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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from N/A to
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Commission file Number 33-9396-LA
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National Health Enhancement Systems, Inc.
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(Name of small business issuer in its charter)
Delaware 86-0460312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
17th Floor
3200 North Central Avenue
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 602-230-7575
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK $.001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[ ]
Issuer's revenues for its most recent fiscal year: $25,185,005
As of April 22, 1997, the aggregate market value of Registrant's voting shares
held by non-affiliates, based upon the average between the closing bid and asked
prices of such stock as quoted on Nasdaq, was approximately $17,087,000.
The number of shares of the Registrant's common stock issued and outstanding was
5,539,067 at April 22, 1997.
The Registrant's definitive Proxy Statement to be filed pursuant to Regulation
14A with the Securities and Exchange Commission not later than May 31, 1997 is
incorporated by reference into Part III, Items 9 through 12.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business 1
Item 2. Description of Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 10
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7. Financial Statements 14
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 29
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16(a) of
the Exchange Act 30
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial
Owners and Management 30
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
National Health Enhancement Systems, Inc. (the "Company"), originally
incorporated in July 1983 as an Arizona corporation named AHI Limited, was
formed for the purpose of developing, licensing and marketing health evaluation
programs to healthcare providers, including hospitals, medical groups, clinics
and physicians. On October 7, 1986, the Company was reincorporated in Delaware
by merger into a Delaware corporation formed for that purpose.
In 1983, the Company commenced marketing a single proprietary,
software-supported health evaluation system designed to assist a healthcare
provider to assess an apparently "well" individual's overall fitness and risk of
incurring cardiovascular disease. This product, the Personal Fitness Profile,
helped healthcare providers to generate additional direct revenue and refer
consumers to other programs, departments or physicians for remedial or
preventive care. The Company's business strategy has since evolved, and the
Company's current business objective is to become the leading supplier of
Medical Call Center system products and services. The Company's products and
services are used by licensed registered nurses and other healthcare
professionals and providers in an effort to manage consumer demand for and
utilization of health care services, lower costs, improve consumer satisfaction
and improve the quality of care.
In April 1993, the Company acquired First Strategic Group, Ltd. ("FSG"), a
California corporation. FSG is a strategic consulting firm which specializes in
the development of healthcare marketing and advertising strategies. FSG services
include providing healthcare marketing consulting services and strategies and
development of creative marketing and/or advertising materials (such as direct
mail pieces and print ad materials) as requested by its clients. FSG services do
not include the placement of media or advertising.
In February 1997, the Company acquired all the stock of Atlanta, Georgia-based
Expert Systems, Inc. (ESI). ESI is a leading provider of tools for developers of
telephone and database technologies to create integrated voice response (IVR)
and computer telephony integration (CTI) features for computer telephony
applications. ESI's flagship EASE(R) product makes it easier for developers of
telephone and database technologies to create voice features for computer
telephony applications.
INDUSTRY BACKGROUND
The growth rate of healthcare expenditures in the United States continues to
rise, as do consumer demands for improved access to healthcare services.
Escalating costs of healthcare and public/political focus on healthcare have
caused many changes to occur in the healthcare market. One of the most
significant changes is the rapid and accelerating growth of managed care in both
the private and public sector. As the focus continues to shift from
fee-for-service to capitation, managed care programs continue to become more
prevalent. This trend creates a marketplace where healthcare providers seek to
maximize profitability by improving or reducing utilization and managing health
risk by keeping people healthy and providing the most cost-effective care should
they become sick.
According to the United States General Accounting Office, an estimated 90
million emergency department visits occurred in 1992, and approximately 40% of
those visits were unnecessary. The cost to diagnose and treat acute and chronic
conditions that are not truly emergencies, in an emergency department, are far
more expensive than the cost to treat such conditions in a physician's office or
an urgent care clinic.
The Company's strategy focuses upon the opportunity to assist healthcare
providers redirect these costly and unnecessary emergency room visits, and
similar inefficient utilization patterns, to more cost-effective settings, by
offering Medical Call Center products and services which can be implemented or
used by healthcare providers. The Company believes its Medical Call Center
products and services are part of the solution to improve service and reduce
healthcare costs. Medical Call Centers are staffed by registered nurses, who
field calls from people with health questions, 24-hours-a-day, seven days a
week. Specially trained nurses
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provide callers, through the use of clinically tested algorithms, access to
specific medical information and referrals designed to direct them to
cost-effective and appropriate levels of care. The Medical Call Center system is
designed to allow patients to become actively involved in managing their own
health. The Company believes that the information callers receive helps them to
make better decisions and helps them avoid unnecessary or inappropriate
emergency or physician office visits. Ultimately, the Company believes this
reduces healthcare costs and increases satisfaction and loyalty within the
healthcare delivery system. A typical Medical Call Center offers the following
capabilities:
1. Assists people in evaluating their health symptoms.
2. Enables people to better understand and manage serious
healthcare episodes.
3. Provides assistance in administering at-home remedies.
4. Offers educational information on a wide variety of health
topics.
5. Offers assistance to find a physician, class or program to
meet the callers' needs.
As managed care and capitation continue to change the healthcare industry, the
focus continues to shift. The Company believes that healthcare providers, to
succeed, will seek to increase access to information and influence decisions
while concurrently managing access to quality healthcare services, and that this
shift toward managing the demand and utilization will require greater reliance
on three components of healthcare: self care, patient education and telephone
triage. Medical Call Center products can guide nurses in triaging adult and
pediatric patients to the most appropriate and cost effective levels of care.
Success for hospitals, primary care physicians, HMO's and other alliances will,
in the Company's opinion, depend upon the degree to which these organizations
are able to effectively educate patients and subscribers regarding appropriate
utilization of the healthcare system. The Company believes that Medical Call
Centers will support utilization management strategies by delivering information
to patients and subscribers to help them make intelligent, well-informed
decisions about their health.
The Company's software products and services provide the foundation to implement
Medical Call Centers and systems operated by or for healthcare providers. The
Company has over 300 Medical Call Center clients. These clients have an
estimated 10 million lives under managed care health plans and have fielded over
10 million triage-related calls and an estimated 30 million total calls with the
Company's Medical Call Center products. The Company currently distributes its
products and services through Company-employed sales representatives and through
distributors, including Pfizer Health Solutions, Inc., Beech Street Corp.,
Rural/Metro Corp. (NASDAQ: RURL) and Advance ParadigM, Inc. (NASDAQ: ADVP).
Historically, the Company's primary customers have been hospitals, but the
Company has recently expanded distribution to medical groups, clinics and
physician groups, self-insured employers and managed care organizations.
In September 1996, the Company launched a Company-operated Medical Call Center
service bureau offering call center services twenty four (24) hours a day, 7
days a week. Eligible participants are able to access, through a toll free
number, specially trained nurses or prerecorded information. The Company markets
the service bureau to managed care organizations, self-insured employers and
other organizations who do not wish to establish and operate their own medical
call centers. Clients include Blue Cross of Arizona, FHP of Utah and hospitals
and health systems with National Health's installed software and voice
technology who use the service bureau to handle after-hours and overflow calls.
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PRODUCTS AND SERVICES
The Company's products have expanded over the past few years to include certain
services and software-based products with license fees or prices ranging between
$2,500 and $250,000. The Company's base of users now includes over 700 clients.
The Company's management believes that this network of healthcare providers is a
base that will facilitate the Company's distribution of new products.
The Company's core Medical Call Center products and services are:
- Centramax. M(TM)
- Centramax. M Plus(TM)
- Voicemax Plus(TM)
- PTAS(TM)
- Parent Advice Line(TM)
- Women's Advice Line(TM)
- Call Center Service Division (Outsourcing)
The Company's products also include value-added products or services such as:
- Patient Test Results(TM)
- The Professionals
- Patient Assessment System
- Health Direct
- Healthcare Marketing Services
- Newcomers
- 55Plus
Centramax. In December 1989, the Company released Centramax(R), a DOS-based
software system that is designed to manage consumer contacts through a
centralized database. With Centramax, the healthcare provider or other end users
can capture and store information on the caller, and subsequently communicate
directly with this and other consumers based on specific information or needs
obtained from the caller; access, analyze and report on information contained in
the database; and track revenues generated from marketing campaigns. The Company
believes that Centramax enables a healthcare organization to improve its
customer service function and more effectively manage the marketing function
through the management of information. For example, the inbound telephone
functions of Centramax are initiated when an operator receives a call. The
Centramax operator then retrieves a particular script and follows the directions
given. The system enables the operator to cross-sell other programs offered by
the healthcare provider which may not have been motivating factors behind the
original call but which may be of interest to the caller. For example, a
pregnant caller may ask for a referral to an OB/GYN. The Centramax software will
remind the operator to mention the healthcare provider's prenatal classes. With
one keystroke the operator can access the schedule and then register the caller.
Centramax is offered to healthcare providers under a non-exclusive license at an
initial license fee plus an annual license and support fee. The user is entitled
to ongoing software support, maintenance and enhancements during the term of the
license.
Centramax Plus. The Centramax Plus product combines the Centramax software
product with certain medically-based health information algorithms, known as the
Health Reference Information System(TM) ("HRIS"), which are designed to enable
nurses to answer health-related questions on incoming calls. Centramax Plus
assists a nurse to respond to callers' questions, answer certain commonly
occurring medical and health related questions, and direct callers to available
medical resources. The Company believes the system enables providers to give the
caller greater access to information to make an informed decision and the
healthcare provider an opportunity to direct the caller to the most appropriate,
cost effective care.
Each Centramax Plus user is granted a non-exclusive license. The Company charges
an initial license fee and an annual support and license fee, which entitles the
Centramax Plus user to continue to license the product and
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to ongoing software updates, support, maintenance, enhancements and updates to
the HRIS for the term of the license.
The Company initially developed the HRIS internally through research of
available current consumer health information and medical texts. In March 1990,
the Company transferred the ownership rights in the HRIS to Micromedex, Inc.
("Micromedex"), retaining the right to distribute the HRIS for a period of time.
Under the agreement, Micromedex is responsible for the accuracy, currency and
medical appropriateness of the HRIS, including additional HRIS developed
thereunder by the Company. Provided certain performance criteria are met, the
Company has the right to be the exclusive world-wide distributor of the HRIS for
the term of the agreement, which expires in 2002. Under certain circumstances,
the Company is granted the right to purchase all rights to the HRIS.
Centramax. M and Centramax. M Plus, which were released in January 1995, are a
Windows(R)-based software product that combines all the features included in
Centramax and Centramax Plus, respectively, with improved and enhanced reporting
and graphics capabilities. In addition, Centramax. M Plus includes pediatric
algorithms that are not offered in the Centramax Plus DOS product. The pediatric
algorithms are provided through an exclusive agreement with Barton Schmitt,
M.D., Professor of Pediatrics at the University of Colorado School of Medicine
and a recognized pioneer in pediatric telephone triage. In September 1994, the
Company entered into an agreement with Dr. Schmitt pursuant to which the Company
acquired certain exclusive rights to distribute the pediatric algorithms
developed by Dr. Schmitt to Medical Call Centers or for use in software used in
Medical Call Centers. The pediatric algorithms have been used for the past seven
(7) years in the "After Hours Program" established at the Denver Children's
Hospital. The Company has included the pediatric algorithms in certain of its
Medical Call Center products, and the Company is obligated to pay a royalty
based on the sales of the pediatric algorithms by the Company on a stand-alone
or bundled basis.
Centramax. M Plus is the base product for the Company's Medical Call Center
offering. Centramax. M and Centramax. M Plus are offered to healthcare providers
under a non-exclusive license at an initial license fee plus an annual license
and support fee. Users are entitled to ongoing software support, maintenance and
enhancements during the term of the license.
Interactive Voice Response System. The Company's interactive voice response
product line consists primarily of the Voicemax Plus product. Introduced in
September 1992, this product permits a licensee to provide health information
to callers via use of a touch-tone telephone, 24 hours a day, 7 days a week,
365 days a year. These products, which currently operate using The Brite Voice
Systems hardware platform, allow callers to anonymously access health
information (over 1,000 health categories), physician referrals, class
information or other information that can be programmed or customized by the
licensee. The Company offers a complementary marketing product called
HealthFone, which offers an exclusive name brand to assist the customer in
generating call volume for the Voicemax Plus product.
The Company believes that the benefits of its interactive voice response system
enable a licensee to improve utilization of existing resources, increase
visibility and improve profitability. Each user of the Voicemax Plus product is
granted a non-exclusive license. Each HealthFone user is granted a five-year
renewable license with an exclusive geographic service area in which the user is
the only healthcare provider in that service area that has been granted the
right to use the HealthFone trade name and marketing materials. The Company
charges each user of the interactive voice products an initial fee and an annual
license and support fee, which entitles the user to annual updates to the health
information, software support and enhancements to the interactive voice response
products.
The Professionals. The Professionals was originally released to include the
Centramax software, the HRIS and a marketing package. Currently, The
Professionals product only includes the marketing package, which is intended to
create awareness of targeted services, and to generate incoming consumer calls,
thereby helping to build the awareness of a healthcare provider's medical call
center operations. The Company believes that healthcare providers will continue
to purchase marketing tools in order to assist them to compete among other
providers for managed care and other opportunities.
Each user of The Professionals is granted a five-year renewable license with an
exclusive geographic service area in which it is the only healthcare provider in
that service area that has been granted the right to use The Professionals
service mark and customized marketing package. The Company charges each licensee
of The
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Professionals an initial license fee and an annual license and support fee,
which entitles the user to have continued geographic exclusivity and annual
updates to the marketing package, during the term of the license.
The Patient Assessment System. The Patient Assessment System ("PAS") combines
nine proprietary, software-supported health screening products designed to
assess an individual's overall fitness and risk of incurring certain kinds of
disease. The nine products are: "The Heart Test(TM)", "The Health Test(TM)",
"The Cancer Test(TM)", "Double Check(TM)", "The Diabetes Test(TM)", "The Woman's
Health Test(TM)" and "The Woman's Health Check(TM)", "The Life Test(TM)" and
the "Custom Profile". The PAS also includes a follow-up referral system linked
to the PAS programs called "The Healthcare Telemarketing Program(TM)" (The PAS
components are referred to herein as the "Programs".) Healthcare providers
deliver the Programs as part of a lead generation system or risk education
assessment system that permits them to refer consumers to other programs,
physicians or departments for remedial or preventive care and thereby generate
additional revenue. The PAS is offered with territorial exclusivity and includes
proprietary software, confidential instruction manuals for implementing and
distributing the Programs as part of a marketing campaign or strategy; and
additional standard promotional and marketing materials. The software supporting
the Programs can also produce group summary reports analyzing a group's
cardiovascular risk factors, cancer risk factors, health assessment results,
diabetes risk factors and levels of interest in specific intervention programs.
The current standard PAS agreement grants each new PAS user up to a five-year
license with a geographic service area within which it has the exclusive right
among healthcare providers to use the software supporting the Programs. The
initial fee paid by a PAS user depends primarily on the population of the
service area, the number of hospitals in the service area, the number of
physicians in a service area and the economic environment of the area. The
Company evaluates increasing the initial PAS user fee as additional programs are
developed. In addition, the standard PAS license agreement requires that each
PAS licensee pay the Company a monthly support fee, and provides for a five year
renewal term upon payment of a renewal fee, and certain rights of first refusal
after the 5 year renewal term.
Due to the geographic exclusivity of the PAS, the number of available markets
has decreased as the Company increased its PAS customer base. Presently, the
Company believes markets remain available and that in the foreseeable future
initial license fee revenue will continue to be generated from the available
markets although at a decreasing rate. In addition, the revenues from PAS
renewal fees, support fees and material sales are expected continue to provide
the Company with ongoing future revenues.
Health Direct. On April 9, 1991, the Company entered into a distribution
agreement with McMurry Publishing Company (formerly Vim & Vigor, Inc.) pursuant
to which the Company distributes, on a nonexclusive basis, a specialized
publication now known as Health Direct. Health Direct is an eight-page, direct
response publication (direct response marketing system) designed primarily to
promote hospital services while providing health information. Health Direct
contains thirty to forty "quick read" health related articles that can be
customized by each licensee. The Company grants geographic exclusivity to
distribute the Health Direct product (generally within a certain zip code area).
