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 July 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 September 8,
1996 was 4,041,747 Shares.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
Page 1 of 16
Exhibit on Page 16
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet at July 31, 1996 3
Consolidated Statements of Operations for the three months
ended July 31, 1996 and 1995 and for the six months
ended July 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the six months
ended July 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 15
ITEM 4. Submission of Matters to Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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2
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NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JULY 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
July 31, 1996
-------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $1,607,298
Accounts receivable, less allowance for doubtful
accounts of $647,633 (Note 2) 5,602,305
Prepaid expenses and supplies 1,481,316
-----------
Total current assets 8,690,919
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, less
accumulated amortization of $1,267,784 979,133
PROPERTY AND EQUIPMENT (net) 1,454,125
EXCESS OF PURCHASE PRICE OVER RELATED NET
ASSETS ACQUIRED 517,477
OTHER ASSETS 385,550
-----------
$12,027,204
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of notes payable and obligations under
capital leases (Note 2) $323,046
Accounts payable 1,406,099
Accrued liabilities (Note 3) 4,205,089
Deferred revenues 4,234,852
-----------
Total current liabilities 10,169,086
NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
excluding current installments (Note 2) 294,463
DEFERRED REVENUES, net of current portion 98,069
COMMITTMENTS AND CONTINGENCIES
-----------
Total liabilities 10,561,618
-----------
STOCKHOLDERS' EQUITY (Note 5)
Convertible Preferred stock, $.001 par value
2,000,000 shares authorized and none issued and outstanding - 125
Common stock $.001 par value, 10,000,000 shares authorized, 4,204,136
shares issued and 4,041,747 outstanding 4,042
Capital contributed in excess of par value 4,249,002
Accumulated deficit (2,784,018)
Less treasury stock, 3,568 shares at cost (3,565)
-----------
Stockholders' equity 1,465,586
-----------
$12,027,204
===========
</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 July 31, Six Months Ended July 31,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Initial license fees $ 2,153,971 $ 1,655,395 $ 5,010,846 $ 3,334,258
Support fees, marketing services and material sales 2,818,351 1,808,721 5,077,187 3,634,510
------------ ------------ ------------ ------------
Total revenues 4,972,322 3,464,116 10,088,033 6,968,768
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of license fees 469,518 276,382 1,137,030 822,048
Cost of support marketing services and materials sold 1,056,352 370,657 1,817,598 664,751
Selling, product support and development 2,837,509 2,054,347 5,654,067 4,326,291
General and administrative 692,316 563,450 1,159,931 954,343
Depreciation and amortization 285,421 221,792 536,127 401,664
Provision for doubtful accounts 75,000 26,500 130,000 71,500
------------ ------------ ------------ ------------
Total operating expenses 5,416,116 3,513,128 10,434,754 7,240,596
------------ ------------ ------------ ------------
Income (loss) before income taxes (443,794) (49,012) (346,721) (271,828)
Provision for income taxes (Note 4) -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (443,794) $ (49,012) $ (346,721) $ (271,828)
============ ============ ============ ============
Net loss per common share (*) $ (0.11) $ (0.01) $ (0.09) $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES 3,866,376 3,791,220 3,851,049 3,791,220
OUTSTANDING (*) ============ ============ ============ ============
(*)Adjusted to reflect a two for one stock split completed in January 1996.
</TABLE>
4
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (346,721) $ (271,828)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 536,127 401,664
Provision for doubtful accounts 130,000 71,500
(Increase) decrease in accounts receivable (227) 177,554
(Increase) decrease in prepaid expenses and supplies (689,004) (410,550)
Increase (decrease) in accounts payable 408,257 (379,939)
Increase (decrease) in accrued liabilities 1,127,739 468,700
Increase (decrease) in deferred revenues 799,937 138,794
----------- -----------
Net cash provided by operating activities 1,966,108 195,895
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in capitalized software development costs (200,181) (77,481)
Purchases of property and equipment (739,625) (268,410)
Increases in other assets (166,505) (18,562)
----------- -----------
Net cash used in investing activities (1,106,311) (364,453)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 38,087 --
Principal payments on notes payable and capital leases (9,346,883) (654,604)
Proceeds from notes payable 7,828,528 750,000
Proceeds from sale of stock 750,000 --
----------- -----------
Net cash provided by (used in) financing activities (730,268) 95,396
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 129,529 (73,162)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,477,769 1,480,765
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,607,298 $ 1,407,503
=========== ===========
</TABLE>
5
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
July 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 six month period ended July 31, 1995 is as follows:
Quarter Ended July 31, Six Months Ended July 31,
---------------------------------------------------
1995 1995
---------------------------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Total revenues $ 4,107,220 $ 3,464,116 $ 8,335,015 $ 6,968,768
Income (loss) before $ 200,863 $ (49,012) $ 368,982 $ (271,828)
provision for income
taxes
Net income (loss) $ 200,863 $ (49,012) $ 368,982 $ (271,828)
Income (loss) per share(*) $ .05 $ (.01) $ .08 $ (.07)
(*) 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 pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, the
accompanying unaudited financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly financial
position, results of operations, and cash flows for the periods presented.
Certain financial statement items from prior periods have been reclassified to
be consistent with the current period financial statement presentation. It is
suggested that these financial statements be read in conjunction with the
financial statements and the related disclosures contained in the Company's
Annual Report on Form 10-KSB/A filed for the fiscal year ended January 31, 1996
with the Securities and Exchange Commission.
The results of operations for the six month period ended July 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year.
<PAGE>
Note 2
- ------
Notes payable and obligations under capital leases at July 31, 1996:
<TABLE>
<S> <C>
Revolving line of credit, advances not to exceed the lesser of the $4,025
calculated borrowing base, as defined, or $2,000,000, interest at
Wall Street Journal prime rate plus 2.5% (10.75% at July 31, 1996),
matures November 1996, secured by substantially all assets of the Company,
including eligible accounts receivable, as defined. The Company also has
an available $500,000 line of credit with the same lender, which matures in
November 1996, interest at Wall Street Journal prime rate, secured by
accounts receivable and equipment
Obligations under capital leases, interest rates ranging from 11% to
28%, maturities through November 1999, secured by computer
and other equipment 613,484
-------
617,509
Less - current installments (323,046)
--------
$294,463
========
</TABLE>
The lines 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. At July 31, 1996, the Company was not in compliance with the
debt-to-net worth requirement and the lender has waived compliance with this
covenant.
Future maturities of notes payable and obligations under capital leases are as
follows as of July 31, 1996:
Notes Payable Capital Leases
------------- --------------
1997 $4,025 $363,488
1998 - 198,205
1999 - 106,636
2000 - 50,014
2001 and later - -
$4,025 718,343
------ --------
Less amount representing interest - (104,859)
------ --------
$4,025 $613,484
====== ========
The Company has made certain capital commitments of approximately $200,000
related to its current office space.
7
<PAGE>
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 3
- ------
Accrued liabilities at July 31, 1996 consist of the following:
Accrued product cost of sales $ 1,472,197
Accrued payroll and commissions 1,026,592
Accrued royalties 1,280,518
Other accrued liabilities 425,782
------------
$ 4,205,089
============
Note 4
- ------
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires deferred income tax assets and liabilities to be computed
based upon cumulative temporary differences in financial reporting and taxable
income, carry forwards available and enacted tax law.
The components of deferred taxes as of July 31, 1996 are as follows:
Allowance for doubtful accounts $259,000
Tax depreciation in excess
of book depreciation (75,000)
Capitalized software costs (392,000)
Accrued liabilities 435,000
Deferred revenues 272,000
Net operating loss carry forward 520,000
Valuation allowance (1,019,000)
------------
$ - 0 -
=============
A valuation allowance is provided when it is uncertain that some or all of the
deferred tax asset will be recognized. As of July 31, 1996, the increase in the
valuation allowance results from changes in temporary differences and net
operating loss carryforwards.
Note 5
- ------
Stockholder's Equity
On July 23, 1996, the Company completed a private placement where the Company
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.
The Company is receiving quarterly payments for the services provided.
8
<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 six months ended July 31, 1995.
Background and Recent Developments
- ----------------------------------
During the fiscal year ended January 31, 1996, and continuing through the period
ended July 31, 1996 the Company continued to invest resources to expand and
improve its sales function and also invested to support its product development
efforts. 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 and in product
development is part of management's strategy to increase revenues. While
management believes this strategy will result in increased revenues, there are
no assurances that future revenues will increase.
The Company's operations are also currently being affected by consolidation,
alliances and mergers in the healthcare market. Nonetheless, and while there are
no assurances, the Company's management believes that its competitive strengths
will 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 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 service bureau business. Successful operation of the newly
launched service bureau is dependent on a number of factors, including the
Company maintaining adequate capital to continue to fund the service bureau's
operations, growth and working capital needs.
9
<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 quarterly payments for the services
provided and the revenue under the contract is recognized based on a percent of
completion. As of July 31,1996 approximately $175,000 had been recognized.
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 have certain demand and piggyback
registration rights.
Results of Operations
- ---------------------
Three Months Ended July 31, 1996 vs. Three Months Ended July 31, 1995
- ---------------------------------------------------------------------
Income/Loss. For the quarter ended July 31, 1996, the Company had net loss of
$443,794 compared to net loss of $49,012 for the quarter ended July 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.
