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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, 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
5,705,062 at November 17, 1997.
Transitional Small Business disclosure format (check one):
Yes [ ] No [ X ].
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TABLE OF CONTENTS
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PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of October 31, 1997 3
Consolidated Statements of Operations for the three
months and nine months ended October 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the nine
months ended October 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,871,713
Accounts receivable, net of allowance
for doubtful accounts of $1,545,783 12,925,357
Prepaid expenses, deferred costs and supplies 3,090,795
------------
Total current assets 17,887,865
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 1,466,165
PROPERTY AND EQUIPMENT, net 2,350,865
EXCESS OF COST OVER
FAIR VALUE OF NET ASSETS ACQUIRED, net 645,307
OTHER ASSETS, net 255,173
------------
$ 22,605,375
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations under
capital leases $ 865,184
Accounts payable 1,806,246
Accrued liabilities 5,311,361
Deferred revenue 7,500,360
------------
Total current liabilities 15,483,151
------------
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES,
net of current installments 226,893
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 10,000,000
shares authorized, 5,705,062 shares issued
and outstanding 5,705
Capital contributed in excess of par value 7,139,333
Accumulated deficit (249,707)
------------
6,895,331
------------
$ 22,605,375
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
3
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
--------------------------------------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Initial license fees and computer hardware $ 4,056,625 $ 4,341,824 $ 10,679,189 $ 10,846,561
Support fees, marketing services,
material sales and other 5,157,521 4,100,298 14,309,220 9,259,011
------------ ------------ ------------ ------------
Total revenues 9,214,146 8,442,122 24,988,409 20,105,572
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of initial license fees
and computer hardware 956,527 1,533,688 2,955,173 3,762,871
Cost of support, marketing services,
materials sales and other 1,641,186 1,509,515 4,588,954 3,736,509
Product development 666,920 448,854 2,110,301 1,612,003
Sales and marketing 2,959,572 2,524,729 8,464,641 6,820,440
General and administrative 1,456,666 819,529 3,487,432 2,142,636
Depreciation and amortization 468,000 399,738 1,386,516 1,065,306
Provision for doubtful accounts 620,868 110,000 724,237 240,000
------------ ------------ ------------ ------------
Total operating expenses 8,769,739 7,346,053 23,717,254 19,379,765
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 444,407 1,096,069 1,271,155 725,807
PROVISION FOR INCOME TAXES (Benefit) (341,008) 150,500 (83,937) 150,500
------------ ------------ ------------ ------------
Net income $ 785,415 $ 945,569 $ 1,355,092 $ 575,307
============ ============ ============ ============
NET INCOME AVAILABLE
FOR COMMON STOCKHOLDERS $ 785,415 $ 945,569 $ 1,355,092 $ 575,307
============ ============ ============ ============
NET INCOME PER
COMMON SHARE $ 0.12 $ 0.15 $ 0.21 $ 0.10
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,718,839 6,282,644 6,601,971 6,006,265
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996 (UNAUDITED)
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,355,092 $ 575,307
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,386,516 1,065,304
Provision for doubtful accounts 724,237 240,000
Changes in assets and liabilities-
Accounts receivable (2,728,684) (2,128,014)
Prepaid expenses, deferred costs and supplies (1,569,043) (329,835)
Accounts payable (415,519) 198,032
Accrued liabilities 358,386 1,611,074
Deferred revenue 864,713 1,136,332
----------- -----------
Net cash provided by operating activities (24,302) 2,368,200
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (783,885) (374,460)
Payments for capitalized software
development costs (784,849) (1,001,660)
Increase in other assets (14,458) (165,227)
----------- -----------
Net cash used in investing activities (1,583,192) (1,541,347)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock -- 799,125
Proceeds from exercise of stock options 155,377 52,239
Net proceeds (payments) on credit facilities 457,344 (1,209,561)
Principal payments on capital leases (307,574) (254,127)
----------- -----------
Net cash provided by (used in) financing activities 305,147 (612,324)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,302,347) 214,529
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 3,174,060 1,477,769
----------- -----------
CASH AND CASH EQUIVALENTS
END OF QUARTER $ 1,871,713 $ 1,692,298
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 181,432 $ 148,944
=========== ===========
Cash paid for income taxes $ 360,200 $ 12,675
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property and equipment acquired
Under capital leases $ 16,000 $ 253,245
=========== ===========
</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
OCTOBER 31, 1997 (UNAUDITED)
(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
specializes in products and services used in the delivery of nurse triage and
care management via telephone.