In addition, the Company requires each Health Direct licensee to purchase a
minimum number of copies of Health Direct per quarter. The Company is obligated
to pay McMurry Publishing a portion of the revenue received from these
publications. In April 1997 the Company launched a Spanish-language publication
similar to Health Direct called Bienestar. The publication is marketed to health
care companies serving Spanish-speaking consumers.
Healthcare Marketing Services. FSG provides healthcare strategic and marketing
services to existing and prospective clients. FSG services include providing
healthcare marketing consulting services and strategies, development of creative
marketing and/or advertising materials (such as direct mail pieces, print ad
materials) as requested by the clients. FSG services do not include the
placement of media.
NEW PRODUCTS AND SERVICES
The Company launched a national Medical Call Center service bureau in September,
1996. The Company's Call Center provides services twenty four (24) hours a day,
7 days a week through managed care companies, health plans and employers.
Eligible participants, typically patients or health plan members, are able to
access
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medical information through a toll free number by reaching nurses or prerecorded
audio libraries. The Company markets the service bureau to managed care
organizations, self-insured employers and other organizations who do not wish to
establish and operate their own Medical Call Centers. Establishment of the
national Medical Call Center 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, competition in a market where
there is at least one established competitor with significantly greater
resources than the Company, and operational (equipment) failures due to fires or
other disasters that would disable the Medical Call Center for a significant
period of time. Although preliminary results are very encouraging, there are no
assurances the service bureau will be successful.
The Company launched the Patient Test Results(TM) (PTR) product in early 1997.
PTR(TM) allows health plan members or patients to receive confidential results
for routine tests via touch-tone telephone. PTR can reduce the amount of time
spent by healthcare providers delivering routine information by allowing a
provider to record basic messages. Patients access the system via a private
access code. The PTR system documents that messages are accessed by patients.
PTR is marketed to physician group practices, hospitals and health systems,
managed care companies and other providers of routine medical tests, like
student health clinics. PTR sales results to date are not material.
The Company intends to develop or acquire, and to market to its current clients
and others, additional products and services which may or may not be similar to
its existing products. The Company's future growth in revenue is dependent on
the Company's ability to acquire or develop and successfully market new products
and services in the changing healthcare market. There are no assurances the
Company will be able to do so. The Company's future success also depends upon
its ability to sell its current products and services to, and acquire or develop
new products and services for, managed care and similar organizations. The
managed care market is changing rapidly, the Company's historical business has
not been in the managed care market, and there are no assurances that the
Company will be able to compete successfully in the managed care market.
Research and Development. Management estimates that during the fiscal years
ended January 31, 1997 and 1996, the Company spent approximately $1,227,371 and
$523,969 respectively, on company-sponsored research and development activities
(which includes enhancements and upgrades to the Company's products).
Liability in the Healthcare Industry. In recent years, participants in the
healthcare industry, including physicians, nurses and other healthcare
professionals, have become subject to an increasing number of lawsuits alleging
malpractice, product liability and related legal theories, many of which involve
large claims and significant defense costs. Although the Company does not
provide healthcare services directly to consumers, except for triage advice,
referral and health information through the Company's Medical Call Center,
medical malpractice, product liability or similar claims against the Company's
customers relating to delivery and use of the Company's products and services
may also be made against the Company. Due to the nature of its business, the
Company could become involved in litigation with the attendant risk of adverse
publicity, significant defense costs and substantial damage awards. To date, no
such claims had been made against the Company. However, there can be no
assurance that claims will not be brought against the Company. Even if such
claims ultimately prove to be without merit, defending against them can be time
consuming and expensive, and any adverse publicity associated with such a claim
could have an adverse effect on the Company. The Company is in no position to
determine the probability of such claims being made.
The Company has taken certain steps to minimize the risk of potential claims.
Delivery and use of the Company's products is the responsibility of the
licensee, and each licensee is required to indemnify the Company against third
party claims arising out of use of the products by the licensee. In addition,
the agreement with Micromedex for use of the HRIS provides that the Company
shall be indemnified and held harmless from third party claims arising from the
accuracy, currency or completeness of the information contained in the HRIS
reviewed by Micromedex. The Company also maintains professional errors and
omissions liability insurance for its installed products, and professional
liability coverage for the Call Center Service Division, which it believes to be
adequate. There can be no assurance, however, that claims in excess of the
Company's insurance coverage will not arise or that all claims would be covered
by such insurance. In addition, although the Company has not experienced
difficulty in obtaining insurance coverage in the past, there
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can be no assurance that the Company will be able to maintain existing insurance
coverage or obtain increased insurance coverage on acceptable terms or at all.
The Company expects to seek increased insurance coverage as its business grows.
REGULATORY MATTERS
Government Regulation. The healthcare industry is subject to extensive and
evolving government regulation at both the Federal and state level regarding the
provision, marketing and reimbursement of healthcare services and products,
including Medicare/Medicaid anti-kickback regulations and requirements governing
the provisions of healthcare information services. Specific sections of the
Social Security Act authorize the exclusion of an individual or entity from
reimbursement and/or participation in state health programs and Medicare
programs if it has violated the Social Security Act. In July 1991, regulations
outlined certain payment practices which would not be subject to criminal
prosecution. These regulations, commonly referred to as "safe harbor"
regulations, effect the manner in which hospitals make physician referrals. The
Company's Medical Call Center software products accommodate the entry of the
information required under the "safe harbor" regulations provided that the
appropriate policies and procedures are followed by the users of the Company's
products. In addition, certain statutes and regulations predate the development
of telephoned-based health care information and other interstate transmission
and communication of medical information and services. The literal language of
certain of these statutes and regulations governing the provision of health care
services, including the practice of nursing and the practice of medicine, and
health maintenance organizations could be construed by regulatory authorities to
apply to certain of the company's teleservicing activities, which use Arizona
registered nurses to provide Medical Call Center services such as triage and
information regarding appropriate sources of care and treatment time FRAMES, and
also could apply to certain activities of the Company's customers when operating
the Company's programs. The Company has not been made, nor is it aware that any
of its clients or nurse employees providing out-of-state teleservicing have ever
been made, the subject of such requirements by a regulatory authority. However,
if regulators seek to enforce any of the foregoing statutory and regulatory
requirements against the Company, its employees and/or its clients could be
required to obtain additional licensed personnel, to modify or curtail the
operation of the Company's programs, to modify the method of payment for the
Company's programs, or to pay fines or incur other penalties. Subject to the
foregoing, the Company has no reason to believe that its business violates any
Federal or state statutes or regulations.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company claims proprietary rights in the software that supports its
products, as well as in confidential training and promotion manuals, the
questionnaires and report forms used with the PAS, the packaging and
presentation of the Company's products and their representative components and
related protectable materials. The Company has registered software source code
copyrights for all of its DOS-based software products and Cemtramax.M. In
addition, the Company's current agreements generally prohibit its customers from
decoding, reproducing or copying the software. Those agreements also require
customers to take reasonable and appropriate actions to protect and preserve the
Company's rights in the software and other proprietary materials. Subject to
certain conditions, the Company will indemnify and defend a customer with
respect to claims brought by third parties against the customer for infringement
of patents, copyrights and trademarks, or misappropriation of trade secrets or
other proprietary rights relating to the products of the Company licensed by its
customers. The Company is not aware of any such claims. Despite the precautions
taken by the Company it may be possible for unauthorized third parties to copy
or independently develop aspects of its product it considers proprietary. The
Company has no patents and existing copyright laws afford only limited product
protection.
The Company holds registered trademarks for the Centramax, The Professionals,
HealthFone and Referral One names with the United States Patent and Trademark
Office.
MARKET CONDITIONS, COMPETITION AND ADDITIONAL RISK FACTORS
The healthcare industry in general is extremely competitive. Many changes in the
industry that began in the 1980's will continue through this decade and will
transform the way healthcare providers function and the types
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of healthcare services they provide. The following trends among others, are
anticipated to have a strong influence on healthcare through the remainder of
the 1990's:
- Integrated healthcare delivery systems.
- Rising national healthcare expenditures.
- Reduced reimbursement levels.
- Increasing competition among providers.
- Shifting healthcare delivery patterns.
- Aging population with an increased demand for healthcare services.
- Hospital mergers and realignments.
Within the healthcare industry, the Company and its clients are competing
directly and indirectly for the business of individuals and businesses
interested in healthcare services. The Company believes that hospitals, clinics,
group practices, managed care organizations and other healthcare providers are
seeking new ways to reduce healthcare costs and to market their services more
effectively. Healthcare providers are particularly interested in products which
assist in reducing healthcare costs and improve the quality and service of
healthcare delivery.
There are a number of software-based systems, health promotion programs, and
wellness services being offered to healthcare providers that are perceived by
the Company to be direct competitors because they have software systems or
services capable of providing health information, database information and
producing reports that contain health information similar to the Company's
reports or providing benefits similar to the Company's software products and
anticipated service bureau offering.
The barriers to entry into this market are relatively low, consisting primarily
of the means to develop or otherwise acquire supporting software and medical
assessment information; a product responsive to the healthcare providers'
particular needs; and a distribution or delivery system for the products and
services. In addition, development of similar programs by healthcare providers
for use in their own facilities may provide competition for the Company.
In addition the Company believes that the competition of offering Medical Call
Center products or services will begin to increase and that there may be new
entrants with substantially greater financial, marketing, technical and other
resources than the Company which may adversely impact the Company's ability to
compete in the market.
The Company believes that much of its competitive strength lies in its user
network and in its ability and experience in providing quality products and
services to its market. The Company's user network of healthcare providers
affords it a means of quickly reaching a group of healthcare providers who have
a proven interest in the types of products the Company supplies and who are
familiar with the quality of the products and services the Company supplies. The
Company believes that it has demonstrated ability and experience in providing
products that are (1) useful in decreasing overall healthcare costs and in
improving healthcare service and quality; (2) effective in improving operating
efficiency and increasing a healthcare provider's return on expenditures; (3)
well supported by the Company's technical expertise; and (4) easy for the
healthcare provider to use. The Company believes that these attributes are
likely to be attractive to healthcare providers without significant
reconfiguration of the products. To the extent the Company offers new products
or services or offers its existing products and services in new markets, it
expects to face increased competition from competitors with potentially greater
financial, marketing or technical resources than the Company. No assurance can
be given that the Company will be able to compete successfully.
The business of the Company is and will continue to be affected by general
economic conditions and is dependent upon both a continued interest to reduce
healthcare costs and a continued competitive environment for healthcare
providers. In addition, the success of the Company will depend upon its ability
to identify and develop sources of revenue in addition to the initial and
recurring maintenance and support fees payable from its customers, such as the
future development or acquisition and distribution of new products and services.
8
<PAGE> 11
Key Employees and Management
The Company's success depends on a limited number of key management employees,
all of whom are subject to certain post-employment non-competition restrictions
of limited duration. If the services of such key employees were no longer
available to the Company, the Company would be materially and adversely
affected. The Company also believes its continued success will depend on its
ability to attract and retain highly-skilled management, marketing, sales and
other personnel. Furthermore, the Company's ability to manage change and growth
successfully will require the Company to continue to improve its management
expertise as well as its financial systems and internal controls.
Principal Customers
The Company has historically marketed its products primarily to hospitals.
Recently, the Company's marketing efforts are expanding to include managed care
organizations, physician groups, self-insured employers, integrated delivery
systems such as physician hospital organizations (PHOs). The Company does not
derive 5% or more of its revenues from any one customer.
Volatility of Operating Results and Stock Price
Revenues and operating results depend primarily on the volume and timing of
orders received during each fiscal quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
license revenues in the last month of each fiscal quarter, frequently in the
last week. Because a significant portion of the Company's operating expenses are
relatively fixed with personnel levels and other expenses based upon anticipated
revenues, a substantial portion of which may not be generated until the end of
each fiscal quarter, the Company may not be able to reduce spending in response
to sales shortfalls or delays. These factors could cause variation in operating
results from quarter to quarter.
The Company believes that such variations in operating results, or factors such
as announcements of developments related to the Company's business, changes in
market analyst estimates and recommendations for the Company's Common Stock,
changes in government regulations and general conditions in the health care
industry and the economy could cause the price of the Company' Common Stock to
fluctuate, perhaps substantially. In addition, in the most recent fiscal year,
the Company's stock prices have experienced significant price fluctuations.
Employees
As of April 15, 1997 the Company employed a total of approximately 225 full-time
employees. None of the Company's employees are covered by a collective
bargaining agreement, and the Company believes its relations with its employees
are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate offices are located in a twenty-five story office
building located in Phoenix Arizona. The Company occupies approximately 23,000
square feet of leased space, for which the lease term for this space expires on
December 15, 2002. The Company believes that its existing office space, along
with the options to expand its space, will be sufficient to meet its needs for
the foreseeable future. The Company also leases approximately 6,500 square feet
of office space in Whittier, California which is used by FSG, and approximately
7,800 square feet of office space in Atlanta, Georgia used by Expert Systems,
Inc. and Health Enhancements International, Inc., a recently formed Company
subsidiary exploring international markets for the Company's products and
services.
ITEM 3. LEGAL PROCEEDINGS
NONE
9
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market (Nasdaq) under the symbol: NHES.
The following table of market price information sets forth the range of high and
low sales price information for the Company's common stock during the past two
fiscal years as quoted on Nasdaq. These quotations reflect interdealer prices,
without retail markups, mark-downs or commissions, and may not reflect actual
transactions.
MARKET PRICE
YEAR ENDED: JANUARY 31, 1997
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
HIGH 11.000 10.250 9.000 13.625
LOW 5.250 5.000 6.250 6.250
</TABLE>
YEAR ENDED: JANUARY 31, 1996
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
HIGH 1.625 1.625 2.750 9.000
LOW 1.063 0.875 1.250 2.375
</TABLE>
The Company has not declared or paid any dividends on its Common Stock to date
and does not plan to do so in the foreseeable future. Pursuant to the Company's
current credit line the Company is prohibited from paying any dividends. On
April 18, 1997, there were approximately 216 shareholders of record and
approximately 1500 other beneficial owners of the Company's common stock.
RECENT SALES OF COMMON STOCK
In fiscal year 1997, the Company issued an aggregate of 167,667 shares of common
stock to two individuals for a total purchase price of $750,000 paid in cash,
and an aggregate of 370,370 shares of common stock to a corporation for a total
purchase price of $2,500,000 paid in cash. Each transaction was a private
placement effected in reliance upon section 4(2) of the Securities Act of 1933,
as amended.
10
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Except as noted herein, all references to the Company include the Company and
its consolidated subsidiaries.
National Health Enhancement Systems, Inc. (NASDAQ:NHES) is a leading provider
of technology, software and services designed to help managed care
organizations, hospitals and delivery systems, physician group practices and
employer groups provide affordable quality health care. National Health's
Medical Call Center products and services are used by over 700 health care
organizations nationwide to lower costs, improve consumer access to care and
improve quality. National Health's capability to link software, technology,
health information and strategic consulting services helps health care
organizations, including employers, promote wellness behavior, educate members,
increase access to appropriate services and lower costs without compromising
care.
National Health implements installed onsite programs which are housed at the
client's location and staffed and managed by the client. NHES clients can also
outsource programs for in-bound and out-bound calls to National Health's Medical
Call Center, typically on a per-member, per-month basis. Whether run by a client
using NHES' tools or outsourced to NHES' Call Center services as a "turnkey"
program, licensed registered nurses and voice technology are used to service
patients, healthplan members or employee groups, as defined by the client.
Results of Operations
For the fiscal year ended January 31, 1997, the Company had income from
operations of $864,296 compared with $617,746 in fiscal year 1996, an
increase of approximately 40%. Net income for 1997 was $736,296 compared to
$559,746 in 1996, an increase of 32%. The percentage increase in income from
operations is greater than the percentage increase in net income because of the
difference in the effective tax rates between the two years. The effective tax
rate in 1997 and 1996, was 15% and 9%, respectively, the result of fully
utilizing the remainder of a prior year NOL carry forward, during the third
quarter of 1997. Fiscal year 1997 represents record earnings for the Company and
is indicative of continued growth in market penetration of the Company's
products and services.
The Company's operations are affected by consolidation, alliances and mergers in
the health care market. While there are no assurances, the Company's management
believes that its competitive strengths will permit it to continue to compete in
its targeted market and that the Company is positioned favorably to take
advantage of future opportunities in the health care industry. The Company's
management also believes its products help health care providers improve their
services and also help reduce health care costs by providing objective
information on health care issues to individuals, thereby enabling them to make
informed choices about when, where and how to seek health care services and
reduce health care costs while providing providers with a favorable return on
their investment in the Company's products. Nonetheless, the Company's
operations may be materially and adversely affected by consolidation, alliances
and mergers in the health care industry, health care reform in the private or
public sector, and by future economic conditions.
