<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------------
NHANCEMENT TECHNOLOGIES INC.
(Name of small business issuer as specified in its charter)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
As of August 12, 1998, there were 5,508,746 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair statement of the information shown. These unaudited
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1997. The results for the six months
ended June 30, 1998 are not necessarily indicative of the results of operations
for a full year.
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NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
=======================================================================================================================
JUNE 30, 1998
=======================================================================================================================
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 2,503,200
Accounts receivable, less allowance for doubtful accounts of $736,000 5,741,000
Income tax receivable 235,300
Notes receivable from stockholders, net of current portion 67,200
Inventory 1,957,600
Prepaid expenses and other 318,200
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,822,500
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 1,783,800
Less accumulated depreciation 679,600
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 1,104,200
- -----------------------------------------------------------------------------------------------------------------------
Excess of cost over net assets acquired of Voice Plus, Inc., net of accumulated amortization
of $150,000 (Note 3) 1,350,000
Excess of cost over net assets acquired of Infotel (Note 3) 1,905,500
Excess of cost over net assets acquired of Advantis, net of accumulated amortization of
$53,900 (Note 3) 1,042,200
Long-term portion of notes receivable from stockholders 183,100
Deferred financing costs 142,600
Other assets 175,800
- -----------------------------------------------------------------------------------------------------------------------
$ 16,725,900
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 246,400
Accounts payable 3,464,300
Accrued liabilities 864,100
Payable to affiliates 390,900
Deferred revenue 1,680,600
Income tax payable 312,100
Deferred income taxes 30,000
Dividend payable 12,600
Shareholder notes payable 1,656,900
Current portion of long-term debt 2,200
Accrued purchase consideration (Note 3) 1,390,400
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 10,050,500
LONG-TERM DEBT, net of current portion 183,100
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,233,600
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized, 8,400 shares issued
and outstanding (Note 6) 688,400
Common stock, $0.01 par value, 20,000,000 shares authorized, 5,169,800 shares
issued and outstanding 51,700
Additional paid-in capital 20,630,200
Accumulated deficit (14,769,900)
Cumulative translation adjustment (108,100)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,492,300
- -----------------------------------------------------------------------------------------------------------------------
$ 16,725,900
=======================================================================================================================
</TABLE>
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<PAGE> 4
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
===============================================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1998 1997 1998
===============================================================================================================
<S> <C> <C> <C> <C>
NET SALES $ 2,640,200 $ 3,394,400 $ 4,072,100 $ 4,610,900
Cost of sales 1,522,800 1,916,900 2,159,400 2,766,900
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,117,400 1,477,500 1,912,700 1,844,000
- ---------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research and development 19,100 -- 42,800 --
Selling, marketing and administrative 873,900 1,324,400 1,483,600 2,413,700
Amortization of excess of cost over net assets acquired 147,400 99,900 246,300 199,700
- ---------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,040,400 1,424,300 1,772,700 2,613,400
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 77,000 53,200 140,000 (769,400)
- ---------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 34,100 17,900 72,500 39,500
Interest expense (19,500) (25,500) (67,900) (52,000)
Other -- 28,000 -- 69,300
- ---------------------------------------------------------------------------------------------------------------
14,600 20,400 4,600 56,800
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 91,600 73,600 144,600 (712,600)
- ---------------------------------------------------------------------------------------------------------------
INCOME TAXES 19,500 26,000 29,900 26,000
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 72,100 $ 47,600 $ 114,700 $ (738,600)
- ---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS - TRANSLATION (NOTE 2) -- (100,000) -- (119,400)
- ---------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) (NOTE 2) $ 72,100 $ (52,400) $ 114,700 $ (858,000)
- ---------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.08) $ 0.03 $ (0.26)
(NOTE 8)
===============================================================================================================
</TABLE>
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<PAGE> 5