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), and Expert Systems, Inc. (ESI), as well as Health
Enhancements International, Inc. (HEI) which is 90% owned by the Company. All
significant intercompany transactions have been eliminated in consolidation.
INTERIM FINANCIAL REPORTING
The accompanying unaudited Consolidated Financial Statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented have been made. The results of operations
for the nine month period ended October 31, 1997, are not necessarily indicative
of the operating results that may be expected for the entire fiscal year ending
January 31, 1998. Certain prior period amounts have been reclassified to conform
to the October 31, 1997 presentation. These financial statements should be read
in conjunction with the Company's Form 10-KSB for the fiscal year ended January
31, 1997.
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. (ESI), 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 ESI's outstanding shares and options at an exchange rate
of .09537 shares of the Company's common stock for each share of ESI 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.
MERGER
On October 2, 1997 the Company announced that it had signed a definitive
agreement to be acquired by HBO & Company ("HBOC"). Upon satisfaction of the
closing conditions set forth in the Agreement of Merger dated October 2, 1997
(the "Merger"), the Company will merge into HBOC of Georgia, a wholly-owned
subsidiary of HBOC. The stockholders of NHES will receive shares of HBOC common
stock in the transaction, and the exchange ratio will be determined by averaging
the closing HBOC stock price for
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a period of 20 trading days ending shortly before the closing of the
transaction. If the average price of HBOC common stock is between $35.37 and
$43.23, NHES stockholders will receive 0.32 of an HBOC share. If the HBOC common
stock average price is above $25.00 up to $35.37, NHES stockholders will receive
a fraction of an HBOC share equal to $11.32 per NHES share. If the average price
of HBOC common stock during the pricing period is above $43.23, NHES
stockholders will receive a fraction of an HBOC share equal to $13.83 per NHES
share. All outstanding options to purchase the Company's common stock will be
assumed by HBOC, with HBOC common stock substituted for Company common stock
pursuant to the exchange ratio applicable to the outstanding common stock. The
transaction will be accounted for as a pooling of interests and treated as a
tax-free reorganization. The Merger has been approved by the Board of Directors
of the Company and HBOC, but is still subject to various conditions, including
approval by the Company's stockholders. A proxy statement of the Company and a
prospectus of HBOC has been delivered to the stockholders of the Company in
connection with the special meeting of stockholders of the Company to vote on
the Merger, which is scheduled to be held on December 29, 1997.
Pursuant to Section 10.2.2 of the Merger Agreement, the Merger Agreement may be
terminated by either party under certain circumstances. The Company has agreed
that if the Merger Agreement is terminated by the Board of Directors of the
Company, in the exercise of good faith determination that its fiduciary duties
to the Company's stockholders imposed by law, that such determination is
required, the Company will pay HBOC (i) a fee in the amount of $3,000,000
inclusive of the amount of HBOC's reasonable costs and expenses in connection
with the negotiation and performance of the Merger Agreement. Payment of the
foregoing amounts shall not be in lieu of damages incurred if the Company
breaches certain covenants in the Merger Agreement.
(2) 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. The difference between
primary and fully diluted net income per common share is not material.
(3) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 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 three and nine months ended October 31, 1997 and 1996 assuming the
Company had adopted SFAS No. 128 at the beginning of each period presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Basic $ 0.14 $ 0.19 $ 0.25 $ 0.12
Diluted $ 0.12 $ 0.15 $ 0.21 $ 0.10
</TABLE>
(4) 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. During the second quarter, 47,696 shares of Common Stock,
valued at $244,591, were released from escrow pursuant to a purchase agreement
and were allocated to excess of cost over fair value of net assets acquired.
7
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PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except as noted herein, all references to the Company or NHES include the
Company and its consolidated subsidiaries.