Revenues and operating results depend primarily on the volume and timing of
orders received during each fiscal quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
license revenues in the last month of each fiscal quarter, frequently in the
last week. Because a significant portion of the Company's operating expenses are
relatively fixed with personnel levels and other expenses based upon anticipated
revenues, a substantial portion of which may not be generated until the end of
each fiscal quarter, the Company may not be able to reduce spending in response
to sales shortfalls or delays. These factors could cause variations in operating
results from quarter to quarter, which may result in volatility in the price of
the Company's common stock.
REVENUES. Total revenues for fiscal year 1997 increased 49% to $25,185,008
compared to total revenues of $16,891,143 in fiscal year 1996. This record
level of revenues is the result of increased demand for the Company's core
products including strong demand for newer products such as pediatric triage and
interactive voice response (IVR) applications. The Company has also taken
measures to increase revenues from support, materials and services, and for the
first time, revenue from these sources exceeded initial license fee revenue for
fiscal year 1997, a trend which the Company anticipates continuing in the
future.
Initial license fee revenue is derived primarily from the sales of the Company's
core software products -- Centramax.M(TM), Centramax.M Plus(TM), Pediatric
Triage and Advice System(TM), Parent Advice Line(TM), and Voicemax Plus(TM) --
and
11
<PAGE> 14
the Company's value-added products and services -- The Professionals(TM),
Healthfone(TM), Patient Assessment System(TM), Health Direct, and health care
marketing services. Revenues generated from the initial license fees of core and
value-added products and services accounted for approximately 47% of the
Company's total revenues in fiscal year 1997, compared to 52% of total revenues
for fiscal year 1996. At the same time, the current year's results show initial
license fees increasing to $11,776,309 in fiscal year 1997, from $8,845,081 in
fiscal year 1996. This is an increase of $2,931,228 or 33%. Revenue from
support, materials and services accounted for approximately 53% of the Company's
total revenues in fiscal year 1997, compared to 48% of total revenues for fiscal
year 1996. At the same time, the current year's results show that revenues from
support, materials and services increased to $13,408,699 compared to support,
materials and services revenues of $8,046,062 in fiscal year 1996. This is an
increase of $5,362,637 or 67%. This increase can be primarily attributed to the
continued expansion of the Company's client base, and the Company's new policy
to charge for support commencing immediately upon contract execution rather than
after the first six months.
Support fees represent charges to customers, 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. As initial fee sales continue to
increase, revenues generated from the associated support fees should continue to
increase as well. Material sales represents the sale of printed questionnaires
and reports from the Company's PAS and quarterly publication of the Health
Direct product. Service revenue is generated from strategic consulting
engagements between the Company and its customers that provide value added
results.
OPERATING EXPENSE. Total operating expenses were $24,320,712 in fiscal year
1997, compared to $16,273,397 in fiscal year 1996, an increase of $8,047,315 or
49%. During fiscal year 1997, the Company invested in the Call Center Service
Division and in additional selling resources, client services, and product
development, all in an effort to better position the Company for the future. The
Company's investments in the sales and client services functions are designed to
enable the Company to improve product sales to new and existing clients, while
continued investments in the area of product development are part of
management's strategy for meeting market needs with a broader array of products
and maintaining existing products as leading edge. Although operating costs
increased as a result of such investment, all major expense categories decreased
or only slightly increased as a percentage of revenue compared to prior year.
COST OF INITIAL LICENSE FEES AND COMPUTER HARDWARE. Initial license fees and
computer hardware costs increased to $4,707,044 in fiscal year 1997 from
$2,158,517 in 1996. This is an increase of $2,548,527. These costs represent the
costs incurred to implement and install core products sold, including hardware
cost, third-party license fees and training. The increase in these costs during
the current fiscal year can be primarily attributed to the increase in initial
license fee revenue and the related product mix.
COST OF SUPPORT, MARKETING SERVICES, AND MATERIALS SALES. Cost of support,
marketing services, and materials sales increased to $5,281,273 in the fiscal
year 1997 from $3,509,171 in 1996, an increase of $1,772,102. These costs
represent the costs associated with providing annual support fees, variable
costs associated with services provided by FSG, printing costs associated with
the Patient Assessment System(TM) and Health Direct products. The increase is
a direct result of the increase in the corresponding revenue during the
current fiscal year.
PRODUCT DEVELOPMENT COSTS. Product development costs were $1,227,371 in fiscal
year 1997 compared to $523,969 in 1996. Product development costs relate to
improvements and enhancements of the Company's call center products and costs
incurred to establish the technological feasibility of software products
currently under development.
SALES AND MARKETING COSTS. Sales and marketing expenses were $8,775,758 in
fiscal year 1997 compared to $7,064,368 in fiscal year 1996. This is an
increase of $1,711,390 or 24%. This increase reflects the Company's investment
in its selling resources.
12
<PAGE> 15
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2,457,065
in fiscal year 1997, compared to $1,888,586 in fiscal year 1996. This is an
increase of $568,479 or 30%. As a percentage of revenue, however, general and
administrative expenses decreased from 11.2% to 9.8% in the current fiscal year.
This increase is due primarily to the additional costs and overhead associated
with the investment in the selling organization, client service, and product
development including additional space requirements, general price increases
in areas such as health and liability insurance, and professional and
consulting services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$1,290,845 in fiscal year 1997 as compared to $862,286 in fiscal year 1996. This
is an increase of $428,559 or 50%. This additional increase in depreciation and
amortization costs is primarily due to the net addition of approximately
$1,794,000 in property, plant & equipment.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts increased
to $581,356 in fiscal year 1997 from $266,500 at the end of fiscal year 1996, an
increase of $314,856. The provision for doubtful accounts is adjusted by the
Company to reflect potentially uncollectible accounts receivable that may
exist at period-end. The Company believes that the allowance for doubtful
accounts is adequate, given the amount of receivables, the Company's credit
terms and the Company's history of collecting receivables.
LIQUIDITY AND CAPITAL RESOURCES.
As of January 31, 1997, the Company had working capital of $1,545,095 compared
to a deficiency in working capital of $1,349,989 at January 31, 1996. The
improvement in working capital was a result of the Company's continued
improvement in results of operations and two private equity placements which
were closed in fiscal year 1997.
Cash provided by operating activities was $2,194,064 in fiscal year 1997,
compared to $678,640 in fiscal year 1996. On July 22, 1996 the Company secured
an equity investment in the amount of $750,000 for the launch of its new
national call center division. Two individuals made the investment in exchange
for 166,667 shares of restricted common stock in a private placement. In
addition, on January 14, 1997, the Company issued 370,370 shares of restricted
stock in a private placement for an aggregate purchase price of $2,500,000. In
connection therewith, the Company entered into a governance agreement pursuant
to which the corporation agreed to certain limitations on its accumulation of
additional shares and on its voting rights. In addition, the investor also
acquired the right to have up to two nominees serve on the Board of Directors of
the Company.
On October 23, 1996 the Company obtained a revolving line of credit providing up
to $2,500,000. The revolving line of credit bears interest at prime plus 2%, and
is secured by accounts receivable and matures on October 22, 1997. The
availability of borrowing on the revolving line of credit is subject to
available eligible accounts receivable and certain other covenants. The Company
also obtained a borrowing line of $250,000 from the same lender. The $250,000
borrowing line is secured by equipment and is structured as "interest only"
bearing interest at prime plus 2%. On April 22, 1997, the amount borrowed at
that time on the $250,000 line was converted into an amortizing loan bearing
interest at prime plus 2%.
During the year the average monthly outstanding balance on the revolving line of
credit was $170,000 bearing an average annual rate of interest of 9.25%. The
Company is primarily utilizing cash provided by operations for its daily
operational cash requirements and as of January 31, 1997, did not have an
outstanding balance on the line of credit. If necessary, the Company believes it
will be able to renew or replace the line of credit by October 22, 1997, the
date at which the current revolving line agreement expires. The Company
continues to evaluate opportunities to expand and increase existing capital.
The Company's operating results continue to be inconsistent on a month-to-month
basis and are dependent upon retention and performance of the Company's sales
staff, long product sales cycles related in part to pricing of the Company's
products and customer budget requirements, and
13
<PAGE> 16
to other factors, such as uncertainties associated with the health care market
and economic conditions, beyond the control of the Company. The Company,
however, will continue to evaluate methods to improve and increase its product
distribution channels and to enhance or expand its current product lines. The
Company has expanded, and will seek to continue to improve and enhance its
product lines in order to be more responsive to the market. The Company believes
that quarterly operating results are dependent, and will continue to be
dependent, on the initial license fee revenues in the foreseeable future. The
Company will continue to focus its efforts on improving cash from operations,
increasing support revenues, and increasing revenue in the new call center
division. The recurring monthly revenue from support fees, material sales and
services is currently not sufficient to maintain a break-even level at the
Company's current operating expense levels.
The discussion above includes statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which are statements other than historical fact, that involve risks and
uncertainties. In addition to the factors discussed elsewhere herein, important
factors may cause the Company's actual results to differ materially from these
and any future forward-looking statements by or on behalf of the Company. Those
factors include, among others, uncertainties and delays in the development and
marketing of new products and services, product and services demand and market
acceptance risks, the Company's ability or inability to obtain additional
financing, the impact of competitive products, services and pricing, continued
rapid change and consolidation in the health care market, general changes in
economic conditions not presently contemplated, and other factors detailed in
the Company's Securities and Exchange Commission filings.
SUBSEQUENT EVENTS.
On February 18, 1997 the Company completed an acquisition of Expert Systems,
Inc. (Expert), a developer and distributor of telephone and database
technologies to create voice features for computer telephone applications. Under
the terms of the acquisition, to be accounted for as a pooling of interests, the
Company issued 465,299 restricted shares, and options for the purchase of 59,701
shares, of the Company's common stock for all of Expert's outstanding shares and
options at an exchange ratio of .09537 shares of the Company's common stock for
each share of Expert's stock outstanding or subject to options. Of the Company
shares issued in the transaction, 46,529 are escrowed securing an indemnity
obligation in favor of the Company.
ITEM 7. FINANCIAL STATEMENTS
14
<PAGE> 17
AUDITED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Health Enhancement Systems, Inc.:
We have audited the accompanying consolidated balance sheet of NATIONAL HEALTH
ENHANCEMENT SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of
January 31, 1997, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years ended January 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Health Enhancement
Systems, Inc. and subsidiaries as of January 31, 1997, and the results of their
operations and their cash flows for the years ended January 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Phoenix, Arizona
March 28, 1997
- ----------------
15
<PAGE> 18
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 3,095,305
Accounts receivable, net of allowance
for doubtful accounts of $629,670 (Notes 2 and 3) 10,822,322
Prepaid expenses, deferred costs and supplies (Note 2) 1,462,054
------------
Total current assets 15,379,681
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of
$1,606,623 (Note 2) 984,441
PROPERTY AND EQUIPMENT,
net (Notes 2 and 3) 2,166,587
EXCESS OF COST OVER
FAIR VALUE OF NET ASSETS ACQUIRED
(Notes 1 and 2) 479,614
OTHER ASSETS (Note 2) 339,574
------------
$ 19,349,897
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital
leases (Notes 1 and 3) $ 324,317
Accounts payable 2,002,327
Accrued liabilities (Note 5) 4,925,944
Deferred revenue (Note 2) 6,581,998
------------
Total current liabilities 13,834,586
------------
OBLIGATIONS UNDER CAPITAL LEASES,
net of current installments (Note 3) 434,263
------------
DEFERRED REVENUE, net of current portion (Note 2) 12,323
------------
COMMITMENTS AND CONTINGENCIES (Notes 1,3,4, and 6)
STOCKHOLDERS' EQUITY (Notes 1 and 6):
Series A convertible preferred stock, $.001 par
value, 2,000,000 shares authorized, zero shares
issued and outstanding --
Common stock, $.001 par value,10,000,000
shares authorized, 5,365,573 shares issued
and 4,996,817 shares outstanding 4,998
Capital contributed in excess of par value 6,768,297
Accumulated deficit (1,701,005)
Less: treasury stock, 3,565 shares, at cost (3,565)
------------
5,068,725
------------
$ 19,349,897
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
16
<PAGE> 19
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
REVENUES (Note 2):
License fees and computer hardware $ 11,776,309 $ 8,845,081
Support fees, marketing services
and material sales 13,408,699 8,046,062
------------ ------------
Total revenues 25,185,008 16,891,143
------------ ------------
OPERATING EXPENSES:
Cost of initial license fees
and computer hardware 4,707,044 2,158,517
Cost of support, marketing services
and materials sales 5,281,273 3,509,171
Product and other development 1,227,371 523,969
Sales and marketing 8,775,758 7,064,368
General and administrative 2,457,065 1,888,586
Depreciation and amortization 1,290,845 862,286
Provision for doubtful accounts 581,356 266,500
------------ ------------
Total operating expenses 24,320,712 16,273,397
------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 864,296 617,746
PROVISION FOR INCOME TAXES (Note 7) (128,000) (58,000)
------------ ------------
Net income $ 736,296 $ 559,746
============ ============
NET INCOME AVAILABLE
FOR COMMON STOCKHOLDERS $ 736,296 $ 559,746
============ ============
NET INCOME PER
COMMON SHARE (Note 2)
Primary $ .13 $ .11
============ ============
Fully diluted $ .13 $ .10
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2)
Primary 5,534,860 5,028,367
============ ============
Fully diluted 5,639,859 5,457,947
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
<PAGE> 20
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Convertible Capital
Preferred Stock Common Stock Contributed
----------------- -------------------- In Excess of Accumulated Treasury
Shares Amount Shares Amount Par Value Deficit Stock Total
------ ------ ------ ------ --------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 31, 1995 125,000 $ 125 3,791,220 $ 3,792 $ 3,442,241 $(2,997,047) $ (3,565) $ 445,546
Stock options exercised -- -- 44,160 44 18,886 -- -- 18,930
Net income -- -- -- -- -- 559,746 -- 559,746
------- ----- --------- ---------- ----------- ----------- -------- ----------
BALANCE AT
JANUARY 31, 1996 125,000 125 3,835,380 3,836 3,461,127 (2,437,301) (3,565) 1,024,222
Stock options
exercised -- -- 122,600 123 58,084 -- -- 58,207
Conversion of
preferred stock (125,000) (125) 500,000 500 (375) -- -- --
Common stock
issued -- -- 538,837 539 3,249,461 -- -- 3,250,000
Net Income -- -- -- -- -- 736,296 -- 736,296
------- ----- --------- ---------- ----------- ---------- ------- ----------
BALANCE AT
JANUARY 31, 1997 -- $ -- 4,996,817 $ 4,998 $ 6,768,297 $(1,701,005) $ (3,565) $5,068,725
======= ===== ========= ========== =========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE> 21
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 736,296 $ 559,746
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,290,845 862,286
Provision for doubtful accounts 581,356 266,500
Changes in assets and liabilities-
Accounts receivable (5,578,100) (2,478,369)
Prepaid expenses, deferred costs and supplies (750,745) (298,021)
Accounts payable 1,004,485 (325,393)
Accrued liabilities 1,848,594 1,099,658
Deferred revenue 3,061,333 992,233
----------- -----------
Net cash provided by operating activities 2,194,064 678,640
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,213,086) (152,995)
Payments for capitalized software
development costs (564,591) (615,779)
Increase in other assets (136,093) (124,081)
----------- -----------
Net cash used in investing activities (1,913,770) (892,855)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,250,000 --
Proceeds from exercise of stock options 58,207 18,930
Net proceeds (payments) on line of credit (1,606,093) 606,093
Principal payments on capital leases (364,872) (413,804)
----------- -----------
Net cash provided by financing activities 1,337,242 211,219
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,617,536 (2,996)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,477,769 1,480,765
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,095,305 $ 1,477,769
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 117,128 $ 309,000
=========== ===========
Cash paid for income taxes $ 105,057 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property and equipment acquired
under capital leases $ 593,686 $ 300,488
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE> 22
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
National Health Enhancement Systems, Inc. (the Company) was incorporated in July
1983 as AHI Limited for the purpose of developing, licensing and marketing
health evaluation programs to hospitals, medical groups, clinics and physicians.
