT DEVELOPMENT COSTS. Product development costs relate to the
technological improvements and enhancements being made to the Company's products
mix and costs incurred to establish the technological feasibility of products
currently under development. Product development costs were $737,593 for the
period ended April 30, 1997 compared to $554,218 for the period ended April 30,
1996. The increase is the result of the Company's continued growth and expansion
of product lines.
SALES AND MARKETING COSTS. Sales and marketing expenses were $2,708,780 for the
period ended April 30, 1997 compared to $2,224,187 for the period ended April
30, 1996. This is an increase of $484,593 or 38%. This increase reflects the
Company's continued investment in selling and marketing resources.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $916,916
for the period ended April 30, 1997 compared to $546,942 for the period ended
April 30, 1996. This is an increase of $369,974 or 68%. As a percentage of
revenue, however, general and administrative expenses increased 3% from the
quarter ended April 30, 1996. This increase is due primarily to general
inflationary increases, continued investment in the organization as a whole
including the addition of new staff, additional space requirements and
equipment, and related expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$443,927 for the period ended April 30, 1997 compared to $313,090 for the period
ended April 30, 1996. This is an increase of $130,837 or 42%. This increase is
due to the addition of furniture and equipment needed to accommodate the
Company's growth.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was $51,369
for the period ended April 30, 1997 compared to $55,000 for April 30, 1996. The
provision for doubtful accounts is adjusted by the Company to reflect
potentially uncollectible accounts receivable that may exist at period end. The
Company believes that the allowance for doubtful accounts is adequate, given the
amount of the accounts receivable, the Company's credit terms and collection
history.
LIQUIDITY AND CAPITAL RESOURCES.
As of April 30, 1997, the Company had working capital of $1,200,019 compared to
working capital of $1,545,095 at January 31, 1997. The decrease in working
capital was a result of the Company's use of cash reserves for operating
purposes. Cash provided by operating activities was $1,307,873 for the period
ended April 30, 1997, compared to $781,187 for the period ended April 30, 1996.
12
<PAGE> 13
On October 23, 1996 the Company obtained a revolving line of credit providing up
to $2,500,000. The revolving line of credit bears interest at prime plus 2%, and
is secured by accounts receivable and matures on October 22, 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 obtained an "interest only" borrowing line of $250,000 from the same lender
that was convertible to an amortizing loan. On April 22, 1997, the amount
outstanding at that time was converted into a 36 month amortizing loan bearing
interest at the rate of prime plus 2%.
During the quarter ended April 30, 1997, the Company did not draw on the
revolving line of credit. If necessary, the Company believes it will be able
to renew or replace the line of credit by October 22, 1997, the date at which
the current revolving line agreement expires, although there are no assurances.
The Company continues to evaluate opportunities to expand and increase existing
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 health care 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 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, increasing support revenues, and
increasing revenue in the new Call Center division. 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.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The discussion above 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 and
marketing of new products and services, product and services demand and market
acceptance risks, the Company's ability or inability to obtain additional
financing, the impact of competitive products, services and pricing, continued
rapid change and consolidation in the health care market, general changes in
economic conditions not presently contemplated, possible initiation of FDA and
other governmental regulation of the Company's products as medical devices, and
other factors detailed in the Company's Securities and Exchange Commission
filings.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. All other schedules have been omitted because of the absence of
conditions under which they are required or because the required material
information is included in the Financial Statements or Notes to the Financial
Statements included herein.
(1) Exhibits required by Item 601 of Regulation S-B are set forth on
the Exhibit Index to this report which is hereby incorporated
herein by this reference.
B. Reports on Form 8-K for the quarter ended April 30, 1997
(1) Acquisition by merger of all the assets and business of Expert
Systems Incorporated by Reference to form 8-K dated February 20,
1997 filed March 6, 1997.
14
<PAGE> 15
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gregory J. Petras Chairman and Chief Executive 06-12-97
- ------------------------ Officer
Gregory J. Petras
/s/ Earl E. Bray Chief Financial Officer 06-12-97
- ------------------------
Earl E. Bray
</TABLE>
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation Incorporated by Reference
of the Company to Exhibit 3.1 of S-18
No. 33-9396-LA
3.2 Bylaws of the Company Incorporated by Reference
to Exhibit 3.2 of S-18
No. 33-9396-LA
4.1 Specimen Certificate Incorporated by Reference
Representing $.001 par value to Exhibit 4.1 of S-18
Common Stock No. 33-9397-LA
4.2 Form of Warrant to the Incorporated by Reference
Underwriter to Exhibit 4.2 of
Amendment No. 2 to S-18
No. 33-9397-LA
4.3 Form of Warrant to the Incorporated by Reference
Advisor to Exhibit 4.3 of
Amendment No. 2 to S-18
No. 33-9397-LA
27 Financial Data Schedule Filed Herewith
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 3,998,117
<SECURITIES> 0
<RECEIVABLES> 10,254,984
<ALLOWANCES> 890,329
<INVENTORY> 0
<CURRENT-ASSETS> 15,568,934
<PP&E> 4,345,118
<DEPRECIATION> 1,973,670
<TOTAL-ASSETS> 20,142,060
<CURRENT-LIABILITIES> 14,368,915
<BONDS> 0
0
0
<COMMON> 169,527
<OTHER-SE> 5,224,535
<TOTAL-LIABILITY-AND-EQUITY> 20,142,060
<SALES> 7,569,681
<TOTAL-REVENUES> 7,569,681
<CGS> 3,117,315
<TOTAL-COSTS> 7,238,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 331,374
<INCOME-TAX> 116,482
<INCOME-CONTINUING> 214,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214,892
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