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================================================
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
PAR VALUE PAR VALUE PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT GAIN (LOSS) TOTAL
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1997 -- -- 4,436,500 $ 44,400 $18,020,600 $(13,601,200) $ 11,300 $4,475,100
Translation loss
Advantis & Infotel -- -- -- -- -- -- (119,400) (119,400)
Issuance of
Preferred Stock
net of stock
issuance cost
of $202,600
(Note 6) 12,500 $1,047,400 -- -- -- -- -- 1,047,400
Deemed dividend
on preferred
stock
convertible at
a discount
(Note 6) -- -- -- -- 416,700 (416,700) -- --
Dividends on
Preferred Stock
converted to
Common Shares -- -- 500 -- 800 (800) -- --
Dividends
Payable on
Preferred Stock -- -- -- -- -- (12,600) -- (12,600)
Preferred
Shares
converted into
Common (4,100) (359,000) 299,800 3,000 356,000 -- -- --
Issuance of
Common Stock
for Infotel
Acquisition
(Note 3) -- -- 433,000 4,300 1,836,100 -- -- 1,840,400
Net loss -- -- -- -- -- (738,600) -- (738,600)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, June
30,1998 8,400 $ 688,400 5,169,800 $ 51,700 $20,630,200 $(14,769,900) $ (108,100) $6,492,300
================================================================================================================================
</TABLE>
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<PAGE> 6
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
============================================================================================================
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1998
============================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 114,700 $ (738,600)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and other amortization 318,500 325,000
Other 1,900 (55,000)
Changes in operating assets and liabilities:
Accounts receivable (239,000) (685,800)
Income tax receivable -- (63,300)
Inventory 372,600 229,600
Prepaid expenses and other (194,800) (289,000)
Other assets (42,700) (71,000)
Income tax payable -- 53,000
Accounts payable and other current liabilities (2,899,100) 242,700
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,567,900) (1,052,400)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from VPI Acquisition 851,900 --
Cash purchase price of Infotel, net of cash acquired of $2,326,000 -- (30,300)
Note receivable from stockholder (60,000) --
Purchase of property and equipment (51,100) (165,700)
- ------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 740,800 (196,000)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit -- 80,000
Proceeds from shareholder notes payable -- 1,400,000
Principal payment on long-term debt (1,814,000) --
Principal payment on long-term debt due stockholder (740,000) --
Proceeds from sale of preferred stock, net of offering costs -- 1,047,400
Proceeds from initial public offering of common stock, net of
offering costs 6,962,200 --
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,408,200 2,527,400
- ------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (139,000)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,581,100 1,140,000
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,100 1,363,200
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,641,200 $ 2,503,200
CASH PAID DURING THE PERIOD FOR:
INTEREST $ -- $ --
INCOME TAXES $ 52,200 $ --
============================================================================================================
</TABLE>
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<PAGE> 7
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On February 3, 1997, the Company issued 1,312,500 shares of its Common
Stock and $1,500,000 in promissory notes for all the outstanding shares of
Voice Plus, Inc. pursuant to a purchase and plan of merger agreement.
On February 4, 1997, the Company issued 258,200 shares of its Common
Stock as repayment of certain notes payable and accrued interest thereon.
On June 22, 1998, the Company acquired all outstanding shares of Common
Stock of Infotel Technologies (Pte) Ltd. In exchange for approximately
433,000 shares of the Company's Common Stock with an estimated value of
$1,840,400 and $2,356,300 in cash. Additionally, management accrued
additional purchase consideration of $1,390,400 based on Infotel's profits
through June 30, 1998 (See Note 3).
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<PAGE> 8
1. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or
the "Company"), was incorporated in October 1996 as a holding company and
successor to the business of BioFactors, Inc. ("BFI" or "BioFactors"), a
Delaware corporation. On February 3, 1997, prior to the February 4, 1997
consummation of the initial public offering ("IPO") of the Company's common
stock, BFI merged with a subsidiary of NHancement whereupon BFI, as the
surviving corporation, became a wholly owned subsidiary of NHancement (the
"BFI Merger"). Also, on February 3, 1997, the Company acquired Voice Plus,
Inc.R ("VPI" or "Voice Plus"), a California corporation that is a systems
integrator and national distributor of voice processing equipment. The
acquisition was accounted for as a purchase, and, accordingly, the results
of VPI's operations were included in the Company's consolidated financial
statements commencing February 3, 1997. For financial accounting purposes,
BFI is deemed to be the acquirer of VPI.