In October 1986, the Company changed its name to National Health Enhancement
Systems, Inc. and reincorporated in the state of Delaware. The Company presently
distributes proprietary software-supported, Medical Call Center products and
services designed to enable health care providers to reduce the costs associated
with inappropriate utilization of health care and improve service to their
customers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, First Strategic Group, Ltd. (FSG) and
NHE Systems, Inc. All significant intercompany transactions have been eliminated
in consolidation. Certain 1996 balances have been reclassified to conform to the
1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
STOCK SPLIT
Effective January 12, 1996, the Board of Directors authorized a two-for-one
stock split of the Company's common stock in the form of a 100% stock dividend
to those shareholders of record as of January 25, 1996. All share and per share
amounts have been restated for all periods to reflect this split.
20
<PAGE> 23
ACQUISITION OF EXPERT SYSTEMS, INC.
On February 18, 1997 the company completed the acquisition of Expert Systems,
Inc. (Expert), a developer and distributor of telephone and database
technologies to create voice features for computer telephone applications. Under
the terms of the acquisition, to be accounted for as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16, the Company issued
465,299 restricted shares, and 59,701 options to purchase shares, of the
Company's common stock for all of Expert's outstanding shares and options at an
exchange rate of .09537 shares of the Company's common stock for each share of
Expert's stock. Of the shares issued in the transaction, 46,529 are escrowed
securing an indemnity obligation in favor of the Company.
The results of operations of the Company and Expert will be combined as of the
date of acquisition and all prior periods presented will be restated to give
effect to the acquisition, as if it occurred at the beginning of each period
presented. Presented below are the unaudited proforma results of operations for
the years ended January 31, 1997 and 1996 assuming the acquisition occurred on
February 1, 1995. Amounts relating to Expert have been restated to be in
conformity with the Company's fiscal year and accounting policies.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Total Revenues $ 28,409,678 $ 20,221,290
Net Income 196,476 660,178
Net Income Per Common Share $ .03 $ .12
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist primarily of investments in bank money market funds.
The Company considers investments with initial maturities of three months or
less from purchase date to be cash equivalents.
DEFERRED COSTS
The costs incurred by the Company to provide post-contract customer support,
primarily royalties required to maintain the medical technical data included in
the Company's software products, are deferred and recognized over the period
benefited. Deferred costs totaled $659,524 at January 31, 1997. Amortization of
such deferred costs totaled $1,124,679 and $493,881 in 1997 and 1996,
respectively.
21
<PAGE> 24
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, capitalization of software development costs begins upon
the establishment of technological feasibility of the product. Development costs
incurred before the product is demonstrated to be technologically feasible are
expensed. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgement
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic
product lives and changes in software and hardware technology. The capitalized
development costs, which include primarily salaries, are amortized using either
the revenue-ratio method or the straight-line method over the product's
remaining estimated useful life of three years, whichever yields the greatest
amount of amortization. Software development costs capitalized during 1997 and
1996 totalled $686,000 and $633,000, respectively. Amortization of capitalized
software totalled $625,000 and $458,000 in 1997 and 1996 respectively. Total
development costs expensed during the years ended January 31, 1997 and 1996
were approximately $1,227,371 and $523,969, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets of three to five years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful lives of the
assets.
At January 31, 1997, property and equipment consisted of the following:
<TABLE>
<S> <C>
Computer equipment $ 1,268,579
Office furniture and equipment 582,751
Assets held under capital leases,
primarily computer equipment 1,687,955
Leasehold improvements 201,829
-----------
3,741,114
Accumulated depreciation (1,574,527)
-----------
$ 2,166,587
===========
</TABLE>
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of the cost over the fair value of net assets acquired resulted from
the acquisition of FSG, and is being amortized over ten years using the
straight-line method. Amortization expense was approximately $77,000 for each of
the years ended January 31, 1997 and 1996.
22
<PAGE> 25
OTHER ASSETS
Other assets include approximately $70,700 of accounts receivable from
customers with terms in excess of one year. These accounts are generally due
over periods ranging from 18 to 36 months. Interest has been imputed on these
amounts at 10%.
REVENUE RECOGNITION
Revenue is recognized in accordance with Statement of Position 91-1, Software
Revenue Recognition. Accordingly, revenue from software licensing is recognized
when delivery of the software has occurred, a signed noncancellable license
agreement has been received from the customer and any remaining obligations
under the license agreement are insignificant. Revenue related to insignificant
obligations is deferred and recognized as the obligations are fulfilled.
Revenue from software license fees related to the Company's obligation to
provide certain post-contract customer support without charge for the first year
of the license is unbundled from the license fee at its fair value and is
deferred and recognized straight-line over the contract support period. Revenue
from annual or other renewals of maintenance contracts (including long-term
contracts) is deferred and recognized straight-line over the term of the
contracts. Revenue from professional services is generally billed on a time
and materials basis. Professional services do not involve significant
customization, modification or production of the licensed software. Such
professional services fees are recognized as the related services are provided.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments With Off-Balance Sheet Risk and Financial Investments With
Concentrations of Credit Risk, consist primarily of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
high quality financial institutions and limits the amount of credit exposure to
any one financial institution.
The Company sells its products and services to customers in the health care
industry throughout the United States. Concentrations of credit risk with
respect to accounts receivable are limited due to the geographic diversity and
large number of customers comprising the Company's customer base. The Company
performs credit evaluations of its customers, but does not require collateral to
support receivable balances. An allowance for doubtful accounts has been
established based on factors surrounding the credit risk of specific borrowers,
historical trends and other information.
23
<PAGE> 26
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments as defined by SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying value of
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to the short maturity of these instruments. The Company's notes
payable bear interest at rates indexed to the prime rate; therefore, the
carrying amounts approximate fair value.
NET INCOME PER COMMON SHARE
Net income per common share and common share equivalent is computed by dividing
the net income by the weighted average number of common shares and common share
equivalents assumed outstanding during the period. For purposes of these
calculations, the Series A Convertible Preferred Stock that was converted into
shares of common stock in 1997 has been assumed to have been converted upon
original issuance (See Note 6).
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which supersedes Accounting Principal Board Opinion No. 15,
the existing authoritative guidance. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997
and requires restatement of all prior-period earnings per share data presented.
The new statement modifies the calculations of primary and fully diluted
earnings per share and replaces them with basic and diluted earnings per share.
The following table sets forth the proforma effect on net income per common
share for fiscal 1997 and 1996 assuming the Company had adopted SFAS No. 128 on
February 1, 1995:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Basic $ .17 $ .15
Diluted $ .13 $ .11
</TABLE>
(3) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES:
Notes payable and obligations under capital leases at January 31, 1997,
were as follows:
Revolving line of credit not to exceed the stated borrowing base
as defined in the borrowing agreement or $2,500,000, bearing
interest at the lender's prime rate (8.25% at January 31, 1997)
plus 2%, matures October 29, 1997, secured by substantially
all of the assets of the Company, including eligible
accounts receivables defined in the borrowing agreement. $ - 0 -
24
<PAGE> 27
<TABLE>
<S> <C>
Borrowing line of $250,000 bearing interest at lender's prime rate
plus 2% secured by equipment that converts to amortizing loan
on April 22, 1997 bearing interest at lender's prime rate plus 2%. - 0 -
Obligations under capital leases bearing interest at weighted
average rate of 12.67%, maturities through November 1999,
secured by computers and other equipment 758,580
----------
758,580
Less: Current installments (324,317)
----------
$ 434,263
==========
</TABLE>
The lines of credit require the Company to maintain compliance with certain
covenants including certain financial ratios. At January 31, 1997, the Company
was in compliance with the financial ratios.
Future maturities of obligations under capital leases as of January 31, 1997 are
as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 385,533
1999 267,905
2000 148,509
2001 68,462
-----------
870,409
Less:
Amounts representing interest (111,829)
----------
$ 758,580
==========
</TABLE>
(4) COMMITMENTS:
The Company leases its office facilities and certain equipment under
noncancellable operating leases expiring through fiscal 2001. The leases include
options to extend for additional periods at the then prevailing market rates.
Rent expense was approximately $434,012 and $229,000 for the years ended January
31, 1997 and 1996, respectively. Future minimum payments under these leases as
of January 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1998 $ 601,310
1999 627,575
2000 664,363
2001 627,125
2002 597,730
Thereafter 214,817
----------
$3,332,920
==========
</TABLE>
25
<PAGE> 28
The Company has entered into certain exclusive agreements with product support
vendors which require the payment of royalties on products sold and also require
minimum annual purchases of products to maintain the exclusivity associated with
these agreements. Future minimum obligations under these agreements as of
January 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 1,733,821
1999 2,099,709
2000 2,293,726
2001 2,938,759
2002 2,213,987
-------------
$ 11,280,002
=============
</TABLE>
(5) ACCRUED LIABILITIES:
Accrued liabilities as of January 31, 1997, are as follows:
<TABLE>
<S> <C>
Accrued product cost of sales $ 1,459,179
Accrued payroll and commissions 1,238,244
Accrued royalties 1,631,678
Other accrued liabilities 596,843
-------------
$ 4,925,944
=============
</TABLE>
(6) STOCKHOLDERS' EQUITY:
1988 STOCK OPTION PLAN
During the fiscal year ended January 31, 1989, the Company adopted the 1988
Stock Option Plan (the Plan). The Plan, as amended, will terminate in May 1998
and provides for the grant of up to 700,000 incentive stock options, 700,000
nonqualified stock options and 200,000 options to be issued at the discretion of
the Board of Directors as either incentive or nonqualified stock options. The
Company has reserved 1,600,000 shares of common stock for exercise of options
under the Plan. Key employees are eligible for both incentive and nonqualified
stock options. Officers, outside directors and certain nonemployee consultants
are eligible only for nonqualified stock options. The Board of Directors, within
the limits of the provisions of the Plan, determines the period over which
granted options become exercisable.
26
<PAGE> 29
A summary of stock option activity under the Plan as of January 31, 1997 and
1996 and for each of the years then ended is set forth in the table below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Wtd. Wtd.
Avg. Avg.
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options outstanding
at beginning
of period 1,362,500 $ .98 1,196,000 $ .90
Granted 179,300 7.88 207,000 1.18
Exercised (122,600) .58 (40,500) .40
Canceled -- -- -- --
--------- ------- --------- -------
Options outstanding
at end of period 1,419,200 1.85 1,362,500 .98
========= ==========
Exercisable at
end of period 1,071,525 .90 790,250 .64
========= ==========
Weighted average
fair value of options
granted $ 5.67 $ .82
========= ==========
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which defines a fair value based method
of accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost related to stock options issued to employees under
these plans using the method of accounting prescribed by the Accounting
Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in APB No. 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 has been applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25; however, the Company has computed for pro forma disclosure purposes
the value of all options granted during 1997 and 1996; using the following
weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk free interest rate 5.91% 6.20%
Expected dividend yield N/A N/A
Expected lives 5 years 5 years
Expected volatility 88.9% 85.4%
</TABLE>
27
<PAGE> 30
Options were assumed to be exercised over the five-year expected life for the
purpose of this valuation. Adjustments were made for options forfeited prior to
vesting. The total value of options granted was computed to be the following
approximate amounts, which would be amortized on the straight-line basis over
the vesting period of the options:
<TABLE>
<S> <C>
Year ended January 31, 1997 $1,016,000
Year ended January 31, 1996 $ 169,740
</TABLE>
If the Company had accounted for stock options issued to employees using a fair
value based method of accounting, the Company's year end net income and net
income per common share and common share equivalent would have been reported as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income:
As reported $ 736,296 $ 559,746
Pro forma 171,400 446,586
Net income per common share
and common share equivalent:
As reported 0.13 0.11
Pro forma 0.03 0.09
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1997 and 1996 are not likely to be representative of the effects on reported net
income and net income per common share and common share equivalent for future
years, because options vest over several years and additional awards are made
each year.
SERIES A CONVERTIBLE PREFERRED STOCK
On August 18, 1992, the Company issued 125,000 shares of Series A Convertible
Preferred Stock (the Preferred Stock) at $2.40 per share, with a quarterly
dividend equal to a certain percentage of the Company's gross quarterly revenue
as defined in the Certificate of Designation for the Preferred Stock. Effective
February 1, 1994, the terms of the Preferred Stock were amended to make each
share of the Preferred Stock, at the option of the holder, convertible into four
shares of the Company's common stock. In addition, the holder of the Preferred
Stock is entitled to four votes for each share of Preferred Stock. Upon
liquidation or dissolution of the Company, the holder of the Preferred Stock
shall have liquidating preferences equal to $2.40 per share of Preferred Stock.
The amendment eliminated all rights to receive dividends subsequent to the
effective date. The amount of accrued and unpaid dividends of $27,763 at January
31, 1994, was reclassified to retained earnings. In 1997, the holder of the
Preferred Stock exercised in full its option to convert the Preferred Stock into
500,000 shares of common stock.
28
<PAGE> 31
EQUITY INVESTMENTS
During the year, the Company secured equity investments from two separate
investor groups. The investor groups made equity investments in the amount of
$750,000 and $2,500,000 on July 22, 1996 and on January 14, 1997, respectively.
The number of shares issued were 166,667 and 370,370 shares respectively, and
the amount of stock issued in both transactions represented less than 10% of the
Company's outstanding stock.
(7) INCOME TAXES:
The Company accounts for income taxes under the provisions of 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
between financial reporting and taxable income.
Income tax expense differs from the amount computed by applying the statutory
U.S. federal income tax rate of 34% to income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Expected income tax expense
at 34% $ 294,000 $ 210,000
State income taxes,
net of federal income tax benefit 52,000 40,000
Amortization of cost over fair value
of net assets acquired 40,000 40,000
Net decrease in valuation allowance (372,000) --
Other, including effect of utilizing
a net operating loss carryforwards 114,000 (232,000)
--------- ---------
Provision for income taxes $ 128,000 $ 58,000
========= =========
</TABLE>
The components of net deferred taxes as of January 31, 1997, are as follows:
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 252,000
Accrued liabilities 354,000
Deferred revenue 290,000
Capitalized software costs (390,000)
Tax depreciation in excess of book depreciation (104,000)
Valuation allowance (402,000)
---------
$ --
=========
</TABLE>
A valuation allowance is provided when it is uncertain that some portion or all
of the deferred tax asset will be recognized. The valuation allowance decreased
during the year ended January 31, 1997, due to the Company's fiscal 1997
operating results.
During 1997, the Company utilized all remaining net operating loss carry
forwards for federal and state income tax purposes of approximately $69,000.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
29
<PAGE> 32
PART III
The information required here by Items 9, 10, 11 and 12 is incorporated by
reference to the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission no later than May 31,
1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. All other schedules have been omitted because of the absence of
conditions under which they are required or because the required material
information is included in the Financial Statements or Notes to the Financial
Statements included herein.
(1) Exhibits required by Item 601 of Regulation S-B are set forth
on the Exhibit Index to this report which is hereby
incorporated herein by this reference.
(2) Management contracts and compensatory plans required to be
filed as an exhibit list form.
(a) Employment Agreements with Dr. Larry Gettman and Jeffrey
Zywicki. Incorporated by Reference to Exhibit 10.9 of S-18 No.
33-9397-LA.
(b) Form of Stock Option Agreement with Key Employees and
Officers. Incorporated by Reference to Exhibit 10.32 to Form
10-K filed for the year ended January 31, 1989.
(c) Form of Stock Option Agreement with Outside Directors.
Incorporated by Reference to Exhibit 10.33 to Form 10-K for
the year ended January 31, 1989.
(d) Key Executive Employment and Severance Agreements.
Incorporated by Reference to Exhibit 10.44 to Form 10KSB filed
for the fiscal year ended January 31, 1994.
(e) Employment Agreement with A. Neal Westermeyer. Incorporated by
Reference to Exhibit 10.46 to Form-10-KSB filed for the fiscal
year ended January 31, 1994.
(f) Restricted Stock Agreement for W. Cal McGraw Incorporated by
Reference to Exhibit 10.57 to this Form 10-KSB filed for the
fiscal year ended January 31, 1997.
B. Reports on Form 8-K for the fourth quarter of fiscal year 1997
NONE
30
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
authorized.