Historically, the Company has often recognized a substantial portion of its
initial license fee 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 expenditures in response to sales shortfalls or delays. These factors
could cause variations in operating results from quarter to quarter.
During the past fiscal quarter, the Company experienced delays in receiving
initial license fee agreements of approximately $1.4 million. While there are no
assurances, the Company expects that this $1.4 million in delayed contracts will
be received in its third fiscal quarter.
Revenues. Total revenues increased approximately 41% to $4,972,322 for the
quarter ended July 31, 1996 from $3,464,116 for the quarter ended July 31, 1995.
The increase is primarily attributed to increases in revenues generated from
support fees.
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 $2,153,971 for the
quarter ended July 31, 1996, from $1,655,395 for the quarter ended July 31,
1995.
Support, marketing services and material revenues were $2,818,351 for the
quarter ended July 31, 1996 compared to $1,808,721 for the quarter ended July
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 $900,000 for
the quarter ended July 31, 1996 compared to the quarter ended July 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 HealthDirect products. The revenue from the sale of materials for
the quarter ended July 31, 1996 decreased from the quarter ended July 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
HealthDirect products. Marketing services represents revenue from strategic and
creative services provided and generated by the Company's subsidiary First
Strategic Group ("FSG"). Revenues from marketing services for the quarter ended
July 31, 1996 were approximately 20% higher than the quarter ended July 31, 1995
due primarily to an increase in new consulting engagements.
10
<PAGE>
Operating Expenses. Total operating expenses increased approximately 51% to
$5,416,116 for the quarter ended July 31, 1996 from $3,513,128 for the quarter
ended July 31, 1995. Total operating expenses increased primarily due to an
increase in expenses associated with selling, product support and development
and variable royalty expenses associated with the recurring revenue increase.
Cost of License Fees, Materials and Service Revenues. The cost of initial
license fees increased to $469,518 for the quarter ended July 31, 1996 from
$276,382 for the quarter ended July 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 HealthDirect product and
costs associated with FSG services revenue, increased to $1,056,352 for the
quarter ended July 31, 1996 from $370,657 for the quarter ended July 31, 1995.
The increase is primarily a result of costs associated with the increased
royalties and marketing service revenues from FSG.
Selling, Product Support and Development. Selling, product support and
development expenses increased to $2,837,509 for the quarter ended July 31, 1996
from $2,054,347 for the quarter ended July 31, 1995. The increase is primarily
attributable to increases in the Company's sales, product support and
development staff, and the expansion of the technical support staff as well as
increased costs associated with supporting these increased staffing levels.
General and Administrative. General and administrative expenses increased to
$692,312 for the quarter ended July 31, 1996 from $563,450 for the quarter ended
July 31, 1995. The increase is primarily attributable to increases in
professional service and other general operating expenses.
Depreciation and Amortization. Depreciation and amortization expense increased
to $285,421 for the quarter ended July 31, 1996 from $221,792 for the quarter
ended July 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.
Six Months Ended July 31, 1996 vs. Six Months Ended July 31, 1995
- -----------------------------------------------------------------
Income/Loss. For the six months ended July 31, 1996, the Company had net loss of
$346,721 compared to net loss of $271,828 for the six months ended July 31,
1995.
Revenue. Total revenue increased approximately 45% to $10,088,033 for the six
months ended July 31, 1996 from $6,968,768 for the six months ended July 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 $5,010,846 for the six months
ended July 31, 1996 from $3,334,258 for the six months ended July 31, 1995. The
increase is due to an increase in the initial license fee revenue from the
Company's medical call center, Centramax.M Plus and interactive voice response
products.
Support, marketing service and material revenue increased to $5,077,187 for the
six months ended July 31, 1996 from $3,634,510 for the six months ended July 31,
1995. Revenue from support fees increased approximately $1.6 million for the six
months ended July 31, 1996 from the six months ended July 31, 1995 due to the
increased customer base and related product license agreements. Revenue
generated from the sale of materials and services decreased for the six months
ended July 31, 1996 from the six months ended July 31, 1995 due to a decrease in
sale of printed questionnaire and reports, and from decreased revenue from
HealthDirect subscriptions.
Operating Expenses. Total operating expenses increased approximately 44% to
$10,434,754 for the six months ended July 31, 1996 from $7,240,596 for the six
months ended July 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.
11
<PAGE>
Cost of License Fees, Materials and Service Revenues. The cost of license fees
increased to $1,137,030 for the six months ended July 31, 1996, compared to
$822,048 for the six months ended July 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 $1,817,598 for the
six months ended July 31, 1996 from $664,751 for the six months ended July 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 expense increased to $5,654,067 for the six months ended July 31,
1996 from $4,326,291 for the six months ended July 31, 1995. The increase was
due primarily to increased sales, product support and development staffs and
related expenses to support the increased staffing levels. These increases in
staff were, in management's opinion, necessary to expand product distribution,
support the Company product development as well as expand the technical support
function to service the Company's customers.
General and Administrative. General and administrative expenses increased to
$1,159,931 for the six months ended July 31, 1996 from $954,343 for the six
months ended July 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 $536,127 for the six months ended July 31, 1996 from $401,664 for the six
months ended July 31, 1995. This increase is due to the increased depreciation
expense from additional equipment purchases and amortization expense associated
with increased software development costs.
12
<PAGE>
Liquidity and Capital Resources
- -------------------------------
As of July 31, 1996, the Company had a working capital deficit (current assets
minus current liabilities) of $1,478,167 compared to a working capital deficit
of $1,349,989 as of January 31, 1996. The Company's accounts receivable balance
decreased to $5,602,305 at July 31, 1996 from $5,735,778 at January 31, 1996.
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 shareholders also received certain demand and piggyback registration rights.
On November 13, 1995, the Company obtained a revolving line of credit providing
up to $2,000,000. The revolving line of credit bears interest at prime plus
2.5%, is secured by accounts receivable and matures on November 13, 1996. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants. The Company
also obtained a line of credit of $500,000, from the same lender. The $500,000
line of credit is secured by 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 lines mature in November 1996 and $4,025 was outstanding
under those lines at July 31, 1996. On July 31, 1996 the Company was out of
compliance with the debt to net worth requirement under the line of credit,
which has been waived by the lender. The Company is in current discussions with
the lender and while there are no assurances the Company's management expects
the lender to renew the line of credit and renegotiate the associated financial
convenents.
The Company is currently dependent on cash from operations and available
proceeds from its lines of credit for its daily operational cash requirements.
The Company will be required to renew or replace the lines of credit in
November, 1996, in order to continue to meet its cash requirements. Successful
operation of the medical 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, lines 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, the Company will continue to actively seek
alternative sources to raise additional 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 $200,000 related to its office space. 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. In the past, the Company has
funded its growth primarily through cash from
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operations and its existing lines of credit. While the Company believes the
recent private placement, lines 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, 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 service bureau operations, and is actively seeking sources of such capital.
While the Company believes it will renew its $2,500,000 lines of credit with the
current lender, there are no assurances the Company will be successful in
renewing or replacing its in credit lines or 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
required renewed credit lines and 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.
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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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On June 20, 1996, the Company held its annual meeting of
stockholders. In addition to electing directors at the annual
meeting, the stockholders approved an amendment to the
Company's 1988 Stock Option Plan, (the "Plan") which provides
for an increase in the number of stock options available under
the Plan from 1,600,000 to 1,700,000 stock options. Of the
common stock entitled to vote at the meeting, 3,320,480 shares
were voted in favor of amendment to the Plan, 30,100 shares
were voted against and 9,573 shares abstained from voting.
All the nominees for directors of the Company as listed in the
proxy statement were elected as follows:
Directors Votes For Votes Withheld
--------- --------- --------------
John Delmatoff 3,355,485 4,668
Gardiner Dutton 3,357,085 3,068
James Myers 3,356,485 3,668
Greg Petras 3,357,485 2,668
Steve Wood 3,357,485 2,668
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-B.
Exhibit 10.52 Call Center Services Agreement with
Beech Street Corporation.
Exhibit 10.53 Subscription and Stock Purchase Agreement
with William Fickling, Jr. and W. Cal
McGraw.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 31, 1996.
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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: September 12, 1996 /s/ Gregory J. Petras
------------------------- -------------------------------------
Gregory J. Petras
President and Chief Executive Officer
Date: September 12, 1996 /s/ Jeffrey T. Zywicki
------------------------- -------------------------------------
Jeffrey T. Zywicki
Sr. Vice President Finance
16
CALL CENTER SERVICES AGREEMENT
This Call Center Services Agreement (the "Agreement") is by and between
National Health Enhancement Systems, Inc., a Delaware corporation ("NHES"), and
Beech Street Corporation, a Georgia corporation ("Beech Street"), and is
effective on and as of the Effective Date, as hereinafter defined.