Effective November 12, 1997, BioFactors, Inc. was merged with and into
Voice Plus, Inc. in a statutory merger intended to qualify, for federal
income tax purposes, as a re-organization under Section 368 of the Internal
Revenue Code of 1986, as amended. Voice Plus is the surviving corporation
in the merger transaction with BioFactors, and the separate existence of
BioFactors ceased on the effective date of the merger. The operations of
the combined entity are being conducted under the name of "Voice Plus,"
which is headquartered in Fremont, California. Voice Plus remains a wholly
owned subsidiary of NHancement.
On December 15, 1997, NHancement purchased one hundred percent (100%)
of the outstanding shares of Advantis Network & System Sdn Bhd
("Advantis"). As a result of the acquisition, Advantis has become a wholly
owned subsidiary of NHancement. Advantis is a telecommunications systems
integrator. The operations of the entity are being conducted under the name
of "Advantis Network & System Sdn Bhd," which is headquartered in Kuala
Lumpur, Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the
Company's consolidated financial statements commencing December 15, 1997.
On June 22, 1998, NHancement purchased one hundred percent (100%) of
the outstanding shares of Infotel Technologies (Pte) Ltd ("Infotel"). As a
result of the acquisition, Infotel has become a wholly owned subsidiary of
NHancement. Infotel is a provider and integrator of infrastructure
communications equipment products, providing radar system integration,
turnkey project management services and test instrumentation, as well as a
portfolio of communication equipment in Asia. The operations of the entity
are being conducted under the name of "Infotel Technologies (Pte) Ltd"
which is headquartered in Singapore. The acquisition was accounted for as a
purchase, and, accordingly, the results of Infotel's operations were
included in the Company's consolidated financial statements commencing June
22, 1998.
The business of NHancement is conducted by its operating company
subsidiaries: Voice Plus, Inc., Advantis Network & System Sdn Bhd, and
Infotel Technologies (Pte) Ltd.
2. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The accompanying consolidated financial statements as of June 30, 1998
and for the three and six months ended June 30, 1998 and 1997 are
unaudited. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been omitted. These consolidated
financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the year ended December 31,
1997 presented in the Company's latest annual report on Form 10-KSB.
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<PAGE> 9
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
The consolidated financial statements presented herein reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations for the
periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for financial statements for fiscal years beginning after
December 15, 1997 and requires comparative information for earlier periods
to be restated. Management has implemented this standard effective January
1, 1998. Results of operations and financial position were unaffected by
the implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. SFAS No. 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Management is in the process of analyzing which subsidiaries
qualify as reportable operating segments under SFAS No. 131 and has been
unable to fully evaluate the impact it may have on future financial
statement disclosure. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In February 1998, the Financial Accounting Standard Board issued SFAS
No. 132, Employers' Disclosures about Pensions and Other Post Retirement
Benefits. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as they were
when previous related accounting standards were issued. SFAS No. 132 is
effective for financial statements for fiscal years beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated unless the information is not readily available, in which case
the notes to the financial statements should include all available
information and a description of the information not available. Management
believes that the Company's current financial statement disclosures will
not need to be modified based upon current operations. Results of
operations and financial position will be unaffected by implementation of
this standard.
In June 1998, the Financial Accounting Standards Board Issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all
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<PAGE> 10
derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1999. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. However, in light of the recent acquisitions of
Advantis and Infotel, management may enter into derivative contracts to
hedge its foreign currency risk in the future. The Company has not yet
evaluated the financial statement impact of adopting this new standard.
3. ACQUISITION AND MERGER TRANSACTIONS
On February 3, 1997, NHancement merged a wholly-owned subsidiary with
and into BFI, whereupon BFI, as the surviving corporation, became a
wholly-owned subsidiary of NHancement, and shares of NHancement common
stock were exchanged for all the issued and outstanding common stock of
BFI, in a ratio of three shares of NHancement Common Stock for every four
shares of BFI Common Stock.