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Registrant)
By /s/ Gregory J. Petras
----------------------------------------
Gregory J. Petras
Chairman and Chief Executive Officer
Date: April 30, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ --------------------------------- ----------------
<S> <C> <C>
/s/ Gregory J. Petras Chairman and Chief Executive 04-30-97
- ------------------------------------ Officer
Gregory J. Petras
/s/ John P. Delmatoff Director 04-30-97
- ------------------------------------
John P. Delmatoff
/s/ Gardiner S. Dutton Director 04-30-97
- ------------------------------------
Gardiner S. Dutton
/s/ James W. Myers Director 04-30-97
- ------------------------------------
James W. Myers
/s/ Steven D. Wood, Ph.D. Director 04-30-97
- ------------------------------------
Steven D. Wood, Ph.D.
/s/ W. Cal McGraw Director 04-30-97
- ------------------------------------
W. Cal McGraw
/s/ Mark E. Liebner Director 04-30-97
- ------------------------------------
Mark E. Liebner
/s/ Jeffrey T. Zywicki Senior Vice President 04-30-97
- ------------------------------------ Treasurer and Secretary
Jeffrey T. Zywicki
/s/ Earl E. Bray Chief Financial Officer 04-30-97
- ------------------------------------
Earl E. Bray
</TABLE>
31
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
2.1 Plan of Reorganization and Incorporated by Reference
Agreement of Merger to Form 8-k filed July 13, 1994
3.1 Certification of Incorporation Incorporated by Reference
of the Company to
Exhibit 3.1 of S-18
No. 33-9396-LA
3.2 Bylaws of the Company Incorporated by Reference
to Exhibit 3.2 of S-18
No. 33-9396-LA
4.1 Specimen Certificate Incorporated by Reference
Representing $.001 par value to Exhibit 4.1 of S-18
Common Stock No. 33-9397-LA
4.2 Form of Warrant to the Incorporated by Reference
Underwriter to Exhibit 4.2 of
Amendment No. 2 to S-18
No. 33-9397-LA
4.3 Form of Warrant to the Incorporated by Reference
Advisor to Exhibit 4.3 of
Amendment No. 2 to S-18
No. 33-9397-LA
10.1 Confirmation of License and Incorporated by Reference
Agreement Regarding Purchase to Exhibit 10.1 of S-18
Option and related letter No. 33-9397-LA
agreement dated October 2, 1986
10.2 Franchising and Licensing Incorporated by Reference
Agreement with The Arizona to Exhibit 10.2 of
Heart Institute, Ltd. Amendment No. 1 to S-18
No. 33-9397-LA
10.3 Assignment of Rights to The Incorporated by Reference
Heart Test to Exhibit 10.3 of S-18
No. 33-9397-LA
10.4 Shareholders Contribution and Incorporated by Reference
Conversion Agreement as to Exhibit 10.4 of S-18
Amended, and related notes held No. 33-9397-LA
by Shareholders and Affiliated
10.5 Form of Outstanding Warrants Incorporated by Reference
to Exhibit 10.5 of S-18
No. 33-9397-LA
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.6 Promissory Notes in the Incorporated by Reference
Aggregate amount of $100,000 to Exhibit 10.6 of S-18
Principal No. 33-9397-LA
10.7 Lease for Company's Office Incorporated by Reference
Space dated August 22, 1986 to Exhibit 10.7 of S-18
No. 33-9397-LA
10.7.1 Amendment to Lease for Incorporated by Reference
Company's Office Space dated to Exhibit 10.7.1 to Form
August 22, 1986 10-K filed for the year
Ended January 31, 1987
10.8 Agreement and Plan of Merger Incorporated by Reference
Exhibit 10.8 of S-18
No. 33-9397-LA
10.9 Employment Agreements with Incorporated by Reference
Dr. Larry Gettman and Exhibit 10.9 of S-18
Jeffrey Zywicki No. 33-9397-LA
10.10 Line of Credit Documentation Incorporated by Reference
to Exhibit 10.10 of S-18
No. 33-9397-LA
10.11 Promissory Note in the Incorporated by Reference
Principal Amount of $25,801 to Exhibit 10.11 of S-18
No. 33-9397-LA
10.12 Company Indemnities Incorporated by Reference
to Exhibit 10.12 of S-18
No. 33-9397-LA
10.13.1 Forms of Franchise Incorporated by Reference
Agreement used in 1987 to Exhibit 10.13.1 to
Amendment No. 2 of S-18
No. 33-9397-LA
10.13.2 Forms of Franchise Incorporated by Reference
Agreement used in 1986 to Exhibit 10.13.2 to
Amendment No. 1 and
Amendment No. 2 to S-18
No. 33-9397-LA
10.13.3 Forms of Franchise Agreement Incorporated by Reference
used in 1985 to Exhibit 10.13.3 to S-18
No. 33-9397-LA
10.13.4 Forms of Franchise Agreement Incorporated by Reference
used in 1984 to Exhibit 10.13.4 to S-18
No. 33-9397-LA
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.13.5 Franchise Agreements Executed Incorporated by Reference
Agreement to Exhibit 10.13.5 of S-18
No. 33-9397-LA
10.13.6 Existing Area Franchise Incorporated by Reference
Agreement to Exhibit 10.13.6 of S-18
No. 33-9397-LA
10.13.7 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1987 to Form 10-K filed for
year ended January 31,
1988
10.13.8 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1988 to Form 10-K filed for the year ended January 31,
1989
10.13.9 Form of Franchise Agreement Incorporated by Reference
used by the Company in 1989 to Form 10-K filed for the year ended January 31,
1990
10.14 Forms of Rescission offers Incorporated by Reference
to Exhibit 10.14 of S-18
No. 33-9397-LA
10.15 Rescission and Refund Responses Incorporated by Reference
for internal use of Programs to Exhibit 10.15 of S-18
No. 33-9396-LA
10.16 Agreements with Corporations Incorporated by Reference
for internal use of Programs to Exhibit 10.16 of S-18
No. 33-9397-LA
10.17 South Dakota and Wisconsin Incorporated by Reference
"No Action" letters and certain to Exhibit 10.17 of
related documents Amendment No. 1 to S-18
No. 33-9397-LA
10.18 Revised Exhibit A to Form of Incorporated by Reference
Stock Escrow Agreement required to Exhibit 10.18 of
by the Arizona Corporation Amendment No. 1 to S-18
Commission and Shareholder No. 33-9397-LA
lock-up agreements
10.19 Promissory Note in Principal Incorporated by Reference
Amount of $50,000 and related to Exhibit 10.19 of
materials Amendment No. 1 to S-18
No. 33-9397-LA
10.20 Agreement with Advisor Incorporated by Reference
to Exhibit 10.20 of
Amendment No. 1 to S-18
No. 33-9397-LA
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.21 Notification of Option to Incorporated by Reference
Purchase the Personal Fitness to Exhibit 10.21 to Form
Profile Software 10-K filed for the fiscal
year ended January 31, 1987
10.21.1 List of Subsidiaries Page 37
10.22 Promissory Note in Principal Incorporated by Reference
Amount of $75,000 for purchase to Exhibit 10.22 to Form
of Personal Fitness Profile 10-K filed for the fiscal
Software and related materials year ended January 31, 1987
10.23 Employment Agreement with Incorporated by Reference
James Wichterman to Exhibit 10.23 to Form
10-Q filed for the quarter ended April 30,
1987
10.24 Term Note Payable in the Incorporated by Reference
Principal Amount of $75,000 to Exhibit 10.24 to Form
10-Q filed for the
quarter ended April 30, 1987
10.25 Software Customization and Incorporated by Reference
License Agreement with to Exhibit 10.25 to Form
Resource Center Enterprises, 10-Q filed for the
Inc. dated May 22, 1987 quarter ended July 31, 1987
10.26 Med Plus Corporation Distribution Incorporated by Reference
and Sales Agreement dated to Exhibit 10.26 to Form
September 19, 1987 10-Q filed for the quarter ended October 31, 1987
10.27 Distribution Agreements Incorporated by Reference
for Marketing Consultants to exhibit 10.27 to Form
10-Q filed for the quarter ended October 31, 1987
10.28 Consulting, Development Incorporated by Reference
and License Agreement with to Exhibit 10.28 to Form
Humana Inc., dated December 10-K filed for the year
31, 1987 ended January 31, 1988
10.29 Agreement with Healthscan, Inc. Incorporated by Reference
to discontinue use of Healthscan to Exhibit 10.29 to Form
10-K filed for the year
ended January 31, 1988
10.30 Stock Option Letter with Incorporated by Reference
Jim Wichterman to Exhibit 10.30 to Form
10-K filed for the year
ended January 31, 1988
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.31 Employment Agreement with Incorporated by Reference
Dan Bergman to Exhibit 10.31 to Form
10-K filed for the year
ended January 31, 1988
10.32 Form of Stock Option Agreement Incorporated by Reference
with Key Employees and Officers to Exhibit 10.32 to Form
10-K filed for the year
ended January 31, 1989
10.33 Form of Stock Option Agreement Incorporated by Reference
with Outside Directors to Exhibit 10.33 to form
10-K filed for the year
ended January 31, 1989
10.34 Severance Agreement with Incorporated by Reference
Gregory J. Petras to Exhibit 10.34 to Form
10-K filed for the year
ended January 31, 1989
10.35 $100,000 Installment Note Incorporated by Reference
Payable to Three Carollo to Exhibit 10.35 to Form
Partnership 10-Q filed for the quarter ended July 31, 1989
10.36 Purchase, Consulting and Incorporated by Reference
Distribution Agreement with to Exhibit 10.36 to Form
Micromedex, Inc. 10-K filed for the fiscal
year ended January 31, 1991
10.37 $125,000 Installment Note Incorporated by Reference
Payable to Gardiner S. Dutton to Exhibit 10.37 to Form
as Agent 10-Q for the quarter ended July 31, 1990
10.38 Asset Purchase Agreement with Incorporated by Reference
Prentice Hall, Inc. to purchase to Exhibit 10.38 to Form
Riskscan July 31, 1990
10.39 Lease for Company's Office Space Incorporated by Reference
dated October 1990 to Exhibit 10.39 to Form 10-K filed for the
fiscal year ended January 31, 1991
10.40 Exclusive Distributor Agreement Incorporated by Reference to Exhibit
with Vim & Vigor, Inc. 10.40 to Form 10-K filed for the fiscal year
ended January 31, 1992.
10.41 Exclusive Agency Agreement Incorporated by Reference to Exhibit
with Joseph Stevens Group, Inc. 10.41 to Form 10-K filed for the
fiscal year ended January 31, 1992
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit Page or
number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
10.42 Development and Distribution Incorporated by Reference to Exhibit
Agreement with Parlay 10.42 to Form 10-KSB filed for fiscal
International Communication, Inc. year ended January 31, 1993
10.43 Amended and Restated Purchase, Incorporated by Reference to Exhibit
Consulting and Distribution Agreement 10.43 to Form 10-KSB filed for fiscal
with Micromedex, Inc. year ended January 31, 1993
10.44 Employment Agreement with Gregory J. Incorporated by Reference to
Petras and From Other key Executives the Form 10-KSB filed for the
fiscal year ended January 31, 1993
10.45 1988 Stock Option Plan Incorporated by Reference to
1988 Proxy statement
10.46 Employment Agreement with Incorporated by Reference to
A. Neal Westermeyer Exhibit 10.46 to Form 10-KSB
filed for fiscal year ended
January 31, 1994
10.47 Amendment and Restated Certificate Incorporated by Reference to
of Designation Agreement of Series A the Form 10-QSB filed for the fiscal
Preferred Stock dated, June 14, 1994 quarter ended April 30, 1994
10.48 Pediatric Protocol Publishing Incorporated by Reference to Exhibit
Agreement with Barton D. Schmitt M.D. 10.48 to Form 10-KSB for the fiscal year
ended January 31, 1995
10.49 Consulting Agreement with Incorporated by Reference to Exhibit
Steven Poole, M.D. 10.49 to Form 10-KSB for the fiscal year
ended January 31, 1995
10.50 First Amendment to Amended and Restated Incorporated by Reference to Exhibit
Purchase, Consulting and Distribution 10.50 to Form 10-KSB for the fiscal year
Agreement ended January 31, 1995
10.51 Development and Distribution Agreement Incorporated by Reference to Form 10-KSB
with Pfizer Health Sciences, Inc. for the fiscal year ended January 31, 1996
10.52 Second Amendment to Amended and Filed Herewith
Restated Purchase, Consulting and
Distribution Agreement.
10.53 Third Amendment to Amended and Filed Herewith
Restated Purchase, Consulting and
Distribution Agreement
10.54 Fourth Amendment to Amended and Filed Herewith
Restated Purchase, Consulting and
Distribution Agreement
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C>
10.55 Merger Agreements Between NHES and Incorporated by Reference to Form
Expert Systems, Inc. 8-k Filed March 6, 1997
10.56 Lease for Company's Office Space Filed Herewith
Dated April 3, 1995.
10.57 Restricted Stock Agreement for W. Cal Filed Herewith
McGraw
21 List of all subsidiaries Filed Herewith
27 Financial Data Schedule Filed Herewith
</TABLE>
38
<PAGE> 1
EXHIBIT NO. 10.52
SECOND AMENDMENT TO
AMENDED AND RESTATED PURCHASE,
CONSULTING AND DISTRIBUTION AGREEMENT
This agreement (the "Amendment") constitutes the Second Amendment to the
Amended and Restated Purchase, Consulting and Distribution Agreement, as amended
(the "Amended and Restated Agreement") by and between National Health
Enhancement Systems, Inc., a Delaware corporation ("NHES"), and Micromedex,
Inc., a Delaware corporation ("MDX"). The Amendment and the Amended and
Restated Agreement are hereinafter referred to as the "Agreement." Capitalized
terms not otherwise defined herein shall have the same meanings as are assigned
thereto in the Amended and Restated Agreement, except as the context otherwise
requires.
WHEREAS, NHES has requested an extension of time for purposes of paying
to MDX the minimum payment due to MDX in respect of the fiscal year 1995, and
MDX is agreeable to granting such extension;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. EXTENSION OF TIME. MDX hereby grants to NHES an extension of time for
making the payment due to MDX under Section 1.2 of the Agreement for fiscal year
1995, such that NHES agrees to pay to MDX the balance of the minimum payment due
(of S627,352, less payments already made to date) for fiscal year ended January
31, 1995 in minimum weekly payments of $25,750, beginning with the first
payment due on August 4, 1995 and continuing until the amount is paid in full.
If NHES makes the payments outlined herein, NHES shall be deemed to have made
such payment within ninety (90) days after the end of fiscal year 1995 for
purposes of Section 1.2. For the period May 1, 1995 through July 31, 1995, NHES
agrees to pay MDX interest equal to nine percent (9%) of the unpaid royalty
amount. Such interest will be due and payable on August 1, 1995, and no interest
shall accrue on the weekly payments outlined herein after August 1, 1995.
2. ENTIRE AGREEMENT. This Amendment constitutes the entire agreement of
the parties relating to the subject matter hereof, and all prior agreements and
understandings related thereto are superseded by this Amendment.
This Amendment is effective as of April 26, 1995.
MICROMEDEX, INC. NATIONAL HEALTH ENHANCEMENT
SYSTEMS, INC.
By /s/ Illegible By /s/ Gregory J. Petras
-------------------------- -------------------------
Its: Vice President, CFO Its: President & CEO
<PAGE> 1
EXHIBIT NO. 10.53
THIRD AMENDMENT TO
AMENDED AND RESTATED PURCHASE,
CONSULTING AND DISTRIBUTION AGREEMENT
This agreement (the "Amendment") constitutes the Third Amendment to the
Amended and Restated Purchase, Consulting and Distribution Agreement, as amended
(the "Amended and Restated Agreement") by and between NATIONAL HEALTH
ENHANCEMENT SYSTEMS, INC., a Delaware corporation ("NHES"), and MICROMEDEX,
INC., a Delaware corporation ("MDX"). The Amendment and the Amended and Restated
Agreement are hereinafter referred to as the "Agreement." Capitalized terms not
otherwise defined herein shall have the same meanings as are assigned thereto in
the Amended and Restated Agreement, except as the context otherwise requires.