National Health Enhancement Systems, Inc. (the Company), is a leading health
information and technology company specializing in products and services used in
the delivery of telephonic triage advice and care management. These products
include clinical software used by licensed health care professionals 24 hours
per day, 7 days per week to assist telephone callers with their medical
concerns. NHES has over 700 clients nationwide, including hospitals, integrated
delivery systems, physician group practices, HMO's, indemnity insurance
companies and self-insured employers as part of its installed base of clients.
Other clients and prospects include PPO's, CHAMPUS, government programs,
children's hospitals, Medicare/Medicaid and military organizations. The Company
also utilizes its own software and employs its own licensed health care
professionals to deliver nurse triage and care management under outsourcing
arrangements through its recently established Medical Call Center Services
Division.
Results of Operations
Net income for the third quarter of 1997 was $785,415 compared to net income of
$945,569 for the third quarter of 1996. For the first nine months of 1997, the
Company had net income of $1,355,092 compared with net income of $575,307 for
the same period during 1996. For the third quarter of 1997, net income per
common share was $.12 compared with net income per common share of $.15 for the
third quarter of 1996. For the first nine months of 1997, net income per share
was $.21 compared with net income per common share of $.10 for the first nine
months of 1996. The improvement in year-to-date net income can be attributed to
a growing recurring revenue base and a benefit realized from research and
development tax credits. The net benefit from the research and development tax
credit was $340,000 for the third quarter of 1997 which contributed $.05 to per
share earnings. The decrease in third quarter net income for 1997 compared to
1996 is primarily attributable to several contracts in the second quarter of
1996 which were delayed from closing until the third quarter of 1996, resulting
in a lower and higher second and third quarter 1996, respectively.
REVENUES. Total revenues for the third quarter of 1997 increased 9% to
$9,214,146 compared to total revenues of $8,442,122 for the third quarter of
1996. For the first nine months of 1997, revenues were up 24% to $24,988,409
compared with revenues for the first nine months of 1996 of $20,105,572. This
increase is primarily related to a growing recurring revenue base including
Medical Call Center Services (started in September 1996) for which there was no
significant corresponding amount in the prior periods, an increase in
maintenance and support, and consulting services. Initial license fee and
computer hardware revenue is derived primarily from the licensing of the
Company's core software products and audio text -- 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 -- such
as Patient Assessment System(TM) and Newcomer Program(TM). Revenue from Support,
Marketing, Material Sales and Other represents post-contract software
maintenance and support, creative marketing services, medical call center
services revenue and consulting services.
COST OF INITIAL LICENSE FEES AND COMPUTER HARDWARE. Cost of initial license fees
and computer hardware costs decreased to $956,527 for the third quarter of 1997
from $1,533,688 for the third quarter of 1996, a decrease of $577,161 or 38%.
For the first nine months of 1997, these costs were $2,955,173 compared with
$3,762,871 over the same period during 1996, which is a decrease of $807,698 or
21%. These costs represent costs incurred to implement and install the Company's
core products, including hardware costs and training. The reduction is a direct
result of expense reduction initiatives, including favorable changes to royalty
agreements, lower cost of hardware and recovery of training costs. Also, in the
third quarter the Company introduced new clinical algorithms which were sold as
separate modules with a lower cost of sale.
COST OF SUPPORT, MARKETING SERVICES, MATERIALS SALES AND OTHER. Cost of support,
marketing services, materials sales and other increased to $1,641,186 for the
third quarter of 1997 compared to $1,509,515 for the third quarter of 1996, an
increase of $131,671 or 9%. For the first nine months of 1997, these costs were
$4,588,954 compared to $3,736,509 for the same period in 1996, which is an
increase of $852,445 or 23%. These costs represent expenses associated with
providing annual support including third party license fees and technical
assistance, variable costs associated with services provided by the Company's
subsidiary FSG, and printing costs associated with the Patient Assessment
System(TM) and Health Direct products. The increase is a direct result of the
growth of the Company's recurring revenue base.