Also, on February 3, 1997, the Company entered into a stock purchase
agreement with Voice Plus, Inc., pursuant to a transaction by which the
Company merged a wholly-owned subsidiary with and into VPI whereupon VPI,
as the surviving corporation, became a wholly-owned subsidiary of the
Company. This merger provided for the exchange of (i) the Company's
unsecured promissory note in a principal amount of $1,000,000, bearing
interest at the medium term T-bill rate, with all principal and accrued
interest paid in full during 1997, (ii) the Company's unsecured promissory
note in a principal amount of $500,000, bearing interest at the medium term
T-bill rate, due on the third anniversary of the consummation of the merger
subject to accelerated payment based upon quarterly earnings of Voice Plus,
and (iii) shares of NHancement common stock with an estimated fair value of
$4,680,000 (of which, shares valued at $2,400,000 were sold in the IPO, and
the remainder of the shares are subject to restrictions on transferability
under the Securities Act of 1933 (as amended) and pursuant to a lock-up
agreement with the underwriter of the IPO), for all the issued and
outstanding common stock of VPI.
On December 15, 1997, the Company consummated the acquisition of
Advantis Network & System Sdn Bhd, a Malaysian corporation and systems
integrator and distributor of communication equipment, pursuant to a
transaction by which Advantis became a wholly-owned subsidiary of
NHancement. The initial consideration payable to the Advantis shareholders
in connection with the acquisition was 300,000 shares of common stock of
NHancement ("NHancement Shares"), to be paid to each Advantis shareholder
pro rata proportional to his Advantis share ownership. During the due
diligence period provided for in the acquisition agreement, NHancement
uncovered an account receivable in the amount of Ringgit Malaysia 640,174
(approximately US$183,000 at the exchange rate in effect as of December 30,
1997, the date of filing of the initial report on Form 8-K regarding the
Advantis acquisition), the collectability of which NHancement determined
was in doubt. Pursuant to a Supplement to the acquisition agreement,
Advantis shareholders guaranteed that the receivable would be collected on
or before June 30, 1998. The Advantis shareholders may utilize their
NHancement Share holdings in satisfaction of their guarantee obligations.
Since the receivable was not collected by June 30, 1998, the Company has
initiated the process of recovering the guaranteed amount from the Advantis
shareholders. It is anticipated that such obligation will be satisfied, in
part, by the return to the Company of certain of the NHancement Shares.
The Advantis shareholders also have the opportunity to receive up to a
maximum of 230,000
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<PAGE> 11
additional NHancement Shares as contingent purchase consideration
("Contingent Purchase Consideration") as a consequence of the acquisition
if Advantis exceeds certain minimum profit levels for its next two fiscal
years ending March 31, 1998 and 1999 totaling approximately RM1.6 million
(about $380,000 US at current translation rates). All NHancement Shares to
be distributed to the Advantis shareholders pursuant to the Agreement will
be issued by NHancement in reliance upon Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act"), and will be subject to the
restrictions on transferability as imposed by the 1933 Act. In addition,
the first 300,000 NHancement Shares are subject to a lock-up provision
prohibiting transfer of fifty percent (50%) of the shares for one year
following the effective date, and prohibiting transfer of the remaining
fifty percent (50%) until February 4, 1999.
On June 22, 1998, the Company acquired all outstanding shares of common
stock of Infotel Technologies (Pte) Ltd, a Singapore corporation and system
integrator of infrastructure communications equipment products, providing
radar system integration, turnkey project management services and test
instrumentation, as well as a portfolio of communication equipment in Asia.