WHEREAS, the parties desire to amend the Agreement to make certain
changes to the provisions of the Agreement relating to payment of royalties to
Micromedex,
NOW, THEREFORE, for good and valuable consideration of NHES's past and
continued investment in the HRIS(TM), the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. MAXIMUM ROYALTY/LICENSE FEE. In consideration of the unforeseen NHES
investment in the HRIS(TM) in the fiscal year ended January 31, 1996, MDX hereby
agrees to accept $627,352 as the royalty due for fiscal year ending January 31,
1996. The parties hereby agree that the total amount of royalties or license
fees owed to Micromedex by NHES for the contract year ending January 31, 1996,
shall be $627,352, which will be paid by NHES in eleven equal monthly
installments of $57,032, beginning February 22, 1996. As a result of these
monthly payments, NHES shall be deemed to have made such payment within ninety
(90) days after the end of fiscal year 1996 for purpose of Section 1.2.
2. SECTION 1.2 OF THE AGREEMENT AND SECTION 3 OF THE FIRST AMENDMENT. In
consideration of the growing demand for the HRIS(TM), Section 1.2 of the
Agreement is hereby amended to provide that the minimum royalty for 1997 shall
be $1,374,712, which shall also be the base number for calculating the minimum
royalty payments for fiscal years 1998 and thereafter pursuant to Section 3 of
the First Amendment to the Agreement. Therefore, the example in Section 3 of the
First Amendment is amended to read as follows: "For example, for FY 1998, the
annual payment amount will be $1,512,183 and the annual payment amount for FY
1999 will be $1,663,401. Beginning February 22, 1996, NHES agrees to make
minimum monthly payments against the 1997 royalty amount of $22,647 per month.
<PAGE> 2
3. ENTIRE AGREEMENT. The Agreement, as amended hereby, constitutes the
entire agreement of the parties relating to the subject matter hereof, and all
prior agreements and understandings are superseded by this Agreement.
Dated as of March 5, 1996.
MICROMEDEX, INC. NATIONAL HEALTH
ENHANCEMENT SYSTEMS, INC.
By: /s/ Illegible By: /s/ Jeffrey T. Zywicki
------------------------- ------------------------
Its: VP/CFO Its: Sr. VP - CFO
<PAGE> 1
EXHIBIT 10.54
FOURTH AMENDMENT TO
AMENDED AND RESTATED PURCHASE,
CONSULTING AND DISTRIBUTION AGREEMENT
This agreement (the "Amendment") constitutes the Fourth Amendment to
the Amended and Restated Purchase, Consulting and Distribution Agreement, as
amended (the "Amended and Restated Agreement"), with an effective date of
October 1, 1992, by and between NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC., a
Delaware corporation ("NHES"), and MICROMEDEX, INC., a Delaware corporation
("MDX"). The Amendment and the Amended and Restated Agreement are hereinafter
referred to as the "Agreement." Capitalized terms not otherwise defined herein
shall have the same meanings as are assigned thereto in the Amended and Restated
Agreement, except as the context otherwise requires.
WHEREAS, the parties recognize that NHES is continuously investing in
development and improvement of the HRIS Product, and they desire that NHES
invest more heavily in the HRIS Product during the NHES fiscal years ending
January 31, 1998, 1999 and 2000 (the "Development Term");
WHEREAS, in order to encourage NHES to make such additional investments
in the HRIS, MDX is willing to "co-invest" in such development and improvement
activity by reducing the amount of license fees payable to MDX under the
Agreement, as provided herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEVELOPMENT PLAN AND QUARTERLY REVIEW PROCESS. Using the form
attached hereto as Exhibit A, NHES will deliver to MDX on a quarterly basis
written proposals for specific uses of the Targeted Money (as defined below) to
develop and improve the HRIS Product during the Development Term ("Proposals").
The Proposals shall be subject to MDX's approval, which will not be unreasonably
withheld or delayed. If MDX has not, within 15 days after receipt of a Proposal
either requested a meeting with NHES (which may be telephonic) within the next
15 days following such request, or objected in writing to the Proposal, the
Proposal shall be deemed to be approved by MDX and NHES may proceed with the
work described therein, funding the same with Targeted Money.
2. TARGETED MONEY. MDX agrees to "invest" pursuant to this Amendment,
by way of fee reductions as provided in Section 3 hereof, $64,326 for fiscal
year ending January 31, 1997; $549,112 for fiscal year ending January 31, 1998;
$404,017 for fiscal year ending January 31, 1999; and $427,874 for fiscal year
ending January 31, 2000. Such amounts are defined herein as "Targeted Money".
<PAGE> 2
3. MDX INVESTMENT BY LICENSE FEE REDUCTIONS. Subject to Section 4
(RISK SHARING), the amounts otherwise payable to MDX by NHES under the Agreement
shall be reduced by the amount of Targeted Money for the related fiscal year, as
follows:
<TABLE>
<CAPTION>
License Fee Reduction For FY Ending January 31,
--------------------- -------------------------
<S> <C>
$ 64,326 1997
$549,112 1998
$404,017 1999
$427,874 2000
</TABLE>
NHES shall use such Targeted Money solely for funding approved Proposals.
4. RISK SHARING. The parties are entering into this Amendment on the
express assumption that developing new and improved HRIS Product should result
in more licenses of HRIS Products ("Units") than otherwise would have occurred.
In order to share in the risk that the assumption may not prove to be true, the
parties agree that the amount of Targeted Money payable under Section 3 for a
fiscal year shall be reduced by an amount determined by multiplying (a) the
"Projected Units" set forth below less the actual number of Units licensed by
NHES during that fiscal year, times (b) the "Per Unit Amount" set forth below:
<TABLE>
<CAPTION>
For FY Ending January 31, Projected Units Per Unit Amount
------------------------- --------------- ---------------
<S> <C> <C>
1998 140 $1,961
1999 165 $1,224
2000 185 $1,156
</TABLE>
For example, if for the fiscal year ended January 31, 1999, NHES sold licenses
for 150 Units, then the Target Money for that year ($404,017) would be reduced
by $18,360 [165 (Projected Units) minus 150 (actual Units) times $1,224].
5. INSPECTION RIGHTS. During the Development Term and for a period of
no fewer than twelve (12) months following termination thereof, NHES agrees to
permit MDX to inspect, during regular business hours and upon reasonable prior
written notice, the relevant books and records of NHES for the purpose of
ascertaining NHES's compliance with Sections 2, 3 and 4 of this Amendment.
6. TERMINATION RIGHT. MDX shall have the right, but not the
obligation, to terminate its obligations under this Amendment relating to fiscal
years ending January 31, 1999 and 2000, upon delivery of at least thirty (30)
days prior written notice of termination to NHES, provided that such termination
shall not terminate any Proposal that has been approved by MDX or the related
reduction of license fees otherwise owed to MDX under the Agreement.
<PAGE> 3
7. ENTIRE AGREEMENT. This Amendment modifies the Amended and Restated
Agreement. All terms and conditions of the Amended and Restated Agreement apply,
including, but not limited to, Section 2 (Health Reference Information System
Product Development) and Section 3 (Ownership & Indemnity), unless explicitly
modified by this Amendment.
Dated as of April 10, 1997.
MICROMEDEX, INC. NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
By /s/ Gregory J. Smith By /s/ Earl E. Bray
--------------------------- ---------------------------
Its CFO Its Chief Financial Officer
<PAGE> 1
EXHIBIT NO. 10.56
LEASE
BETWEEN
SOUTHWEST PORTFOLIO PARTNERSHIP,
a Texas general partnership
AND
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.,
an Arizona corporation.
DATE: APRIL 3, 1995
GREAT AMERICAN TOWER
PHOENIX, ARIZONA
<PAGE> 2
LEASE
Basic Lease Information
<TABLE>
<CAPTION>
<S> <C>
Date April 3, 1995
Tenant: National Health Enhancement Systems, Inc., an Arizona corporation.
Address: 3200 North Central Avenue, Suite #1700
Phoenix, Arizona 85012
Landlord: Southwest Portfolio Partnership, a Texas general partnership
Agent for
Landlord: PG Property Services, Inc. dba Paragon Group
Address: 3200 North Central Avenue, Suite 1500
Phoenix, Arizona 85012
Building: 3200 North Central Avenue, Phoenix, Arizona
Leased Premises: Suite #1700
Net Rentable Area: 14,589 approximate square feet
(Leased Premises)
Term
Commencement Date: July 1, 1995 at 12:00 a.m.
Term
Expiration Date: June 31, 2002 at 12:00 p.m.
Base Rent: See Article 16
Security Deposit: $6,010 33 (currently on deposit with Landlord; no funding required)
Tenant's
Proportionate Share: 4.36%
Base Year: 1995
No. of Parking Spaces: See Article 18
</TABLE>
The undersigned Landlord and Tenant agree to the following terms set
forth in this Basic Lease Information (the "Basic Lease Information Sheet").
This Basic Lease Information Sheet is hereby incorporated into and made a part
of the attached Lease (the Basic Lease Summary Sheet and the attached Lease to
be known collectively as the "Lease"). which pertain to the office building
("Building") located at 3200 North Central Avenue, Phoenix, Arizona. The Basic
Lease Information is intended as a summary only of certain pertinent terms and
provisions of this Lease. Each reference in the Lease to any term contained in
this Basic Lease Information Sheet shall have the meaning as set forth in the
Basic Lease Information Sheet. In the event of any conflict or inconsistency
between the terms and provisions of the attached Lease and the terms and
provisions of the Basic Lease Information Sheet, the terms and provisions of the
Lease shall at all times govern and be given controlling effect.
<PAGE> 3
ARTICLE 4
RENT
4.1 BASE RENT. Tenant shall pay the Base Rent in the manner hereinafter
set forth. Commencing with the first day of the first (1) calendar month of the
Term and continuing on the first day of each calendar month thereafter during
the Term and any extensions or renewals thereof Tenant shall pay the Base Rent
specified in Article 16 in advance, without demand and without any reduction,
abatement, counterclaim or set-off. If the Term commences on a day other than
the first day of a calendar month, then Gross Rent payable for the first month
shall be prorated based upon the number of days in the first calendar month of
the Term from and after the Term Commencement Date and the prorated installment
shall be paid on the first day of the calendar month next succeeding the first
month together with the other amounts payable on that day. If the Term
terminates on a day other than the last day of a calendar month, then Gross Rent
provided for such partial month shall be prorated and the prorated installment
shall be paid on the first day of the calendar month in which the date of
termination occurs. Except as otherwise provided in Paragraph 4.4, Tenant shall
have no right to prepay or make advance payment of Rent,
4.2 BASE YEAR LEASE. The provisions for payment of Operating Cost
increase by means of periodic payment of Tenant's Proportionate Share of the
Operating Cost Increase are intended to pass on to the Tenant and reimburse
Landlord for Tenant's Proportionate Share of all costs and expenses of the
nature described in Section 4.3 hereof that exceed the Base Year Operating
Cost. The Base Year Operating Cost shall be an amount equal to the 1995 actual
operating cost grossed up to 95% occupancy for calculation of future operating
cost increases.
4.3 BASIC OPERATING COST.
(a) Basic Operating Cost shall mean all expenses and costs
(but not specific costs which are separately billed to and paid by specific
tenants) of every kind and nature which Landlord shall pay or become obligated
to pay because of or in connection with the management, maintenance, repair,
replacement, preservation and operation of the Project and its supporting
facilities directly servicing the Project as an office building in the locale
where the Building is located including, but not limited to the following:
(1) Costs and expenses incurred for and in connection
with providing the Basic Services (as defined herein); wages, salaries and
related expenses and benefits of all on-site and off-site employees engaged in
the operation, maintenance and security of the Project (inclusive of Parking
Facilities) except those utilities paid by other tenants;
(2) Cost of Landlord's management office and office
operation in the Project based on a reasonable requirement;
(3) All supplies, materials and equipment rental used
in the operation and maintenance of the Project;
(4) Utilities, including water and power,
communication, heating, lighting and ventilating the entire Project except those
utilities paid by other tenants or contract users of any portion of the
Project;
(5) All maintenance, janitorial and service
agreements for the Project and the equipment therein, including, without
limitation, alarm service, window cleaning, and the maintenance of elevators,
sidewalks, landscaping Building exterior and service areas;
(6) All generally accepted property management costs.
<PAGE> 4
15.16 AUTHORITY TO EXECUTE. The parties hereto and the persons
executing this Lease on behalf of such parties represent and warrant that the
individuals executing this Lease on their respective behalf are duly authorized
to execute and deliver this Lease on its behalf and that this Lease is binding
upon each party in accordance with its terms.
15.17 EXHIBITS. All exhibits, riders and schedules, if any, attached
hereto shall be deemed as part of this Lease.
ARTICLE 16
RENT
Base Rent shall be paid in accordance with the other terms and conditions of
this Lease. The Base Rent payment schedule is as follows:
<TABLE>
<CAPTION>
Months Payment/Month (plus all applicable taxes)
<S> <C>
01 - 12 $14,589.00
13 - 24 $15,804.75
25 - 36 $17,020.50
37 - 48 $18,236.25
49 - 60 $19,452.00
61 - 72 $20,667.75
73 - 84 $21,883.50
</TABLE>
ARTICLE 17
RELOCATION - SUBSTITUTE PREMISES
[Intentionally Deleted]
ARTICLE 18
PARKING
18.1 GENERAL PROVISIONS.
(a) Tenant's rights to use the parking privileges shall be
subject to timely payment of the parking fee, if any, as established from time
to time and subject to such further rules and regulations as Landlord or its
parking operator may establish from time to time and to all applicable laws,
ordinances, rules and regulations. Landlord may assign any unreserved and
unassigned parking privileges and/or make all or a portion of such privileges
reserved or institute an attendant assisted tandem parking program and/or valet
parking program if it determines in its sole discretion that such is necessary
for orderly and efficient parking. Tenant shall not use more parking spaces than
said number of parking privileges. Tenant shall not use any spaces which have
been specifically assigned by Landlord to other tenants or for other uses such
as visitor parking or which have been designated by governmental entities with
competent jurisdiction as being restricted to certain uses. Notwithstanding
anything to the contrary contained in this Article 18, both Landlord and Tenant
shall be subject to and bound by that certain Declaration of Condominium for BCE
Center Parking Condominium and Declaration Establishing Easements, Rights,
Covenants, Conditions and Restrictions Regarding Parking Structure, recorded as
instrument number 87 405392 'in official records of Maricopa County, Arizona on
June 25, 1987, including all amendments or modifications thereto.
<PAGE> 5
(a) Tenant shall be provided up to five (5) covered/reserved
parking stalls at a rate of $25.00 plus all applicable taxes per month per stall
for the first 36 months of the Lease term. The rate shall then increase
to $40.00 per month per stall plus all applicable taxes for the remainder of the
Lease term.
(b) Tenant shall be provided up to 95 covered/unreserved and
rooftop parking stalls (first come first serve basis) at a rate of $15.00 plus
all applicable taxes per month per stall for the first 36 months of the Lease
term. The rate shall then increase to $25.00 per month per stall plus all
applicable taxes for the remainder of the Lease term.
18.7 PARKING LOCATION. Landlord shall install a set of secondary
parking gates on the fourth floor of the parking garage to reserve in area for
Tenant's covered/unreserved and rooftop parkers. The cost of these secondary
gates will be paid by Tenant up to a cost of $16,000 subject to the Tenant's
improvement allowance.
18.8 PARKING VALIDATIONS. Landlord shall provide Tenant with (1)
visitor validation stamp to be used to validate Tenant's clients, customers,
invitees and visitors parking. Tenant may validate up to 900 hours of visitor
parking per twelve month (calendar year) period using the visitor validation
stamp. Any visitor parking in excess of 900 hours will be billed to Tenant at
the then visitor parking cost. Validated parking tickets accepted by Landlord
pursuant to this provision must be imprinted with the validation stamp provided
by Landlord. Tickets not imprinted with the validation stamp provided by
Landlord will be billed to Tenant at the then prevailing visitor parking charge.
These validations are to be used exclusively by Tenant's visitors, clients,
customers, invitees and not for the benefit of the Tenants employees, quasi
employees, temporary employees or any relating entities of the Tenant, or
off-site employees of the Tenant. Any unauthorized validations will be charged
at the then visitor parking rates. Tenant may not sell or transfer validation
stamp. Tenant must notify Landlord of any scheduled event requiring more than
twenty (20) general visitor parking spots by notifying Landlord in writing with
forty eight(48) hours prior notice. Landlord, at its option, may select an
alternate location for assembly parking of twenty (20) vehicles or more.