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PRODUCT DEVELOPMENT COSTS. Product development costs were $666,920 for the third
quarter of 1997 compared to $448,854 for the third quarter of 1996. For the
first nine months of 1997, these costs were $2,110,301 compared to $1,612,003
for the same period during 1996. Product development costs relate to the
technological improvements and enhancements being made to the Company's product
mix and costs incurred to establish the technological feasibility of products
currently under development. The increase is the result of the Company's
continued investment in product enhancement and expansion.
SALES AND MARKETING. Sales and marketing expenses were $2,959,572 for the third
quarter of 1997 compared to $2,524,729 for the third quarter of 1996. For the
first nine months of 1997, these expenses were $8,464,641 compared to $6,820,440
for the same period during 1996. This increase, which is consistent with the
increase in revenue, reflects the Company's continued investment in selling and
marketing resources.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,456,666
for the third quarter of 1997 compared to $819,529 for the third quarter of
1996. For the first nine months of 1997 these expenses were $3,487,432 compared
to $2,142,636 for the same period during 1996. The increase in general and
administrative expenses reflects the additional support needed for the overall
rapid growth of the Company, including the new Medical Call Center Services
Division and other product expansion. As a percentage of revenue, general and
administrative expenses were 16% for the three months ended October 31, 1997
compared to 10% for the same period in 1996. The increase can be attributed to
an increase in professional fees in connection with a research and development
tax credit, various expenses related to the Company's annual client forum and
temporary services incurred in connection with special projects.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $468,000 for
the third quarter of 1997 compared to $399,738 for the third quarter of 1996.
For the first nine months of 1997 total depreciation and amortization expenses
were $1,386,516 compared to $1,065,306 for the same period during 1996. This
increase in depreciation and amortization is due to the addition of furniture
and equipment needed for new hires, predominantly in the Medical Call Center
Services division and sales division.
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. 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.
LIQUIDITY AND CAPITAL RESOURCES.
As of October 31, 1997, the Company had working capital of $2,404,714 compared
to working capital of $1,545,095 at January 31, 1997. The improvement in working
capital is a result of the Company's increased operating results. For the nine
months ended October 31, 1997, cash decreased by $1,302,347. The decrease in
cash is primarily attributed to investments in property and equipment and new
products.
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 January 2, 1998. 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
at prime plus 2% secured by equipment, and is convertible to an amortizing loan.
As of October 31, 1997, the Company maintains an outstanding balance of $241,000
on this loan. The Company has also obtained a revolving line of credit of
$250,000 from another lender at prime plus 1% secured by equipment and inventory
and expires September 15, 1998 (as of October 31, 1997, the full amount of this
credit line was outstanding).
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, has and 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 as well
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as the continued growth of the recurring revenue base. The Company will continue
to focus its efforts on improving cash from operations, increasing support
revenues, increasing revenue in the new call center division as well as
developing international sales opportunities. The recurring monthly revenue from
support fees, material sales, services and other, is currently not sufficient to
maintain a breakeven level at the Company's current operating expense levels.
ANNOUNCEMENT OF THE PROPOSED COMBINATION WITH HBOC
On October 2, 1997 the Company announced that it had signed a definitive
agreement to be acquired by HBO & Company ("HBOC"). Upon satisfaction of the
closing conditions set forth in the Agreement of Merger dated October 2, 1997
(the "Merger"), the Company will merge into HBOC of Georgia, a wholly-owned
subsidiary of HBOC. Various risks related to the announcement of the proposed
Merger with HBOC could have a material adverse effect on the Company's results
of operations, financial condition or business. Among other things, there can be
no assurance customers of the Company will continue their current or historical
licensing patterns without regard to the proposed Merger, or that certain
customers will not defer licensing decisions as they evaluate, among other
things, the proposed Merger, or that certain existing and prospective customers
will not decide to license products from the Company's competitors instead of
licensing the Company's products. The Company's continued success depends to a
significant degree upon the continuing contribution of key employees in
management, development, sales, technical support and administration. Existing
employees are likely to have uncertainty as to their future roles within HBOC.