The consideration paid to the Infotel shareholders in connection with the
acquisition consisted of cash of S$3,780,000 (US$2,356,300 at a translation
rate of 1.62) and approximately 433,000 shares of Common Stock of
NHancement ("Acquisition Shares"). If the price per share of the Company's
Common Stock is less than $5.00 on the first anniversary of the Infotel
acquisition, 50% of the initial shares issued to the Infotel shareholders
is subject to adjustment and likewise 50% is subject to adjustment on the
second anniversary if the per share price is less than $5.00. Should the
Company's Common Stock price be below $5.00 per share on either of these
dates, the Infotel shareholders would be entitled to receive that number of
shares equal to the lesser of (i) one-half the initial shares valued at
$5.00 per share divided by the fair market value per share minus one-half
of the initial shares or (ii) one-half the initial shares valued at $5.00
per share divided by $2.75 (subject to adjustment for stock splits and the
like). At the current price per share of the Company's Common Stock, these
calculations would result in a significant number of additional shares
being issued to the Infotel shareholders. Additionally, the Infotel
shareholders have the opportunity to receive up to a maximum of S$3,200,000
(approximately US$1,844,000 at current rates) in additional cash payments
if Infotel exceeds certain minimum profit levels totaling S$1.6 million
(US$922,000) during the two year period ending June 30, 1999. Management
has recorded as additional purchase consideration $1,390,400 based on
Infotel's profits for the year ended June 30, 1998. All Acquisition Shares
were distributed to the Infotel shareholders pursuant to the Agreement were
issued by NHancement in reliance upon Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"), and are subject to restrictions on
transferability under the 1933 Act. In addition, the Acquisition Shares are
subject to a lock-up provision prohibiting transfer of fifty percent (50%)
of the shares for one year following the effective date of the initial
agreement, and prohibiting transfer of the remaining fifty percent (50%)
until the second anniversary of the effective date of the initial
agreement.
As of June 30, 1998, the purchase price of Infotel and excess of
cost over net assets acquired (`goodwill') recorded in connection with the
Infotel acquisition are summarized as follows:
<TABLE>
<S> <C>
Consideration:
Common stock - 433,000 shares subject to a share price guarantee $ 1,840,400
Cash 2,356,300
Accrued purchase consideration 1,390,400
-----------
Total consideration 5,587,100
Calculation of goodwill:
Net assets acquired (1) 3,849,000
Cost of acquisition (167,400)
-----------
3,681,600
-----------
Excess of cost over net assets acquired $ 1,905,500
===========
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
(1) Consists principally of the following :
Cash and cash equivalents $ 2,326,000
Accounts receivable 2,050,000
Inventories 1,651,000
Property and equipment 374,000
Other assets 101,000
Accounts payable and accrued expenses (2,014,000)
Other liabilities (639,000)
-----------
$ 3,849,000
===========
</TABLE>
(1) The Company is in the process of valuing the net assets acquired
from Infotel. Accordingly, the allocation of purchase price may be adjusted
in future periods.
4. INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed its IPO of 2,300,000 shares
of $0.01 par value Common Stock, of which 1,700,000 shares were sold by the
Company and 600,000 shares, representing a portion of the consideration for
the outstanding shares of VPI, were sold by a stockholder of the Company.
On February 11, 1997, the underwriters exercised an option to purchase from
the Company an additional 345,000 shares of Common Stock to cover
over-allotments. The Company raised approximately $6.5 million of funds,
net of underwriting commissions, printing costs, legal and accounting fees
and other offering expenses, totaling approximately $1,660,200, from the
offering (including the over-allotment shares) and did not receive any of
the proceeds from the sale of shares by the stockholder.
5. STOCK OPTIONS
During the three months ended June 30, 1998, no additional options of
the Company's Common Stock were granted.
6. FINANCING ACTIVITIES
On April 13, 1998, the Company signed a $3.0 million Series A
Convertible Preferred Stock financing agreement (the "Securities Purchase
Agreement"). Under the terms of the Securities Purchase Agreement, the
Company received $1,250,000 in April 1998 (less commissions and certain
other costs and expenses of approximately $202,600), and, subject to
satisfaction of certain conditions specified in the Securities Purchase
Agreement, as amended June 15, 1998, will receive $750,000 two (2) business
days after the Company obtains stockholder approval for the Preferred Stock
financing, $500,000 thirty days thereafter and the final $500,000 thirty
days thereafter. The Preferred Stock bears a 5% cumulative dividend and has
a liquidation preference equal to the original purchase price plus
cumulative but unpaid dividends. If at the time of any additional closing
date under the Securities Purchase Agreement, the average closing bid price
of the Common Stock for the five (5) trading days ending on the trading day
immediately before such closing date is less than $2.00 or the average
daily volume for a thirty day period falls below 20,000 shares, the
investors are not required to fund any remaining portion of the $3.0
million in excess of the first $1,250,000 investment. Further, if the five
day average closing bid price of the Company's common stock falls below
$2.00 per share, the Company has the option to redeem the Preferred Stock
at 118% of the original purchase price plus cumulative but unpaid
dividends. Any shares of Preferred Stock tendered for conversion prior to
delivery of the Company's notice of redemption shall not be affected by the
redemption notice and shall be converted into shares of Common Stock. As to
any shares with respect to which such conversion rights have not been
timely exercised, such conversion rights shall terminate upon delivery by
the Company of its notice of redemption. The Preferred Stock is convertible
into Common Stock at the
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<PAGE> 13
lesser of the five day average closing bid price at the time of signing or
75% of the five day average closing bid price at the time of each
conversion. The 25% conversion discount will be reflected as a preferred
stock dividend and will result in a $1.0 million decrease in the income or
increase in the loss applicable to Common Stock in computing the net
income/loss per share in the event the entire $3.0 million financing is
consummated. Through June 30, 1998, the Company has recorded a deemed
dividend of $416,700.