ARTICLE 19
TENANT IMPROVEMENTS
19.1 TENANT IMPROVEMENTS. CONSTRUCTION ALLOWANCE. Landlord shall
provide Tenant with a Construction Allowance not to exceed $18.00 per rentable
square foot; ($18.00 x 14,589 rsf = $262,602.00) However, a minimum of $14.00
per rentable square foot ($14.00 x 14,337 = $200,718) must be used for Tenant
Leasehold Improvements within Tenants Premises. Said Leasehold Improvements
shall include but not be limited to hard construction cost, reasonable
construction management fees, architectural fees, engineering fees, permits and
taxes. Leasehold Improvement Cost does not include systems furniture or
detachable furniture. The difference between the $18.00 and the $14.00 may be
used for systems furniture or detachable improvements used in the premises or
any reasonable and actual relocation costs not covered by the relocation
allowance. Receipt of those costs must be submitted to Landlord. Existing
Improvements may be reused in the reconstruction of Tenant's leasehold
improvements. There will be no rent credits or offsets for any unused
allowances.
19.2 SPACE PLANNING & DESIGN ALLOWANCE. Landlord shall contribute
$22,500.00 for architectural, engineering, space planning, construction drawing
(which shall be on CAD and added to Landlords files), all reimbursable costs and
design fees. The allowance for architectural and engineering fees will be paid
by Landlord upon delivery of a lien release executed by the architect for the
payment amount. Any amount in excess of the specified allowance will be paid by
Tenant. Tenant, at Tenant's sole cost, shall provide Landlord with a Computer
Automated Disk ("CAD") of the construction documents to be included in
Landlord's active files.
19.3 MISCELLANEOUS ALLOWANCE. All money provided by Landlord to Tenant
under Article 19 which is used for items other than tenant improvements shall
be paid to Tenant after Tenant
<PAGE> 6
occupies Premises and provides written conditional acceptance of Premises in a
form provided by Landlord. Landlord shall use its best effort to reimburse
Tenant within 30 days of submitting to Landlord written conditional acceptance
of premises as described above.
19.4 RELOCATION ALLOWANCE. Landlord shall provide Tenant with a
Relocation Allowance which shall not exceed $20,000 to help cover Tenant's
reasonable and actual costs associated with the relocation of telephones,
computers, files, personnel and office furniture, etc. within the Leased
Premises or to an alternate location on or off-site during the period the
Tenant's Leasehold Improvements are being constructed. Tenant must submit to
Landlord in writing a copy of all invoices which are to be paid as a result of
this article. All costs must be reasonable and actual and the total cost to
Landlord shall not exceed the sum of $20,000. Landlord shall use its best effort
to reimburse Tenant for the reasonable costs described in this article within 30
days of submitting to Landlord written conditional acceptance of premises as
described in Article 19.3.
ARTICLE 20
RIGHT OF FIRST REFUSAL
20.1 RIGHT OF FIRST REFUSAL. Landlord hereby grants to Tenant and
Tenant shall have a right of first refusal ("Right of First Refusal") with
respect to any available space ("Right of First Refusal Space") on the 10,098
rsf on the 15th floor shown on Exhibit "A-1" and a Secondary Right of Refusal
subject to previous rights of expansion of the 18th floor as shown on Exhibit
"A-2" for the term of the Lease, which First Right Refusal is subject to the
following terms and conditions:
a) The Right of First Refusal may not be exercised if a
material event of default under the terms of this Lease has occurred by
Tenant.
b) If Landlord intends to rent all or part of the available
Right of First Refusal Space to a third party (the "Third Party"), Landlord
shall provide written notice ("First Right of Refusal Notice") to Tenant that
negotiations are proceeding with a bona fide third party ("Third Party Offer")
with the intent to lease First Right of Refusal Space. Tenant shall thereafter
have five (5) business days from receipt of the First Right of Refusal Notice in
which to notify Landlord, in writing ("Acceptance Notice"), that it elects to
lease all, but not less than all of the space set out in the First Right of
Refusal Notice. If Tenant elects to lease the space set forth in the First Right
of Refusal Notice, then, within ten (10) Business Days of receipt by Landlord of
the Acceptance Notice, Tenant and Landlord shall execute and deliver an
amendment to this Lease upon the terms set forth in subparagraphs d & e hereof.
c) If Tenant does not timely deliver the Acceptance Notice,
then Landlord shall be free to enter into a lease of the space set forth in the
First Right of Refusal Notice with the Third Party. If Landlord does not execute
a lease for the space to such Third Party within one hundred eighty (180) days
of the First Right of Refusal Notice, Tenant shall then again have the rights
concerning such space set forth in this Article.
d) The initial Base Rent for the Right of First Refusal Space
shall equal the number of rentable square feet in the Right of First Refusal
Space as shown on Exhibit A-1 located on the 15th floor or "A-2" located on the
18th floor multiplied times the Base Rent per square foot then payable for the
Leased Premises prior to the expansion. The Right of First Refusal Space will
be subject to the rent schedule on a pro rata rentable square foot basis as
shown in Article 16 on a prospective basis.
e) Prior to tender of possession of the Right of First Refusal
Space, the Right of First Refusal Space shall be improved per the allowance
schedule ("Tenant Improvement Allowance") hereinbelow to integrate the Right of
First Refusal Space into the Leased Premises, including, but not limited to,
hard construction costs, architectural, space planning, engineering, and a
construction management fee cost payable to Landlord. The following schedule
outlines the allowance the Landlord will allow for improvements.
<PAGE> 7
If the First Refusal Space is taken within the:
<TABLE>
<CAPTION>
<S> <C>
1st Year: $11.00 per usable square foot
2nd Year: $ 8.00 per usable square foot
3rd Year: $ 4.00 per usable square foot
4th-7th Year: None.
</TABLE>
The above improvement allowance is for construction and related costs only and
no credit will be provided on any unused allowance for rent credit or cash
payment to Tenant.
ARTICLE 21
OPTION TO RENEW
21.1 EXERCISE OF OPTIONS. Provided Tenant is not in material default
under this Lease, either at the time of notice of exercise of renewal or at the
commencement of the renewal term, Tenant shall have the right to renew this
Lease for one (1) additional period of five (5) years. The terms of the Lease
during each renewal period shall remain the same, except that Base Rent shall be
determined as set forth below.
(a) If Tenant desires to exercise an option to renew, it
shall do so by notifying Landlord in writing not less than six (6) months prior
to the expiration of the then applicable term.
(b) Upon receipt of Tenant's notification provided in Section
(a) above, Landlord shall not later than One Hundred Fifty (150) days prior to
the expiration of the term, inform Tenant of the rental rate for the renewal
term, which shall not exceed an amount equal to ninety-five percent (95%) of the
then prevailing market rate for lease space in the Building (the "Market Rent
Notice".)
(c) Within ten (10) days after receipt of the Market Rent
Notice from Landlord, Tenant shall notify Landlord whether it elects to exercise
its option to renew for the rental rate set forth by Landlord. If Tenant fails
to so notify Landlord, it shall be deemed to have waived such renewal option and
any further renewal options. If Tenant elects to accept such rental rate, then
the term of this Lease shall be extended for such renewal period at the rental
rate set forth in Landlord's notice to Tenant.
21. 2 MARKET RENT. "Market Rent" means the annual amount per square
foot (exclusive of occupancy costs) that a willing tenant would pay and a
willing landlord would accept in arm's length bona fide negotiations, without
any additional inducements, for lease of the Premises or a single floor in the
Building if smaller, on the same terms and conditions for the specified period
of time.
21.3 DETERMINATION OF MARKET RENT. Market Rent shall be initially
determined by Landlord considering the most recent new leases and market renewal
leases of comparable space in the Building and other office buildings in the
Central Avenue corridor. If there are no such leases that are recent,
consideration shall be given to the most recent new leases and market renewal
leases for comparable space in other comparable buildings near the Building.
Appropriate allowances shall be made for the duration of any such leases, any
inducements granted to a tenant to secure such execution thereof and any special
term or condition contained therein, but no allowance shall be made for the
value of existing improvements and finishes provided by tenant.
21.4 DISAGREEMENT ON MARKET RENT.
(a) If Tenant does not agree with Landlord's determination of
Market Rent, Tenant shall give notice to Landlord of that disagreement within
ten (10) days of receipt of the Market Rent Notice.
(b) If Tenant gives notice of disagreement, the matter shall
be immediately referred to an individual (the "Expert") mutually selected by
Landlord and Tenant.
<PAGE> 8
FIRST LEASE ADDENDUM
THIS FIRST LEASE ADDENDUM, made and entered into on this 11th day of
December, 1995 by and between Southwest Portfolio Partnership a Texas general
Partnership hereinafter referred to as "Landlord", and National Health
Enhancement Systems, Inc., an Arizona corporation, having its offices at 3200
North Central Avenue, Suite 1700, Phoenix, Arizona 85012 (hereinafter referred
to as "Tenant").
WHEREAS, per that certain lease dated April 13, 1995 (hereinafter referred to
as the "Lease"), Tenant agreed to lease from Southwest Portfolio Partnership and
Landlord agreed to demise, lease and rent unto Tenant 14,589 rentable square
feet of office space located at 3200 North Central Avenue, Suite 1700, Phoenix,
Arizona 85012 (the "Premises"), for a period of eighty four (84) months,
commencing on July 1, 1995, and expiring at 12:00 PM on June 31, 2002;
WHEREAS, Tenant desires to lease an additional 8,824 rentable square feet of
office space, comprised of 6,242 rentable square feet in suite 1250 and 2,582
rentable square feet in suite 1270, located at 3200 North Central Avenue,
Phoenix, Arizona 85012 (hereinafter referred to as the "First Additional
Premises").
NOW, THEREFORE, for and in consideration of the mutual premises and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Lease hereby amended as
follows:
(1) First Additional Premises. Landlord does hereby let and demise unto Tenant,
and Tenant does hereby lease and rent from Landlord, the First Additional
Premises described as being 8,824 rentable square feet of office space,
comprised of 6,242 rentable square feet in suite 1250, and 2,582 rentable
square feet in suite 1270, located at 3200 North Central Avenue, Phoenix,
Arizona, as shown on Exhibit (A) attached hereto and by reference made a
part hereof.
(2) Term of Lease of First Additional Premises. The term of the Lease of the
First Additional Premises shall be for seventy seven (77) months, commencing
on the first day of February 1996, and expiring at 12:00 PM on June 31,
2002.
(3) Base Rent for First Additional Premises. In addition to the Base Rent for
the Premises, Tenant agrees to pay to Landlord, as Base Rent for the First
Additional Premises, the following amounts; The initial Base Rent for the
First Additional Premises shall equal 8,824 rentable square feet multiplied
times the Base Rent per square foot then payable for the leased premises
prior to expansion the First Additional Premises which will be subject to
the rent schedule on a pro rate rentable square foot as shown in Article 16
of the Lease dated April 3, 1995 on a prospective basis. Rent for the First
Additional Premises commences concurrent with the Term of the First
Additional Premises with no rental concessions or abatement.
Such amounts shall be payable in accordance with Article 4 of the Lease.
(4) Tenant Improvement Allowance. Landlord will provide Tenant with a tenant
improvement allowance not to exceed $40,000. Said allowance is to be used
only for leasehold improvements such as construction costs, construction
management fees, engineering fees, architectural fees, construction
drawings, permits and taxes. Leasehold improvement costs does not include
systems furniture or detachable furniture fixtures or office equipment.
There shall be no cash, rent credits or offsets. Said allowance must be used
within six(6) months of occupancy, if not used within the six(6) month
period this Tenant Improvement Allowance will be considered forfeited by the
Tenant and Landlord shall
<PAGE> 9
have no further obligation to provide the Tenant Improvement Allowance as
described in this "First Amendment."
(5) Definition of Premises. Effective as of the date Tenant occupies the First
Additional Premises, any and all references in the Lease to the "Premises"
shall include the First Additional Premises. Thereafter, Tenant shall
occupy a total of 23,413 rentable square feet. The terms set forth in this
Addendum shall apply to all occupied space, inclusive of both "First
Additional Premises" and to the "Premises".
(6) Other Terms and Conditions. All other terms and conditions of the Lease
shall remain in full force and effect except as specifically amended herein.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First Lease Addendum
on the day and year first above written.
Landlord:
Southwest Portfolio Partnership
a Texas general Partnership
BY: /s/ Illegible
--------------------------------
Its: Vice President
--------------------------------
By: Central Avenue Leasing
BY: /s/ Illegible
--------------------------------
Its: Power of Attorney
--------------------------------
Tenant:
National Health Enhancement Systems. Inc.,
an Arizona corporation
BY: /s/ Illegible
--------------------------------
Its: V.P. Administration
--------------------------------
<PAGE> 10
SECOND LEASE ADDENDUM
THIS SECOND LEASE ADDENDUM, made and entered into on this 5th day of
June, 1996 by and between Southwest Portfolio Partnership a Texas general
Partnership hereinafter referred to as "Landlord", and National Health
Enhancement Systems, Inc., an Arizona corporation, having its offices at 3200
North Central Avenue, Suite 1700, Phoenix, Arizona 85012 (hereinafter referred
to as "Tenant").
WHEREAS, per that certain lease dated April 13, 1995 (hereinafter referred to as
the "Lease"), Tenant agreed to lease from Southwest Portfolio Partnership and
Landlord agreed to demise, lease and rent unto Tenant 14,589 rentable square
feet of office space located at 3200 North Central Avenue, Suite 1700, Phoenix,
Arizona 85012 (the "Premises"), for a period of eighty four (84) months,
commencing on July 1, 1995, and expiring at 12:00 PM on June 30, 2002;
WHEREAS, per that certain Addendum dated December 11, 1995 (herein referred to
as the "First Lease Addendum"), Tenant agreed to lease from Landlord and
Landlord agreed to demise, lease and rent unto Tenant 8,824 additional rentable
square feet of office space located in suites 1250 and 1270, commencing February
1, 1996 and expiring June 30, 2002.
WHEREAS, Tenant desires to lease an additional 4,507 rentable square feet
effective July 1, 1996 and increasing by an additional 447 rentable square feet
on February 1, 1997 for a total of 4,954 rentable square feet, of office space
in suite 850, located at 3200 North Central Avenue, Phoenix, Arizona 85012
(hereinafter referred to as the "Second Additional Premises").
NOW, THEREFORE, for and in consideration of the mutual premises and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Lease hereby amended as
follows:
(1) Second Additional Premises. Landlord does hereby let and demise unto Tenant,
and Tenant does hereby lease and rent from Landlord, the Second Additional
Premises described as being 4,507 rentable square feet effective July 1,
1996 and increasing by an additional 447 rentable square feet on February 1,
1997 for a total of 4,954 rentable of office space, in suite 850, located at
3200 North Central Avenue, Phoenix, Arizona, as shown on Exhibit (A)
attached hereto and by reference made a part hereof.
(2) Term of Lease of Second Additional Premises. The term of the Lease of the
Second Additional Premises shall be for seventy two (72) months, commencing
on the first day of July 1996, and expiring at 12:00 PM on June 30, 2002.
<PAGE> 11
(3) Base Rent for Second Additional Premises. In addition to the Base Rent for
the Premises, and First Additional Premises, Tenant agrees to pay to
Landlord, as Base Rent for the Second Additional Premises, the following
amounts;
Months 01 - 12 $ 14.00 psf.
Months 13 - 24 $ 15.00 psf.
Months 25 - 36 $ 16.00 psf.
Months 37 - 48 $ 17.00 psf.
Months 49 - 60 S 18.00 psf.
Months 61 - 72 $ 19.00 psf.
Such amounts shall be payable in accordance with Article 4 of the Lease.
(4) Tenant Improvement Allowance. Landlord will provide Tenant with a tenant
allowance not to exceed $39,000. Said allowance is to be used only for
leasehold improvements such as construction costs, Construction management
fees, engineering fees, architectural fees, construction drawings, permits
and taxes. Leasehold improvement costs does not include systems furniture or
detachable furniture fixtures or office equipment. There shall be no cash,
rent credits or offsets. Said allowance must be used within the first six
(6) months of occupancy, if Tenant Improvements are not completed 100%,
within the first six (6) months of occupancy, any remaining and unused
Tenant Improvement Allowance will be considered forfeited by the Tenant and
Landlord shall have no further obligation to provide the tenant
improvement allowance as described in this "Second Addendum."
(5) Operation Expenses. 1996 Base Year Expense Stop.