WHEREAS, Beech Street desires to obtain, for itself and for its
customers and potential customers, the opportunity to purchase medical call
center services that uses NHES's proprietary technologies;
WHEREAS, NHES is willing to offer medical call center services to Beech
Street and others, and Beech Street is willing to support NHES as set forth
herein;
WHEREAS, Beech Street and NHES have entered into that certain
Distribution and Development Agreement of even date herewith (the "Distribution
Agreement") in support of the foregoing;
WHEREAS, Beech Street also desires to obtain from NHES specialized
services in order to assist Beech Street maximize its effectiveness in offering
Call Center Services under the Distribution Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Special Services. During the 12 month term of this Agreement,
NHES agrees to provide Beech Street with the special services (the "Special
Services") described in this Section 1, as follows:
(a) Programs for Call Center Services, Sales and
Marketing. NHES, with Beech Street's assistance, has or will (i) develop certain
training programs for Beech Street sales and marketing personnel with respect to
Call Center Services; (ii) develop and assist Beech Street to execute a sales
and marketing plan for Beech Street's introduction of Call Center Services to
Beech Street affiliates; and (iii) develop and assist Beech Street to execute a
joint sales and marketing plan to penetrate new markets for Call Center
Services.
(b) Training on NHES Products and Services. NHES has
provided certain training and will provide additional training set forth in
Section 6.4 of the Distribution Agreement prior to and during the term of this
Call Center Services Agreement. Training provided under such Section 6.4 after
the term of this Agreement will be governed by Section 6.5 of the Distribution
Agreement.
(c) Development of a "Workers Compensation Medical
Management Program". NHES shall develop for Beech Street a "Workers Compensation
Medical Management Program" (the "Initial Program"), which shall be deemed to be
a Beech Street
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Product under Section 8.1 of the Distribution Agreement. The Initial Program
shall be developed under a mutually acceptable development plan.
(d) Outcome Measurement Plan. NHES will develop an
outcome measurement methodology and program, with Beech Street's assistance, to
verify the impact of Call Center programs.
(e) Development of Reports. NHES will develop the
reporting packages to be used pursuant to Section 3.4 of the Distribution
Agreement.
(f) Call Center Communication Plan. Beech Street and
NHES will collaborate on development of communications materials and programs to
market and advertise the Call Center Services and the Telephone Number to the
User population.
2. Special Services Fee. In exchange for agreeing to provide the
Special Services, Beech Street shall pay to NHES a fee (the "Special Services
Fee") in the aggregate amount of $1,245,000, payable quarterly in the following
amounts on the following dates:
Execution of this Agreement $350,000
October 15, 1996 $400,000
January 15, 1997 $315,000
April 15, 1997 $180,000
The first payment of the Special Services Fee is being made contemporaneously
with execution and delivery of this Agreement. Payments shall be past due on the
tenth (10th) day following the due date. All payments are nonrefundable.
3. Ownership; Management Representatives. The Call Center will be
owned entirely by NHES or a wholly-owned subsidiary thereof, using NHES products
and other third party products, to provide telephone-based personal health
management services and other products and services as determined by NHES from
time to time. Beech Street will not have any ownership interest therein of any
kind or nature. For purposes of administering this Agreement, each party will
appoint a permanent liaison to the other for purposes of coordinating the
relationship between the parties on a day-to-day basis. Each party shall have
the right in its sole discretion to change the liaison from time to time by
providing written notification of such change to the other party.
4. Term. The term of this Agreement shall commence on the
Effective Date for an initial term of one (1) year. Notwithstanding the
foregoing, this Agreement may be earlier terminated as set forth in Section 7
hereof.
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5. Termination. This Agreement may be terminated as follows:
5.1 Upon Breach. By either party upon breach of this Agreement
by the other party and the failure of such party to cure the breach within
ninety (90) days' after written notice (or within fifteen (15) days' after
written notice of breach of a payment obligation).
5.2 Insolvency, Bankruptcy, Etc. By a party if the other party
files a petition in bankruptcy, or has filed against it an involuntary petition
in bankruptcy that is not dismissed within 90 days after such filing, or makes a
general assignment for the benefit of creditors, a receiver or trustee is
appointed for the other party's business, or other insolvency proceedings in
respect of the other party are commenced.
5.3 Regulatory Impact. By either party upon at least ninety
(90) days' prior written notice (or the longest period of notice less than 90
days which is practicable under the circumstances in light of applicable
regulatory requirements), if a party's performance under this Agreement or the
Distribution Agreement would be rendered impossible, impractical or unprofitable
due to the application of, or changes in, federal, state or local statutes,
rules or regulations.
6. Complete Agreement; No Assignment; No Waiver. This Agreement
the attachments hereto and the Escrow Agreement shall constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior understandings, proposals negotiations and communications,
oral or written, between the parties or their representatives. This Agreement
may not be modified except in a writing signed by the duly authorized
representatives of the parties hereto. Neither party may assign its rights,
duties or obligations under this Agreement to any entity in whole or in part
without the prior written consent of the other party; provided that NHES may
assign its rights and delegate its obligations hereunder to a wholly-owned
subsidiary of NHES without the prior consent of Beech Street and Beech Street
may assign its rights and delegate its obligations hereunder to a wholly-owned
subsidiary or sister company with prior notification to NHES, but without prior
consent of NHES.
6.1 Notices. All notices, demands, consents approvals and
other communications shall be sufficient if in writing and sent by prepaid wire,
facsimile transmission or registered or certified mail, return receipt
requested, postage prepaid to the addresses of the parties specified in their
signatures below. Notices shall be effective when received, three (3) days
following mailing or upon facsimile transmission, whichever Is earliest. Notices
should be mailed to the parties at the following addresses:
3
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If to Beech Street:
Beech Street Corporation
173 Technology
Irvine, CA 92718
Attn: Claudia Smith
If to NHES:
National Health Enhancement Systems, Inc.
3200 North Central Avenue, Suite 1750
Phoenix, AZ 85012
Attn: President
The address for giving notice may be changed by complying with the written
notice provisions of this Section.
6.2 Severability. In case one or more provisions of this
Agreement shall be invalid, illegal or unenforceable, such provisions shall be
severed and the remaining provisions shall continue as valid, legal and
enforceable. The remaining provisions shall be integrated and interpreted in
such a way as to give them maximum enforceability and validity under the
applicable law, while retaining the original intent of the parties with respect
to such provisions.
6.3 Disclaimer of Agency. This Agreement shall not constitute
either party the legal representative or agent of the other, nor shall either
party have the right or authority to assume, create or incur any liability or
any obligation of any kind, expressed or implied, against, or in the name of or
on behalf of the other party.
6.4 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona (without
regard to choice of laws).
6.5 Dispute Resolution. If a dispute arises among the parties
in connection with this Agreement, or any instruments delivered in connection
herewith, including without limitation an alleged breach of any representation,
warranty or covenant herein or therein, or a disagreement regarding the
interpretation of any provision hereof or thereof (the "Dispute"), the parties
agree to use the following procedure in good faith prior to any party pursuing
other available judicial or non-judicial remedies:
6.5.1 A meeting shall be held among the parties
within ten (10) days after any party gives written notice of the Dispute to each
other party (the "Dispute Notice") attended by a representative of each party
having decision-making authority regarding the
4
<PAGE>
Dispute (subject to board of directors or equivalent approval, if required), to
attempt in good faith to negotiate a resolution of the Dispute.
6.5.2 If, within thirty (30) days after the Dispute
Notice, the parties have not succeeded in negotiating a written resolution of
the Dispute, upon written request by any party to each other party all parties
will promptly negotiate in good faith to jointly appoint a mutually acceptable
neutral person not affiliated with any of the parties (the "Neutral"). If all
parties so agree in writing, a panel of two or more individuals (such panel also
being referred to as the "Neutral") may be selected by the parties. The parties
shall seek assistance in such regard from the American Arbitration Association
or the Center for Public Resources if they have been unable to agree upon such
appointment within forty (40) days after the Dispute Notice. The fees and costs
of the Neutral and of any such assistance shall be shared equally among the
parties.
6.5.3 In consultation with the Neutral, the parties
will negotiate in good faith to select or devise a nonbinding alternative
dispute resolution procedure ("ADR") by which they will attempt to resolve the
Dispute, and a time and place for the ADR to be held, with the Neutral (at the
written request of any party to each other party) making the decision as to the
procedure and/or place and time if the parties have been unable to agree on any
of such matters in writing within ten (10) days after selection of the Neutral.
6.5.4 The parties agree to participate in good faith
in the ADR to its conclusion; provided, however, that no party shall be
obligated to continue to participate in the ADR if the parties have not resolved
the Dispute in writing within one hundred twenty (120) days after the Dispute
Notice and any party shall have terminated the ADR by delivery written notice of
termination to each other party following expiration of said 120-day period.
Following any such termination notice after selection of the Neutral, and if any
party so requests in writing to the Neutral (with a copy to each other party),
then the Neutral shall make a recommended resolution of the Dispute in writing
to each party, which recommendation shall not be binding upon the parties;
provided, however, that the parties shall give good faith consideration to the
settlement of the Dispute on the basis of such recommendation, and at the
election of either party the Dispute shall be submitted to binding arbitration
as provided below. In the event of binding arbitration, the party seeking
further resolution shall pay the reasonable attorneys' fees, costs and other
expenses (including expert witness fees) of the other party incurred in
connection with the pursuit of (and defense against) such arbitration, if the
result thereof is less favorable to the party pursuing the arbitration than the
recommendation of the Neutral.