Persons being recruited for positions in the Company may have similar
uncertainty and defer or reverse decisions to become employed by the Company. In
addition, competitors of the Company may use this uncertainty to attempt to
recruit such employees or prospective employees and make it more difficult for
the Company to retain and attract key employees. If the Merger is not
consummated, such expenses, which may include the expenses of HBOC and the
"break-up" in the amount of $3,000,000 inclusive of the amount of HBOC's
reasonable costs and expenses in connection with the negotiation and performance
of the Merger Agreement. Payment of the foregoing amounts shall not be in lieu
of damages incurred if the Company breaches certain covenants in the Merger
Agreement fee described under "Merger" above, could have a material adverse
effect on the Company's results of operations.
If the proposed Merger occurs, each share of the Company's common stock
outstanding at the time of the Merger will be converted into the right to
receive a fraction of an HBOC share based on an exchange ratio which will be
determined by averaging the closing HBOC stock price for a period of 20 trading
days ending shortly before the closing of the transaction. If the average price
of HBOC common stock is between $35.37 and $43.23, NHES stockholders will
receive 0.32 of an HBOC share. If the HBOC common stock average price is above
$25.00 up to $35.37, NHES stockholders will receive a fraction of an HBOC share
equal to $11.32 per NHES share. If the average price of HBOC common stock during
the pricing period is above $43.23, NHES stockholders will receive a fraction of
an HBOC share equal to $13.83 per NHES share. However, because the Exchange
Ratio is based on the above methodology, the market price of the Company's
common stock will likely move in the same general direction as does HBOC's stock
before the effective time of the Merger. If the market price of HBOC common
stock decreases or increases before the effective time of the Merger, the market
value of the HBOC common stock to be received by Company stockholders at the
effective time of the proposed Merger would correspondingly decrease or
increase.
If for any reason the proposed Merger is terminated, the announcement of such
termination may trigger a substantial decrease in the Company's stock price, as
reported on the Nasdaq National Market.
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, and other factors detailed in
the Company's Securities and Exchange Commission filings.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 5. - OTHER INFORMATION
On October 2, 1997 the Company announced that it had signed a definitive
agreement to be acquired by HBO & Company ("HBOC"). Upon satisfaction of the
closing conditions set forth in the Agreement of Merger dated October 2, 1997
(the "Merger"), the Company will merge into HBOC of Georgia, a wholly-owned
subsidiary of HBOC. The stockholders of NHES will receive shares of HBOC common
stock in the transaction, and the exchange ratio will be determined by averaging
the closing HBOC stock price for a period of 20 trading days ending shortly
before the closing of the transaction. If the average price of HBOC common stock
is between $35.37 and $43.23, NHES stockholders will receive 0.32 of an HBOC
share. If the HBOC common stock average price is above $25.00 up to $35.37, NHES
stockholders will receive a fraction of an HBOC share equal to $11.32 per NHES
share. If the average price of HBOC common stock during the pricing period is
above $43.23, NHES stockholders will receive a fraction of an HBOC share equal
to $13.83 per NHES share (all such actions collectively, the "Merger"). All
outstanding options to purchase the Company's common stock will be assumed by
HBOC, with HBOC common stock substituted for Company common stock pursuant to
the exchange ratio applicable to the outstanding common stock. The transaction
will be accounted for as a pooling of interests and treated as a tax-free
reorganization. The Merger has been approved by the Board of Directors of the
Company and HBOC, but is still subject to various conditions, including approval
by the Company's stockholders. A proxy statement of the Company and a prospectus
of HBOC has been delivered to the stockholders of the Company in connection with
the special meeting of stockholders of the Company to vote on the Merger, which
is scheduled to be held on December 29, 1997.
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
There were no reports on Form 8-K filed during the three months ended
October 31, 1997.
11
<PAGE> 12
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
National Health Enhancement Systems, Inc.
(Registrant)
SIGNATURE TITLE DATE
- ------------------------- ---------------------------- --------
/s/ Gregory J. Petras Chairman and Chief Executive 12-12-97
- ------------------------- Officer
Gregory J. Petras
/s/ Earl E. Bray Chief Financial Officer 12-12-97
- -------------------------
Earl E. Bray
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
27 Financial Data Schedule Filed Herewith
13
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