(6) Parking. Landlord will provide Tenant with a total of fifteen (15)
additional parking spaces. Of the fifteen total additional parking spaces,
Two (2) parking spaces are covered/reserved and will be provided at a rate
of $30.00 plus all applicable taxes, per parking space per month for the
first thirty six (36) months of the lease term, then at a rate of $45.00 per
parking space per month for the remaining thirty six (36) months of the
lease term. Seven (7) parking spaces are covered/unreserved and will be
provided at a rate of $20.00 plus all applicable taxes, per parking space
per month for the first thirty six (36) months of the lease term, then at a
rate of $40.00 per parking space per month for the remaining thirty six (36)
months of the lease term. Six (6) parking spaces are rooftop and will be
provided free for the first thirty six (36) months of the lease term, then
at a rate of $15.00 per parking space per month for the remaining thirty six
(36) months of the lease term.
(7) Definition of Premises. Effective as of the date Tenant occupies the Second
Additional Premises, any and all references in the Lease to the "Premises"
shall include the Second Additional Premises, First Additional Premises and
the Premises. Thereafter, Tenant shall occupy a total of 28,367 rentable
square feet. The terms set forth in this Addendum shall apply to all
occupied space, inclusive of "Second Additional Premises", "First Additional
Premises", and to the "Premises".
(8) Other Terms and Conditions. All other terms and conditions of the Lease
shall remain in full force and effect except as specifically amended
herein.
<PAGE> 1
EXHIBIT 10.57
RESTRICTED STOCK PURCHASE AGREEMENT
This RESTRICTED STOCK PURCHASE AGREEMENT (the "Agreement") is made as
of this ______ day of _______________, 1996, at Phoenix, Arizona, between HEALTH
ENHANCEMENT INTERNATIONAL, Inc., an Arizona corporation (the "Company") and
MCGRAW PARTNERS (the "Purchaser").
WHEREAS, Purchaser is willing and desires to invest in the initial
capitalization of the Company;
WHEREAS, Purchaser is a family partnership in which W. Cal McGraw
("McGraw") is a general partner, and McGraw is an officer and director of the
Company and his participation in the business of the Company is considered by
the Company to be important for its potential success ; and
WHEREAS, the Company is willing to sell to the Purchaser and the
Purchaser desires to purchase Common Stock of the Company according to the terms
and conditions hereof.
THEREFORE, the parties agree as follows:
1. Sale of Stock.
The Company hereby agrees to sell to the Purchaser and the Purchaser
hereby agrees to purchase from the Company an aggregate of Ten Thousand (10,000)
shares of the Company's Common Stock (the "Shares"), at the price of five cents
($0.05) per share, for an aggregate purchase price of Five Hundred Dollars
($500) (the "Purchase Price").
2. Payment of Purchase Price.
The Purchase Price for the Shares shall be paid at the time of
execution of this Agreement.
3. Issuance of Shares.
Upon receipt by the Company of the Purchase Price, the Company shall
issue a duly executed certificate evidencing the Shares in the name of the
Purchaser.
4. Repurchase Options. The Company shall have the option, but not the
obligation, to repurchase the Shares as follows:
a. Company Call Option. Commencing at any time January 1, 2000, the
Company shall have the right and option (the "Call Option") to repurchase all or
any portion of the Shares at a purchase price per share equal to the Fair Market
Value of the Shares, as determined pursuant to Section 7 of this Agreement as of
the exercise date of the Call Option. The Call Option shall be administered as
described in Section 4(d) below.
<PAGE> 2
b. Accelerated Call Option in Certain Circumstances. Notwithstanding
Section 4(a), if McGraw's service with the Company as an officer, director or
employee terminates prior to January 1, 2000, due to McGraw's resignation, death
or disability, or is terminated at any time by the Company for Cause, the
Company shall, upon the date of such termination, as reasonably fixed and
determined by the Company (the "Termination Date"), have the right and option
(the "Accelerated Call Option") to repurchase all or any portion of the Shares
at a purchase price per share equal to the Fair Market Value of the Shares as of
the Termination Date, as determined pursuant to Section 7 of this Agreement,
provided that if the termination of McGraw's employment is for Cause, the
purchase price for the Shares shall be the lower of the Purchase Price per share
paid by Purchaser for such Shares or the Fair Market Value per share of such
Shares as of the Termination Date. "Cause" means that McGraw shall have, in the
reasonable judgment of the Board of Directors of National Health Enhancement
Systems, Inc. ("NHES"), (i) committed a criminal act or an act of fraud,
embezzlement, breach of trust or other act of gross misconduct, (ii) willfully
violated written corporate policy or rules of the Company, or (iii) willfully or
habitually refused to follow the directions given by the Board of the Company or
of NHES from time to time after written notice of such refusals has been given
to McGraw by the Company or NHES. The Accelerated Call Option shall be
administered as described in Section 4(d) below.
c. McGraw Put Option. Commencing at any time after January 1, 2002,
McGraw shall have the right and option (the "Put Option") to require the Company
to repurchase all of the Shares at a purchase price per share equal to the Fair
Market Value of the Shares as of the exercise date of such Put Option, as
determined pursuant to Section 7 of this Agreement. The Put Option shall be
administered as described in Section 4(d) below.
d. The options described above shall be administered as follows:
(i) The Company shall exercise the Call Option and Accelerated
Call Option described above (each a "Company Option"), if at all, by
delivering written notice of exercise to Purchaser specifying the
number of Shares being repurchased and the Consummation Date (as
hereafter defined). If the option is being exercised pursuant to
Section 4(b), the exercise notice must be delivered within ninety (90)
days following the Termination Date. Purchaser shall exercise the Put
Option described above, if at all, by delivering written notice of
exercise to the Company that Purchaser is electing to sell of its
Shares to the Company and specifying the Consummation Date.
(ii) Payment on the exercise of a Company Option or the Put
Option shall be made, against delivery of the certificates evidencing
the Shares with duly and properly executed assignments in blank, by an
initial payment on the Consummation Date equal to one-third of the
purchase price, and the balance shall be made in two equal annual
installments of principal and accrued interest, one on the first
anniversary of the Consummation Date and the other on the second
anniversary of the Commencement Date. Interest shall commence to
<PAGE> 3
accrue from the Consummation Date at the prime rate of interest in
effect on the Consummation Date as announced in the Wall Street Journal
(or a reasonable substitute selected by the Board of Directors of the
Company (the "Board")), and it shall be adjusted annually thereafter to
the then-existing Wall Street Journal-announced prime rate (or a
reasonable substitute selected by the Board), which adjusted rate of
interest shall remain in effect for the entire year then beginning
(interim changes in the prime rate during the year being disregarded).
If the Company's exercise of a Company Option is for less than one
third (1/3) of the Shares, then the Company shall pay the entire
purchase price on the Consummation Date. The "Consummation Date" for
purposes of this paragraph shall be the sixtieth (60th) day following
delivery of the Company's notice of exercise. The Company may, at its
election, prepay amounts due under this paragraph, without premium or
penalty.
(iii) If McGraw determines in connection with the exercise of
the Call Option or the Put Option that McGraw would not be able to
utilize installment sale reporting for tax purposes in connection with
the its sale of the Shares to the Company pursuant to the procedures
set forth in Section 4(ii), then the parties agree that the purchase
and sale transaction shall be restructured to divide the purchase and
sale transaction into three successive sales and purchase transactions
of the Shares, with three Consummation Dates, each to be on the dates
that payment would have been made under Section 4(ii). The number of
Shares sold in each transaction shall be one-third of the total amount
that would have been sold pursuant to the exercise, and the purchase
price shall be the same it would have been had the purchase and sale
been completed pursuant to Section 4(ii), provided that for the second
and third transactions, the price shall be increased by the amount of
interest that would have been paid pursuant to Section 4(ii) as it
relates to the Shares being purchased at the particular Consummation
Date. In addition, McGraw will deliver to NHES or its designee, at the
initial Consummation Date, McGraw's irrevocable and general proxy to
vote all of the Shares to be sold at the second and third Consummation
Dates.
5. Restriction on Transfer.
Except for a transfer of the Shares to the Company or its assignees as
contemplated by this Agreement or after compliance with Section 6 hereof, none
of the Shares or any beneficial interest therein shall be transferred,
encumbered or otherwise disposed of in any way.
6. Right of First Refusal.
a. In the event, at any time following the date of this Agreement,
the Purchaser or its transferee desires (or is required) to sell or transfer in
any manner the Shares, it shall first offer such Shares for sale to the Company
at the same price, and upon the same terms (or terms as similar as reasonably
possible) upon which it is proposing or is to dispose of such Shares. If the
<PAGE> 4
transfer does not involve a price freely set by the Purchaser, the price shall
be the Fair Market Value of the Shares. Such right of first refusal shall be
provided to the Company for a period of thirty (30) days following receipt by
the Company of written notice (the "Offering Notice") by the Purchaser of the
proposed transferee and the terms and conditions of said proposed sale or
transfer, or thirty (30) days following establishment of Fair Market Value
pursuant to Section 7. In the event the Company does not exercise its right of
first refusal and the Shares are not disposed of to such proposed transferee in
strict accordance with the Offering Notice within thirty (30) days following
lapse of the period of the right of first refusal provided to the Company, the
Shares shall once again be subject to the right of first refusal herein
provided.
b. In the event, at any time following the date of this Agreement, of
any transfer by operation of law or other involuntary transfer (including a
transfer pursuant to dissolution of marriage) of all or a portion of the Shares,
the Company shall have the right and option to purchase all of the Shares
transferred for a purchase price equal to the Fair Market Value of the Shares.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of thirty (30) days following the
establishment of Fair Market Value pursuant to Section 7.
c. All transferees of Shares or any interest therein shall be required
as a condition of such transfer to agree in writing, in a form satisfactory to
the Company, that they will receive and hold such Shares or interests subject to
the provisions of this Agreement, including the Company's options under Section
4 and the right of first refusal in this Section 6. Any attempted sale or
transfer of the Shares shall be void unless the provisions of this Agreement are
met.
d. The options granted the Company pursuant to Section 4 and the right
of first refusal granted the Company by this Section 6 shall terminate at such
time as a public market exists for the Company's Common Stock (or any other
stock issued in exchange for the Shares purchased under this Agreement). Upon
termination of the right of first refusal and at the Purchaser's request the
Company shall issue a new certificate representing the Shares without a legend
referring to such refusal right. For the purpose of this Agreement, a "public
market" shall be deemed to exist if (i) such stock is listed on a national
securities exchange (as that term is used in the Securities Exchange Act of
1934) or (ii) such stock is traded on the over-the-counter market and prices are
published daily on business days in a recognized financial journal.
7. Definition of Fair Market Value.
The "Fair Market Value" of the Shares shall be the single value
negotiated by and agreeable to the Company and Purchaser. If the Fair Market
Value is not mutually agreed upon within fifteen (15) days after the expiration
date for the option under which any of the Shares, or interest therein, is to be
purchased, or within 30 days after the Company's notice of option exercise
pursuant to Section 4(a), the Fair Market Value shall be determined by
arbitration as set forth below. The arbitration will be held in Phoenix,
Arizona, and for this purpose each party
<PAGE> 5
hereby expressly consents to such arbitration in such place. In the event the
parties cannot mutually agree upon an arbitrator to settle their dispute or
controversy, each party shall then select one arbitrator, who shall be
experienced in valuing businesses similar to the Company and who shall be
independent from and have no prior relationships with either of the parties or
their affiliates. If the number of arbitrators is an even number, the
arbitrators so selected shall select an additional arbitrator. The arithmetic
average of the estimates of the two (2) arbitrators whose estimates are closest
in value shall be binding upon the parties hereto for all purposes, and judgment
to enforce any such binding decision may be entered in Superior Court, Maricopa
County, Arizona and Fulton County, Georgia (and for this purpose each party
hereby expressly and irrevocably consents to the jurisdiction of said courts).
If any party fails to select an arbitrator within fifteen (15) days after
written demand from another other party to do so, or if the arbitrators selected
fail to select an additional arbitrator within fifteen (15) days after the last
of such selected arbitrators is appointed, then such other arbitrator or
arbitrators shall be selected pursuant to the then existing rules and
regulations of the American Arbitration Association governing commercial
transactions. In all other respects, the arbitrators shall conduct all
proceedings pursuant to the Uniform Arbitration Act as adopted in the State of
Arizona and the then existing rules and regulations of the American Arbitration
Association governing commercial transactions to the extent such rules and
regulations are not inconsistent with such Act or this Agreement.
8. Investment Representations.
In connection with the purchase of the Shares, the Purchaser represents
and warrants to the Company the following:
a. The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
b. The Purchaser is purchasing these securities for investment for its
own account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933 and
applicable state securities laws (collectively, the "Securities Act"). The
Purchaser further acknowledges and understands that the securities have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of its
investment intent as expressed herein.
c. The Purchaser acknowledges and understands that the securities must
be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. The
Purchaser further acknowledges and understands that the Company is under no
obligation to register the securities. The Purchaser understands that the
certificate evidencing the securities will be imprinted with a legend which
prohibits the transfer of the securities unless they are registered or such
registration is not required in the opinion of
<PAGE> 6
counsel for the Company.
d. The Purchaser is aware of the adoption of Rule 144 by the
Securities and Exchange Commission, promulgated under the Securities Act, which
permits limited public resale of Securities acquired in a non-public offering
subject to the satisfaction of certain conditions and that such conditions are
not currently satisfied with respect to the Company and the Shares and there can
be no assurance (and the Company undertakes no obligation to ensure) that such
conditions will ever be met.
e. The Purchaser further acknowledges that in the event all of the
requirements of Rule 144 are not met, compliance with another registration
exemption will be required; and that although Rule 144 is not exclusive, the
staff of the Commission has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and other than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available for such offers or sales and
that such persons and the brokers who participate in the transactions do so at
their own risk.
9. Legends.
The share certificate(s) evidencing the Shares issued hereunder shall
be endorsed with the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY."
10. Adjustment for Stock Split.
All references to the number and purchase price of the Shares in this
Agreement shall be appropriately adjusted to reflect any stock split, stock
dividend or other change in the Shares which may be made by the Company after
the date of this Agreement. This provision does not grant Purchaser any
preemptive or other rights to acquire additional shares of the Company.
<PAGE> 7
11. General Provisions.
a. This Agreement shall be governed by the laws of the State of
Arizona. This Agreement represents the entire agreement between the parties with
respect to the purchase of Common Stock by the Purchaser and may only be
modified or amended in writing signed by both parties.
b. Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, first class with postage prepaid, and addressed to
the parties at the addresses set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing.
c. The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
d. Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party thereafter from enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
e. The Purchaser agrees to execute, upon request of the Company, any
further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date set forth above.
HEALTH ENHANCEMENT MCGRAW PARTNERS
INTERNATIONAL, INC.
By: /s/ Gregory J. Petras By: /s/ W. Cal McGraw
--------------------------- ------------------------
W. Cal McGraw
Title: President Its: Authorized General Partner
<PAGE> 8
3200 North Central Avenue ________________________________
17th Floor ________________________________
Phoenix, Arizona 85012 ________________________________
<PAGE> 1
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
COMPANY NAME AND ADDRESS
1) Expert Systems, Inc.
1301 Hightower Trail
Suite 201
Roswell, GA 30350-2917
(An Arizona Corporation)
2) First Strategic Group, Ltd.
7032 Comstock
Suite 100
Whittier, CA 90602-1388
(A Delaware Corporation)
3) Health Enhancement International, Inc.
3200 N. Central Avenue
Suite 1700
Phoenix, Az 85012-2437
(An Arizona Corporation)
4) NHE Systems, Inc.
3200 N. Central Avenue
Suite 1700
Phoenix, Az 85012-2437
(An Arizona Corporation)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,095,305
<SECURITIES> 0
<RECEIVABLES> 11,451,992
<ALLOWANCES> 629,670
<INVENTORY> 0
<CURRENT-ASSETS> 15,379,681
<PP&E> 3,741,114
<DEPRECIATION> 1,574,527
<TOTAL-ASSETS> 19,349,897
<CURRENT-LIABILITIES> 13,834,586
<BONDS> 0
0
0
<COMMON> 4,998
<OTHER-SE> 5,063,727
<TOTAL-LIABILITY-AND-EQUITY> 19,349,897
<SALES> 25,185,008
<TOTAL-REVENUES> 25,185,008
<CGS> 9,988,317
<TOTAL-COSTS> 24,320,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 864,296
<INCOME-TAX> 128,000
<INCOME-CONTINUING> 736,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 736,296
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