6.5.5 Notwithstanding anything herein to the
contrary, nothing in this Section shall preclude any party from seeking interim
or provisional relief, in the form of a temporary restraining order, preliminary
injunction or other interim equitable relief concerning the Dispute, either
prior to or during the Mediation if necessary to protect the interests of such
party. Further, this Section shall be specifically enforceable.
5
<PAGE>
6.5.6 Subject to the foregoing, a party may seek
arbitration of an unresolved Dispute in Phoenix, Arizona (the "Venue City"), in
accordance with the Rules of the AAA governing commercial transactions. The
arbitration tribunal shall consist of three (3) arbitrators. The party
initiating arbitration shall nominate one arbitrator (who shall be knowledgeable
in the industry but not be affiliated with such party) in the request for
arbitration and the other party shall nominate a second arbitrator (who shall be
knowledgeable in the industry but not be affiliated with such party) in the
answer thereto. The two arbitrators so named will then jointly appoint the third
arbitrator (who shall be knowledgeable in the industry but shall not be
affiliated with either party) as chairman of the arbitration tribunal. If either
party fails to nominate its arbitrator, or if the arbitrators named by the
parties fail to agree on the person to be named as chairman within sixty (60)
days, the office of the AAA in the Venue City shall make the necessary
appointments of an arbitrator or the chairman of the arbitration tribunal. The
award of the arbitration tribunal shall be final and judgment upon such an award
may be entered in any competent court or application may be made to any
competent court for judicial acceptance of such an award and an order of
enforcement.
6.5.7 At the reasonable request of either party, the
mediator or arbitration tribunal shall adopt rules and procedures designed to
expedite the dispute resolution process.
6.6 Survival. Each party's obligations to pay monies to the
other party which have accrued prior to the date of termination shall survive
termination of this Agreement.
6.7 Effective Date. The "Effective Date" shall be ___________,
1996.
BEECH STREET CORPORATION
By _________________________________________
Its ________________________________________
NATIONAL HEALTH ENHANCEMENT
SYSTEMS, INC.
By _________________________________________
Its ________________________________________
6
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
SUBSCRIPTION
AND STOCK PURCHASE AGREEMENT
Dated as of ____________, 1996
This Subscription and Stock Purchase Agreement is by and between
National Health Enhancement Systems, Inc., a Delaware corporation (the
"Company"), William A. Fickling, Jr. ("Fickling") and W. Cal McGraw ("McGraw").
(Each of Fickling and McGraw are sometimes referred to herein severally and not
jointly as an "Investor", and collectively as "Investors".) The Company and each
of the Investors hereby agree as follows:
SECTION 1
Subscription for Shares
-----------------------
By execution of this Subscription and Stock Purchase Agreement (the
"Agreement"), each Investor hereby subscribes for and, subject to the terms and
conditions of this Agreement and in reliance on the representations, warranties
and promises contained herein, agrees to purchase the number of fully paid and
nonassessable shares (the "Shares") of the Company's Common Stock, par value
$.001 per share, set forth by such Investor's name on Schedule A attached
hereto, free and clear of all liens, claims, and encumbrances other than the
transfer restrictions noted herein. In consideration for the issuance of the
Shares to such Investor, and in full payment for such Shares, such Investor
agrees to pay to the Company in legal tender of the United States of America the
amount set forth on Schedule A attached hereto, in cash, or by check or by wire
transfer in currently available Phoenix, Arizona funds.
SECTION 2
Authorization and Sale of the Shares
------------------------------------
2.1 Authorization of the Shares. The Company has, or before the Closing
(as hereinafter defined) will have, authorized the issuance, sale and delivery
of the Shares.
2.2 Sale of the Shares. Subject to the terms and conditions hereof and
in reliance upon the representations contained herein, the Company agrees to
issue, sell and deliver to each Investor the Shares subscribed for in exchange
for the consideration specified pursuant to Section 1.
2.3 Use of Proceeds. The anticipated use of proceeds of the sale of the
Shares subscribed for is for general working capital purposes.
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SECTION 3
Closing Date; Delivery
----------------------
3.1 Closing Date. The closing with respect to the purchase and sale of
the Shares (the "Closing") shall be held following the execution and delivery of
this Agreement at a place and time determined pursuant to paragraph 3.3 (the
"Closing Date") or at such other time and place as shall be mutually agreed upon
by the Company and the Investors.
3.2 Delivery. At the Closing, the Company will deliver to each Investor
a certificate or certificates registered in the Investor's name or such nominee
name as said Investor may previously have requested in writing, each certificate
to be properly executed and sealed by duly authorized officers of the Company.
Such certificate(s) shall represent all the Shares subscribed for by such
Investor and shall be delivered against payment therefor in the manner provided
for herein. All transactions effected at the Closing shall be deemed to occur
simultaneously and no transaction shall be deemed complete, and no document
delivered, until all transactions are completed and all documents delivered.
3.3 Closing. The time and place of Closing (which shall be at the time
and place of delivery to Investor by the Company of the certificate or
certificates evidencing all the Shares being purchased, and the place of
delivery to the Company of payment or satisfactory evidence of payment by the
Investor of the purchase price therefor) shall be at 9:00 o'clock M.S.T. on
___________, 1996, at the offices of Osborn Maledon, P.A., in Phoenix, Arizona,
or such other place and time as the Company and Investor shall agree upon.
Unless waived in the manner provided for herein, all conditions to closing
specified in this Agreement shall be satisfied at or prior to the Closing.
SECTION 4
Representations and Warranties of the Company
---------------------------------------------
The Company represents, warrants and covenants to and with each
Investor as follows:
4.1 Organization and Standing: Certificate of Incorporation and Bylaws.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The copies of the Company's
Certificate of Incorporation, as amended, and Bylaws delivered to Investor are
true, correct and complete copies of the originals, each of which remains in
full force and effect and has not been repealed. The Company is duly qualified
as a foreign corporation in good standing in each jurisdiction in which the
conduct of its business makes such qualification necessary and appropriate, and
such qualification remains in effect and has not been revoked.
2
<PAGE>
4.2 Corporate Power and Government Consents. The Company has all
requisite corporate power to enter into this Agreement, to sell the Shares, to
carry out and perform its obligations under the terms of this Agreement, and to
carry out its business both as presently conducted and as presently
contemplated. Assuming the accuracy of the Investor's representations hereunder,
no consent, authorization, approval, permit or order of, or declaration to or
filing with any governmental or regulatory authority is required in connection
with: (i) the execution, delivery and performance of this Agreement, (ii) the
offer, issuance, sale or delivery of the Shares, or (iii) for the issuance of
Common Stock upon conversion of the Shares.
4.3 Capitalization. Immediately prior to the Closing, the Company's
authorized, issued and outstanding stock of all classes and all options, rights,
and warrants with respect to such stock shall be as described in the Company's
Form 10-KSB and Annual Report for the fiscal year ended January 31, 1996. All
outstanding shares of each class have been duly and validly issued, and are
fully paid and nonassessable.
4.4 Authorization and Reservation of Shares. All corporate action on
the part of the Company, its directors and shareholders necessary for or
appropriate to or in connection with the execution, delivery and performance by
the Company of this Agreement, and the consummation of the transactions
contemplated herein, including without limitation the authorization, issuance
and delivery of the Shares, has been taken or will be taken prior to the
Closing. The resolution of the Board of Directors authorizing the issuance and
sale of the Shares to be sold pursuant to this Agreement remains in full force
and effect and has not been amended or revoked. This Agreement is a legal, valid
and binding obligation of the Company, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, and moratorium
laws and other similar laws of general application relating to the enforcement
of creditors rights.
The Shares, when issued and sold in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and will be free
and clear of any lien, claim or encumbrance created or suffered by the Company,
excepting only restrictions on transfer described in this Agreement. The Company
shall, at the time of Closing, have paid any issuance, transfer or stamp tax
connected with the sale of the Shares and will pay any such tax which may be
assessed or levied on the conversion of the Shares.
4.5 Subsidiaries. The Company has no material subsidiaries (which term
shall include any direct or indirect ownership interest in any other
corporation, partnership, association, firm or business), other than First
Strategic Group, Inc. and NHE Systems, Inc.
4.6 Financial Statements. (a) True and complete copies of the financial
statements listed in Schedule 4.6 to this Agreement have been delivered by the
Company to Investor. Those financial statements: (1) are in accordance with the
books and records of the Company, (2) are and future financial statements will
be prepared in accordance with generally accepted accounting principles
consistently applied, subject to changes resulting from year end adjustments,
and (3) present fairly in all material respects the financial position of the
Company
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<PAGE>
at the dates, and the results of its operations and cash flows for the periods,
indicated in those statements. As of the date of the most recent balance sheet
listed in Schedule 4.6, the Company did not have any material debts, liabilities
or obligations, whether absolute, accrued, contingent or otherwise, which are
not fully reflected in such balance sheet or otherwise listed in Schedule 4.6,
nor has the Company suffered any material adverse change in its business,
assets, financial condition or prospects.
(b) Litigation. There are no legal actions, suits, arbitrations or
other legal, administrative or governmental proceedings pending or, to the
Company's knowledge, threatened against the Company or relating to this
transaction.
(c) Title to Assets. Except as disclosed in Schedule 5 (the Schedule of
Exceptions), the Company has good and marketable title to its assets, including,
without limitation, those reflected in the most recent balance sheet listed in
Schedule 4.6 (other than those since disposed of in the ordinary course of
business), free and clear of all security interests, charges and other
encumbrances, except (i) liens for taxes not yet due and payable, and (ii)
inchoate landlord's and materialmen and like liens that are not delinquent and
are incidental to the conduct of business or the ownership of property and which
were not incurred in connection with the borrowing of money or the obtaining of
credit and which do not, in the aggregate, materially detract from the value of
the assets affected thereby and do not materially impair the use thereof by the
Company.
4.7 Tax Returns and Audits. All required tax returns and extensions of
the Company have been accurately prepared and duly and timely filed, and all
taxes required to be paid with respect to the periods or transactions covered by
such returns have been duly and timely paid in all material respects. The
Company is not delinquent in the payment of any tax, assessment or governmental
charge, has not had any tax deficiency proposed or assessed against it, and has
not executed any waiver still in effect of any statute of limitations on the
assessment or collection of any tax. Except as indicated on the Schedule of
Exceptions none of the federal or state income tax returns or state franchise
tax returns of the Company has ever been audited by governmental authorities.
4.8 Compliance with Laws and Other Instruments. The business and
operations of the Company have been and are being conducted in accordance with
all applicable laws, rules, regulations, judgments and decrees in all material
respects. Neither the execution, delivery or performance of this Agreement, nor
the offer, issuance, sale or delivery of the Shares, with or without the giving
of notice or passage of time, or both, will (i) violate, or result in any breach
of, or constitute a default under, or result in the imposition of any
encumbrance upon any asset of the Company pursuant to, any provision of any
corporate charter, bylaws, contract, judgment, decree or other document or
instrument or (ii) to the best of the Company's knowledge, will cause the
Company to lose the benefit of any right or privilege it presently enjoys or
cause any person who normally does business with the Company to discontinue to
do so on the same basis. Subject to the accuracy of the Investor's
representations contained in Section 5 hereof, the offer, sale and issuance of
the Shares pursuant to the terms of this Agreement are exempt from
4
<PAGE>
registration under Section 5 of the Securities Act of 1933, as amended (the
"Act") and any applicable state securities law.
4.9 Permits, Patents, Trademarks, and Trade Secrets. The Company has
all franchises, permits, licenses and other similar authority necessary for the
conduct of its business as now being conducted and as planned to be conducted,
and it is not in default under any of them. The Company owns or possesses or has
applied for all patents, patent rights, trademarks, trademark rights, trade
names, trade name rights, rights to intellectual property and copyrights
necessary to conduct its business as now being conducted and as planned to be
conducted without conflict with or infringement upon any valid rights of others.
Except as disclosed on the Schedule of Exceptions, the Company has not received
any notice of infringement upon or conflict with the asserted rights of others.
4.10 No Defaults; Insurance. In all material respects, the Company has
performed all obligations required to be performed by it, and is not in default
under, any contract, commitment or instrument, and no event or condition has
occurred which, with the giving of notice or passage of time, or both, would
constitute such a default. The Company has insurance coverage in such amounts
and covering such risks as is usually carried by companies engaged in similar
businesses and is adequate for the business being conducted, and the properties
owned or leased, by the Company.
4.11 Brokers and Finders. No person or firm has, or will have, any
right, interest or valid claim against the Company for any commission, fee or
other compensation in connection with the sale of the Shares as a finder or
broker or in any similar capacity as a result of any act or omission by the
Company, or anyone acting on behalf of the Company. The Company hereby agrees to
indemnify and hold the Investor harmless in connection with the payment of such
fee.
4.12 SEC Reporting. The Company has filed all reports, registration
statements, proxy statements, and other materials required to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to the federal
securities laws and rules and regulations thereunder (the "Federal Securities
Laws"). The Company has recently filed amended 10-QSBs for the quarters ending
April 30, 1995, July 31, 1995, and October 31, 1995, and an amended 10- KSB for
the fiscal year ended January 31, 1995, in order to reflect certain restated
financial information as described therein. Subject to the foregoing, such
reports, registration statements, proxy statements, and other materials were
prepared in all material respects in accordance with the requirements of the
Federal Securities Laws, and none of such materials contain any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. For so long as the
Investor owns any of the Shares, the Company shall file with the Commission all
periodic reports, proxy statements, registration statements and other materials
required to be so filed pursuant to the Federal Securities Laws.
5
<PAGE>
4.13 Disclosure. Neither this Agreement (including the Schedules) nor
any writing furnished to Investor pursuant to or in connection with this
Agreement by the Company or anyone acting on its behalf, including, but not
limited to, the financial statements and any private placement materials,
contains any untrue statement of a material fact. Together they do not omit to
state any material fact required to make the statements herein or therein not
misleading in the light of the circumstances under which those statements were
made. The projections contained in any of the aforementioned documents have been
prepared in good faith by the Company on the basis of assumptions which the
Company believes to be reasonable, but the Company makes no representation that
its actual operating results will conform to any such projections.
SECTION 5
Representations, Warranties and
-------------------------------
Covenants of Investor
---------------------
5.1 Representations. Each Investor represents and warrants to the
Company for himself, herself, or itself that:
(a) the execution, delivery and performance by the Investor of this
Agreement have been duly authorized;
(b) this Agreement constitutes a valid and binding obligation of
Investor;
(c) no person or firm has, or will have, as a result of any act or
omission by Investor, any right, interest or valid claim against the Company,
for any commission, fee or other compensation as a finder or broker in any
similar capacity; and
(d) Investor (a) has been furnished access to the business records of
the Company and such additional information and documents as he may have
requested, has been given the opportunity to meet with Company officials and to
have such persons answer questions regarding the Company's affairs and
condition, and is, on the basis of such access, opportunity and information,
able to make an informed investment decision regarding his investment in the
Shares, and (b) is acquiring the Shares being purchased: (i) for the account of
Investor, (ii) for investment and not with a view to, or for sale in connection
with, any distribution of said Shares or with any present intention of
distributing or selling said Shares, and (iii) without any reason to anticipate
any change in circumstances or any particular occasion or event which would
cause Investor to sell said Shares. No information or knowledge obtained in any
investigation pursuant to this Section 5.1(d) shall affect or be deemed to
modify any representation or warranty of the Company contained herein or the
conditions to the obligations of the parties to consummate the purchase of the
Shares.
(e) Investor is an "Accredited Investor" within the meaning of
Regulation D promulgated under the Act.
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<PAGE>
5.2 Covenants. Each Investor covenants to the Company that he will not
sell or otherwise transfer any of the Shares except in accordance with the Act
and other applicable securities laws and that, prior to any transfer (other than
pursuant to an effective registration under the Act and other applicable
securities laws), he will furnish to the Company a written opinion of counsel,
reasonably satisfactory in form and substance to the Company, to the effect that
registration under the Act is not required in connection with the proposed
transfer. The Company will promptly review any such opinion to determine whether
it is reasonably satisfactory in form and substance.
Each Investor acknowledges that he is aware that he will not be
entitled to make any public offer or public sale of any of the Shares for an
indefinite period unless the offering of those Shares are then registered under
the Securities Act. Although it may be possible in the future to make limited
public sales of the Shares without registration in reliance on Rule 144 under
the Act, Investor is aware that there is no assurance that it will remain
available for this purpose. Accordingly, Investor understands that he must bear
the economic risk of his investment in the Shares for an indefinite period.
5.3 Legends. Each Investor acknowledges that the certificates
evidencing the Shares (other than Shares that shall have been transferred
pursuant to an effective registration statement), will conspicuously bear a
legend substantially in the following form until counsel reasonably satisfactory
to the Company determines that the legend is no longer required:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT."
Each Investor acknowledges that appropriate stop transfer orders may be
noted on the Company's stock records with respect to all certificates so
legended.
SECTION 6
Conditions to Closing of Investor
---------------------------------
Each Investor's obligation to purchase the Shares subscribed for at the
Closing is subject to the fulfillment, to the satisfaction of such Investor, on
or prior to the Closing Date of each of the following conditions:
7
<PAGE>
6.1 Representations and Warranties Correct; Performance. The
representations and warranties made by the Company in Section 4 hereof, and by
Investor in Section 5 hereof, shall be true and correct in all material respects
when made, and shall be true and correct in all material respects on the Closing
Date with the same force and effect as if they had been made on and as of the
Closing Date; and all covenants, agreements, and conditions contained in this
Agreement to be performed or complied with by the Company on or prior to the
Closing Date shall have been performed or complied with in all material
respects. The Company shall notify Investor in writing of any breach by the
Company of any agreement, covenant, representation or warranty herein prior to
the Closing.
6.2 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be satisfactory in substance and
form to Investor and to the Company.
6.3 Legal Investment. At the time of the Closing the purchase of Shares
by Investor shall be legally permitted by the laws and regulations to which
Investor and the Company may be subject.
6.4 Investor Rights Agreement. The Company and the Investor shall have
entered into an Investor Rights Agreement in the form attached hereto as Exhibit
6.4.
SECTION 7
Conditions to Closing of Company
--------------------------------
The Company's obligation to sell the Shares to be purchased at the
Closing is subject to the fulfillment to its satisfaction on or prior to the
Closing Date of each of the following conditions:
7.1 Representations and Warranties Correct; Performance. That the
representations made by each Investor pursuant to Section 5 hereof shall be true
and correct when made and shall be true and correct in all material respects on
the Closing Date with the same force and effect as if they had been made on and
as of the Closing Date; and all covenants, agreements, and conditions contained
in this Agreement to be performed or complied with by the Investors on or prior
to the Closing Date shall have been performed or complied with in all material
respects. Each Investor shall notify the Company in writing of any breach by
such Investor of any agreement, covenant, representation or warranty herein
prior to the Closing.
7.2 Investment. Each Investor shall at the Closing purchase and pay for
the Shares subscribed for herein.
8
<PAGE>
SECTION 8
Information Reporting
---------------------
8.1 Reporting Requirements. The Company will furnish or grant to
Investors, promptly upon sending, making available or filing the same, such
reports and financial statements as the Company shall send or make available to
the stockholders of the Company or to the Securities and Exchange Commission.
SECTION 9
Covenant of the Company
-----------------------
Following the Closing, the Company shall nominate one representative
selected by Investors jointly to be a candidate for election to the Company's
Board of Directors and to use its best efforts to cause the election to the
Board of such representative. This Section shall apply for so long as the
Investors holds at least fifty percent (50%) of the Shares purchased hereunder
(taking into account any stock splits, stock dividends or similar adjustments),
or that certain Distribution and Development Agreement by and between Beech
Street and the Company is in effect. The right set forth in this Section 9 is
personal and nontransferable.
SECTION 10
Definitions and Miscellaneous Provisions
----------------------------------------
10.1 Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined), to the extent they
may have a meaning beyond that ascribed by common usage:
"Person" means any individual or any entity or organization
whether or not in corporate firm and regardless of whether such entity
or organization is a juristic or legal person, and any agency, board,
branch or division of any government.
"Shares" shall have the meaning ascribed in Section 1.
10.2 Incorporation by Reference. All schedules, exhibits, and
attachments to this Agreement are incorporated herein by reference and form a
part of this Agreement, to the same extent as if set forth herein in full.
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<PAGE>
10.3 No Waiver; Cumulative Remedies. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
10.4 Amendments, Waivers and Consents. Any provision in this Agreement
to the contrary notwithstanding, and except as hereinafter provided, changes in
or additions to this Agreement may be made, and compliance with any covenant or
provision set forth herein may be omitted or waived, by Investor as to the
interests of that Investor only. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
10.5 Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder shall be in writing (including
electronic mail or telegraphic communication) and mailed, telegraphed or
delivered to the Company or to Investor at the address set forth below the
respective signatures hereto or at such other address as to which such party may
inform the other parties in writing in compliance with the terms of this
Section.
If to any other holder of the Shares: at such holder's address for
notice as set forth in the register maintained by the Company, or, as to each of
the foregoing, at such other address as shall be designated by such Person in
written notice to the other parties complying as to delivery with the terms of
this Section.
All such notices, requests, demands and other communications shall,
when mailed (by registered mail, return receipt requested, postage prepaid) or
telegraphed, be effective when deposited in the mails or delivered to the
telegraph company, respectively, addressed as aforesaid, unless otherwise
provided herein, and otherwise such notices shall be effective upon receipt.
10.6 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Investor and his respective heirs, successors
and (to the extent specifically permitted herein) assigns.
10.7 Survival of Representations and Warranties; Indemnity. All
representations and warranties made in this Agreement, the Shares or any other
instrument or document delivered in connection herewith or therewith, shall
survive the execution and delivery hereof or thereof, but each shall terminate,
and no action may be brought in connection with any breach thereof, subsequent
to the first anniversary of the Closing Date. Each of the parties agrees to
indemnify and hold harmless the other party and their respective affiliates and
agents against any and all damages, losses, claims, liabilities or expenses
(including reasonable attorneys' fees and costs, including costs of
investigation) arising out of the breach of any of the agreements, covenants,
representations or warranties contained in this Agreement or related materials.
10
<PAGE>
10.8 Prior Agreements. This Agreement, together with the Schedules
hereto and documents referenced in each constitutes the entire agreement between
the parties and supersedes any prior understandings or agreements concerning the
subject matter hereof, except only that certain confidentiality and market
stand-off letter agreement delivered by Investor in connection herewith, which
letter remains in full force and effect.
10.9 Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
10.10 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Arizona.
10.11 Headings. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
11
<PAGE>
10.12 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
NATIONAL HEALTH ENHANCEMENT
SYSTEMS, INC.
By:___________________________________________
Title:________________________________________
Date:_________________________________________
3200 North Central
Suite 1750
Phoenix, Arizona 85012
"Company"
________________________________________
WILLIAM A. FICKLING, JR.
Date:___________________________________
c/o Mulberry Street Corporation
577 Mulberry Street, Suite 1100
Macon, Georgia 31201-2728
________________________________________
W. CAL MCGRAW
Date:___________________________________
500 Northridge Road, Suite 600
Atlanta, Georgia 30350
each an "Investor"
12
<PAGE>
INDEX OF EXHIBIT AND SCHEDULES
------------------------------
Schedule A Investor Subscription Amounts
Schedule 4.6 Financial Statements
Schedule 5 Schedule of Exceptions
Exhibit 6.4 Form of Investor Rights Agreement
1
<PAGE>
Schedule A
Subscription Amounts
Investor Shares Subscribed For Aggregate
Price
Fickling 161,111 shares of Common Stock $725,000
McGraw 5,556 shares of Common Stock 25,000
------
Total $750,000
<PAGE>
Schedule 4.6
Financial Statements
1. Annual Financial Statements for the FYs ended January 31, 1996 and 1995
(Form 10KSB and Form 10KSB/A, respectively, and Annual Reports and
Proxy Statements for the same years);
2. Quarterly Financial Statements for FYs 1997, 1996 and 1995 (Forms
10QSB/A for 1996 and 10QSB for 1997 and 1995)
<PAGE>
Schedule 5
SCHEDULE OF EXCEPTIONS
SECTION EXCEPTION
- ------- ---------
4.6 Security interest in favor of Concord Growth Corporation
and Venture Lending, a division of Cupertino National Bank
and Trust, in certain assets.
4.6(b) A former employee has threatened a potential claim for
intentional infliction of emotional distress and
defamation. She has demanded $150,000. The Company
believes the claims have no merit.
4.6(c) In the normal course of the Company's operations it has
leased certain equipment and furniture. Such equipment and
furniture are collateral for security interests in favor
of the respective Lessor.
4.7 State of Arizona use tax audit for the periods: 1/1/92 to
11/30/95
<PAGE>
Exhibit 6.4
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of
the ____ day of _____________, 1996, by and among National Health Enhancement
Systems, Inc., a Delaware corporation (the "Company"), William A. Fickling, Jr.,
and W. Cal McGraw ("Investors").
RECITALS
The Company and Investors are entering into a Subscription and Stock
Purchase Agreement of even date herewith, pursuant to which the Company shall
sell, and Investors shall acquire, shares of the Company's Common Stock (the
"Shares").
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
SECTION 1
Restrictions on Transferability
-------------------------------
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Holder" shall mean any person holding Registrable
Securities, including without limitation, the Investors.
"Initiating Holders" shall mean an Investor or transferees
of an Investor under Section 1.14 hereof who in the aggregate are Holders of not
less than fifty percent (50 %) of the Shares.
The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the declaration or ordering
of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred
by the Company in complying with Sections 1.5, 1.6 and 1.7 hereof, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, blue
sky fees and expenses, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company which shall be paid in any event by the Company).
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<PAGE>
"Registrable Securities" means (a) the Shares; (b) any
Common Stock of the Company issued or issuable in respect of the Shares or other
securities issued or issuable with respect to the Shares upon any stock split,
stock dividend, recapitalization, or similar event, or any Common Stock
otherwise issued or issuable with respect to the Shares; and (c) any Common
Stock of the Company with respect to which the Company has granted registration
rights to others; provided, however, that shares of Common Stock or other
securities shall only be treated as Registrable Securities if and so long as
they have not been (x) sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction, or (y) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(l) thereof so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the consummation
of such sale.
"Restricted Securities" shall mean the securities of the
Company required to bear the legend set forth in Section 1.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar or successor federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all fees and disbursements of counsel for the
Holders (as limited by Section 1.9).
1.2 Restrictions. The Shares shall not be sold, assigned,
transferred or pledged except upon the conditions specified in this Agreement,
which conditions are intended to ensure compliance with the provisions of the
Securities Act. Each Investor will cause any proposed purchaser, assignee,
transferee or pledgee of the Shares to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Agreement.
1.3 Restrictive Legend. Each certificate representing (a) the
Shares and (b) any other securities issued in respect of the Shares upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall (unless otherwise permitted by the provisions of Section 1.4 below)
be stamped or otherwise imprinted with a legend in substantially the following
form (in addition to any legend required under applicable state securities
laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE
2
<PAGE>
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANS FERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREE MENT BETWEEN THE COMPANY AND THE
ORIGINAL SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE COMPANY."
Each Investor and Holder consent to the Company making a
notation on its records and giving instructions to any transfer agent of the
Restricted Securities in order to implement the restrictions on transfer
established in this Section 1.
1.4 Notice of Proposed Transfers. The holder of each
certificate representing Restricted Securities, by acceptance thereof, agrees to
comply in all respects with the provisions of this Section 1. Prior to any
proposed sale, assignment, transfer or pledge of any Restricted Securities,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the holder thereof shall give written notice to
the Company of such holder's intention to effect such transfer, sale, assignment
or pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (a) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
proposed transfer of the Restricted Securities may be effected without
registration or qualification under the Securities Act and applicable state
"blue sky" statutes, rules and regulations ("Blue Sky Laws"), or (b) a "no
action" letter from the Commission and applicable state "blue sky" regulators
(the "Regulators") to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
or the Regulators that action be taken with respect thereto, or (c) any other
evidence reasonably satisfactory to counsel to the Company, whereupon the holder
of such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder to
the Company. The Company will not require such a legal opinion or "no action"
letter (x) in any transaction in compliance with Rule 144 and applicable state
counterparts, (y) in any transaction in which an Investor which is a corporation
distributes Restricted Securities after six (6) months after the purchase
thereof solely to its majority owned subsidiaries or affiliates for no
consideration, or (z) in any transaction in which an Investor which is a
partnership distributes Restricted Securities after six (6) months after the
purchase thereof solely to partners thereof for no consideration; provided that
each transferee agrees in writing to be subject to the terms of this Section 1,
and provided that with respect to (y) and (z) the Company is provided with a
legal opinion meeting the standards described above to the effect that such
proposed transfer may be effected without registration or qualification under
applicable Blue Sky Laws. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear, except if such transfer is made
pursuant to Rule 144, the appropriate restrictive legends set forth in this
Section 1, except that such
3
<PAGE>
certificate shall not bear such restrictive legend if, in the opinion of counsel
for such holder and the Company, such legend is not required in order to
establish compliance with any provisions of the Securities Act.
1.5 Requested Registration.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to the Registrable
Securities, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of the written notice from
the Company;
provided, however, that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 1.5:
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act;
(B) During the eighteen (18) months
following the effective date of this Agreement; or thereafter if within eighteen
(18) months following the effective date of this Agreement the Company has
commenced a secondary public offering of the Common Stock of the Company to the
general public which is thereafter effected pursuant to a registration statement
filed with, and declared effective by, the Commission under the Securities Act;
except to the extent the Initiating Holders did not sell Registrable Securities
in such offering and registration under this Section 1.5 is otherwise available;
(C) After the Company has effected one (1)
such registration pursuant to this subparagraph 1.5(a), such registration has
been declared or ordered effective and the securities offered pursuant to such
registration have been sold;
4
<PAGE>
(D) If the request of the Initiating Holders
applies to less than anticipated gross proceeds to be received by such Holders
does not exceed $500,000); or
(E) After four (4) years from the date of
this Agreement.
Subject to the foregoing clauses (A) through (E), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Initiating Holders.
(b) Underwriting . In the event that a registration
pursuant to Section 1.5 is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part of the notice
given pursuant to Section 1.5(a)(i). The right of any Holder to registration
pursuant to Section 1.5 shall be conditioned upon such Holder's participation in
the underwriting arrangements required by this Section 1.5 and the inclusion of
such Holder's Registrable Securities in the underwriting, to the extent
requested and provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders (which managing underwriter
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 1.5, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten (including reducing the number of shares of
Registrable Securities to be underwritten to zero), then the Company shall so
advise all Holders of Registrable Securities and the number of shares of
Registrable Securities that may be included in the registration and underwriting
(if any) shall be allocated among all Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities or other securities so withdrawn shall also be withdrawn
from registration, and such Registrable Securities shall not be transferred in a
public distribution prior to ninety (90) days after the date of the final
prospectus used in such public offering.
5
<PAGE>
1.6 Company Registration.
(a) Notice of Registration. If at any time or from time to
time, the Company shall determine to register any of its securities, either for
its own account or the account of a security holder other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice
thereof, and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests made within twenty (20) days after receipt of such written notice
from the Company by any Holder, subject to Section 1.6(b).
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participa tion in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration, as the case may be).
Notwithstanding any other provision of this Section 1.6, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting
(including a reduction to zero), on a pro rata basis based on the total number
of securities (including, without limitation, Registrable Securities) entitled
to registration pursuant to registration rights granted to the participating
holders by the Company; provided, however, no such reduction may reduce the
number of securities being sold by the Company for its own account. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder or other holder to the nearest 100 shares. If any Holder or other holder
disapproves of the terms of any such underwriting, he or she may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to ninety (90) days after the date of the final prospectus
included in the registration statement relating thereto.
(c) Right to Terminate Registration. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 1.6 prior to the effectiveness of such registration, whether or not
any Holder has elected to include securities in such registration.
6
<PAGE>
1.7 Registration on Form S-3.
(a) From and after the first anniversary date of this
Agreement, if any Initiating Holder requests that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of the Registrable Securities, the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $500,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
however, that the Company shall not be required to effect more than two Form S-3
registrations in any twelve (12) month period regardless of who requests such
registration. The Company will (i) promptly give written notice of the proposed
registration to all other Holders, and (ii) as soon as practicable, use its best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of written notice from the
Company. The substantive provisions of Section 1.5(b) shall be applicable to
each registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not
be obligated to take any action pursuant to this Section 1.7: (i) in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registra tion,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act; (ii)
during the period starting with the date sixty (60) days prior to the filing of,
and ending on the earlier of (x) one year from the date sixty (60) days prior to
the Company's date of filing of, or (y) a date six (6) months following the
effective date of, a registration statement (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (iii) if the Company shall furnish to such
Initiating Holder a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors, it would be
seriously detrimental to the Company or its shareholders for registration
statements to be filed in the near future, then the Company's obligation to use
its best efforts to file a registration statement shall be deferred for a period
not to exceed one hundred twenty (120) days from the receipt of the request to
file such registration by such Initiating Holder.
7
<PAGE>
1.8 Acknowledgment of Previous Grants of "Piggyback"
Registration. Investors acknowledge that the Company has previously granted
"piggyback" registration rights relating to Common Stock of the Company.
1.9 Expenses of Registration. All Registration Expenses
incurred in connection with any registration pursuant to Sections 1.5, 1.6 and
1.7 in any such registration (other than expenses in excess of $15,000 of any
special audit required in connection with a registration pursuant to Section
1.5, which shall be borne by the Holders of Registrable Securities pro rata on
the basis of the number of shares to be registered) shall be borne by the
Company, provided that the Company shall not be required to pay the Registration
Expenses of any registration proceeding begun pursuant to Section 1.5, the
request of which has been subsequently withdrawn by the Initiating Holders. In
such case, (i) the Holders of Registrable Securities to have been registered
shall bear all such Registration Expenses pro rata on the basis of the number of
shares to have been registered, and (ii) the Company shall be deemed not to have
effected a registration pursuant to subparagraph 1.5(a) of this Agreement.
Notwithstanding the foregoing, however, if at the time of the withdrawal, the
Holders have learned of a material adverse change in the condition, business or
prospects of the Company from that known to the Holders at the time of their
request, of which the Company had knowledge at the time of the request, then the
Holders shall not be required to pay any of said Registration Expenses. In such
case, the Company shall be deemed not to have effected a registration pursuant
to subparagraph 1.5(a) of this Agreement. Unless otherwise stated, all other
Selling Expenses relating to securities registered on behalf of the Holders
shall be borne by the Holders of the registered securities included in such
registration pro rata on the basis of the number of shares so registered.
1.10 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will, at its expense:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least ninety (90)
days or until the distribution described in the registration statement has been
completed; and
(b) Furnish to the Holders participating in such
registration and to the underwriters of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities.
8
<PAGE>
1.11 Indemnification.
(a) The Company will indemnify each Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 1, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each, of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, and will reimburse the Company, such
Holders, such directors, officers, persons, underwriters or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, as
such expenses are incurred, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or
9
<PAGE>
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
(c) Each party entitled to indemnification under this
Section 1.11 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemni fied Party may participate in such
defense at such party's expense; provided, however, that an Indemnified Party
(together with all other Indemnified Parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 1 unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
1.12 Information by Holder. The Holder or Holders of
Registrable Securities included in any registration shall furnish to the Company
such information regarding such Holder or Holders, the Registrable Securities
held by them and the distribution proposed by such Holder or Holders as the
Company may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 1.
1.13 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times while the Company is subject to the reporting requirements of the
Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act");
10
<PAGE>
(b) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act; and
(c) So long as an Investor owns any Restricted Securities,
to furnish to the Investors forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public) and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as Investors may reasonably request in
availing themselves of any rule or regulation of the Commission allowing
Investors to sell any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the
Company to register securities granted to each Investor under Sections 1.5, 1.6
and 1.7 may be assigned to a transferee or assignee reasonably acceptable to the
Company in connection with any transfer or assignment of Registrable Securities
by such Investor (together with any affiliate); provided that (a) such transfer
may otherwise be effected in accordance with applicable securities laws, (b)
written notice of such assignment is given to the Company and (c) the
Registrable Securities to be assigned or transferred represent at least one
percent (1%) of the outstanding capital stock of the Company on the date of
transfer.
1.15 Market Standoff Agreement. Each Holder agrees in
connection with any registration of the Company's securities (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan) that, upon request of the Company or the underwriters
managing any underwritten offering of the Company's securities, not to sell,
make any short sale of, loan, grant any option for the purchase of, pledge,
hypothecate, or otherwise dispose of any Registrable Securities (other than
those included in the registration) or other capital stock of the Company or
securities exchangeable or convertible into capital stock of the Company without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed one hundred eighty (180) days from
the date of the final prospectus used in such registration) as may be requested
by the Company or such managing underwriters. The certificates for the Shares
shall contain, for so long as such market standoff provision remains in place, a
legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A MARKET STANDOFF AGREEMENT BETWEEN
THE COMPANY AND THE ORIGINAL SHAREHOLDER THAT PROHIBITS SALE OR
TRANSFER OF SUCH SHARES FOR A PERIOD OF UP TO 180 DAYS FOLLOWING THE
DATE OF THE FINAL PROSPECTUS FOR THE INITIAL PUBLIC
11
<PAGE>
OFFERING OF THE ISSUER'S COMMON STOCK. A COPY OF THE AGREEMENT IS ON
FILE WITH THE SECRETARY OF THE ISSUER.
1.16 Termination of Rights. The rights of any particular Holder
to cause the Company to register securities under Sections 1.5, 1.6 and 1.7
shall terminate with respect to such Holder on the earlier of (i) the date when
such securities may be sold during a one-year period pursuant to Rule 144 (but
not Rule 144A) or similar or successor Rule and (ii) the date four (4) years
after the effective date of this Agreement.
SECTION 2
Miscellaneous
-------------
2.1 Assignment. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties hereto.
2.2 Third Parties. Nothing in this Agreement, express or
implied, is intended to confer upon any person or entity, other than the parties
hereto, and their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided herein. "Holders" who are not parties to this Agreement, or
successors or assigns of such parties, are not third party beneficiaries of this
Agreement and may not enforce this Agreement without the prior written consent
of the Company in its discretion.
2.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Arizona as applied to agreements
entered into and performed in the State of Arizona solely by residents thereof.
2.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.5 Notices. Any notice required or permitted by this
Agreement shall be in writing shall be sent by prepaid registered or certified
mail, return receipt requested, addressed to the other party at the address
shown below or at such other address for which such party gives notice
hereunder. Such notice shall be deemed to have been given four (4) days after
deposit in the mail, postage prepaid.
2.6 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, portions of such provisions,
or such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
12
<PAGE>
2.7 Amendment and Waiver. Any provision of this Agreement may
be amended with the written consent of the Company and the Holders of at least a
majority of the Shares. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Holder of the Shares and the Company. In
addition, the Company may waive performance of any obligation owing to it, as to
some or all of the Holders of the Shares, or agree to accept alternatives to
such performance, without obtaining the consent of any Holder of Shares. In the
event that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern.
2.8 Rights of Holders of the Shares. Each Holder of Shares
shall have the absolute right to exercise or refrain from exercising any right
or rights that such Holder may have by reason of this Agreement, including,
without limitation, the right to consent to the waiver or modification of any
obligation under this Agreement, and such Holder shall not incur any liability
to any other holder of any securities of the Company as a result of exercising
or refraining from exercising any such right or rights.
2.9 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any party to this Agreement, upon any breach
or default of the other party, shall impair any such right, power or remedy of
such non-breaching party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
2.10 Agreement to Mediate and Arbitrate. The parties hereto
deem it to be in their respective best interests to settle any dispute as
expeditiously and economically as possible. Therefore, the parties expressly
agree to submit any dispute between them arising out of or relating to this
Agreement ("Dispute") to mediation and, if necessary, arbitration, as set forth
below. The parties hereto thus expressly waive any rights they may have to trial
by jury with respect to such dispute. The dispute resolution proceedings shall
be conducted in Dallas, Texas, or other site mutually acceptable to the parties.
The parties agree to use the following procedure in good faith to resolve any
Dispute:
(a) A meeting shall be held among the parties within ten
(10) days after any party gives written notice of the Dispute to each other
party (the "Dispute Notice") attended by a representative of each party having
decision-making authority regarding the Dispute (subject to board of directors
or equivalent approval, if required), to attempt in good faith to negotiate a
resolution of the Dispute.
13
<PAGE>
(b) If, within thirty (30) days after the Dispute Notice,
the parties have not succeeded in negotiating a written resolution of the
Dispute, upon written request by any party to each other party all parties will
promptly negotiate in good faith to jointly appoint a mutually acceptable
neutral person not affiliated with any of the parties (the "Neutral"). If all
parties so agree in writing, a panel of two or more individuals (such panel also
being referred to as the "Neutral") may be selected by the parties. The parties
shall seek assistance in such regard from the American Arbitration Association
(the "AAA") or the Center for Public Resources if they have been unable to agree
upon such appointment within forty (40) days after the Dispute Notice. The fees
and costs of the Neutral and of any such assistance shall be shared equally
among the parties.
(c) In consultation with the Neutral, the parties will
negotiate in good faith to select or devise a nonbinding alternative dispute
resolution procedure ("Mediation") by which they will attempt to resolve the
Dispute, and a time and place for the Mediation to be held, with the Neutral (at
the written request of any party to each other party) making the decision as to
the procedure if the parties have been unable to agree on any of such matters in
writing within ten (10) days after selection of the Neutral.
(d) The parties agree to participate in good faith in the
Mediation to its conclusion; provided, however, that no party shall be obligated
to continue to participate in the Mediation if the parties have not resolved the
Dispute in writing within one hundred twenty (120) days after the Dispute Notice
and any party shall have terminated the Mediation by delivery of written notice
of termination to each other party following expiration of said 120-day period.
Following any such termination notice after selection of the Neutral, and if any
party so requests in writing to the Neutral (with a copy to each other party),
then the Neutral shall make a recommended resolution of the Dispute in writing
to each party, which recommendation shall not be binding upon the parties;
provided, however, that the parties shall give good faith consideration to the
settlement of the Dispute on the basis of such recommendation, and if the
parties are unable to resolve the Dispute on the basis of such recommendation,
then at the election of either party the Dispute shall be submitted to binding
arbitration as provided below. In the event of binding arbitration, the party
seeking further resolution shall pay the reasonable attorneys' fees, costs and
other expenses (including expert witness fees) of the other party incurred in
connection with the pursuit of (and defense against) such arbitration, if the
result thereof is less favorable to the party pursuing the arbitration than the
recommendation of the Neutral.
(e) Notwithstanding anything herein to the contrary,
nothing in this Section shall preclude any party from seeking interim or
provisional relief, in the form of a temporary restraining order, preliminary
injunction or other interim equitable relief concerning the Dispute, either
prior to or during the Mediation if necessary to protect the interests of such
party. Further, this Section shall be specifically enforceable.
14
<PAGE>
(f) Subject to the foregoing, a party may seek arbitration
of an unresolved Dispute in Dallas, Texas, in accordance with the Rules of the
AAA governing commercial transactions. The arbitration tribunal shall consist of
three (3) arbitrators. The party initiating arbitration shall nominate one
arbitrator (who shall be knowledgeable in the industry but not be affiliated
with such party) in the request for arbitration and the other party shall
nominate a second arbitrator (who shall be knowledgeable in the industry but not
be affiliated with such party) in the answer thereto. The two arbitrators so
named will then jointly appoint the third arbitrator (who shall be knowledgeable
in the industry but shall not be affiliated with either party) as chairman of
the arbitration tribunal. If either party fails to nominate its arbitrator, or
if the arbitrators named by the parties fail to agree on the person to be named
as chairman within sixty (60) days, the office of the AAA in Dallas, Texas shall
make the necessary appointments of an arbitrator or the chairman of the
arbitration tribunal. The award of the arbitration tribunal shall be final and
judgment upon such an award may be entered in any competent court or application
may be made to any competent court for judicial acceptance of such an award and
an order of enforcement.
(g) At the reasonable request of either party, the
mediator or arbitration tribunal shall adopt rules and procedures designed to
expedite the dispute resolution process.
IN WITNESS WHEREOF, the parties have this Agreement as of the date
first above written.
NATIONAL HEALTH ENHANCEMENT
SYSTEMS, INC.
By:__________________________________________
Title:_______________________________________
Date:________________________________________
3200 North Central, Suite 1750
Phoenix, Arizona 85012
"Company"
_____________________________________________
WILLIAM A. FICKLING, JR.
Date:________________________________________
c/o Mulberry Street Corporation
577 Mulberry Street, Suite 1100
Macon, Georgia 31201-2728
15
<PAGE>
W. CAL MCGRAW
Date:________________________________________
500 Northridge Road, Suite 600
Atlanta, Georgia 30350
"Investors"
16
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