The Company entered into a bridge loan with the holders of the
Preferred Stock (the "Preferred Stockholders") and certain management
stockholders. NHancement used the funds in the aggregate amount of
$1,400,000 to complete the acquisition of Infotel. Interest is payable on
the promissory notes at a rate of 10% per annum. Funds loaned to the
Company by the Preferred Stockholders totaled $750,000. The notes payable
to the Preferred Stockholders provide for repayment on the earlier of the
closing of the next tranche of the Company's Preferred Stock in accordance
with the terms of the Securities Purchase Agreement, as amended, or 90 days
from the date of issuance. Additionally, the notes payable to the Preferred
Stockholders will be applied against the purchase price of the additional
Preferred Stock available for purchase under the Securities Purchase
Agreement, subject to receipt by the Company of certain stockholder
approvals.
Funds loaned to the Company by certain management stockholders
totaled $650,000. Of this amount, $125,000, $225,000 and $300,000 were
loaned to NHancement by Esmond T. Goei, Chairman of the Board and Chief
Executive Officer of the Company, Douglas S. Zorn, Executive Vice President
and Chief Financial Officer of the Company, and James S. Gillespie,
formerly the President of Voice Plus, Inc. and currently a member of the
Board of Directors of the Company, respectively. The notes payable to
management provide for repayment within 90 days from the date of the loan.
In the event of any partial repayment, partial repayments are to be
apportioned as follows: (i) the first $75,000 of any partial repayment is
to be paid first to Mr. Gillespie, (ii) the next $200,000 of any partial
repayment is to be paid equally to Mr. Gillespie and Mr. Zorn and (iii) the
remaining payments are to be pro rated equally among all three members of
management until these loans have been repaid in full.
7. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of BioFactors, VPI, Advantis, and Infotel for the six months
ended June 30, 1998 and 1997, as if the VPI, Advantis, and Infotel
acquisitions had occurred at the beginning of the respective periods, after
giving effect to certain adjustments, including the amortization of excess
of costs over net assets acquired and interest expense on notes payable to
common and preferred stockholders. The following unaudited pro forma
summary does not necessarily reflect the results of operations as they
would have been had the VPI, Advantis, and Infotel acquisitions occurred at
the beginning of the periods presented and is not necessarily indicative of
the results of operations for any future period.
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<PAGE> 14
<TABLE>
<CAPTION>
==================================================================================================
UNAUDITED
PRO FORMA
SIX MONTHS ENDED
JUNE 30,
--------
1997 1998
==================================================================================================
<S> <C> <C>
Net sales $ 13,766,800 $ 11,130,800
Net income (loss) $ 292,400 $ (270,400)
Less preferred stock dividends $ -- $ (430,100)
------------ ------------
Basic and diluted net income (loss) applicable to common stock $ 292,400 $ (700,500)
============ ============
Net income (loss) per common share $ 0.07 $ (0.11)
Weighted average common and common equivalent shares outstanding 4,485,700 4,885,200
================================================================================================
</TABLE>
7. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128,
Earnings Per Share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
NET INCOME (LOSS) - NUMERATOR 1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 72,100 $ 47,600 $ 114,700 $ (738,600)
Less: preferred stock dividends -- (430,100) -- (430,100)
==========================================================================================
Basic and diluted net loss
applicable to common stock $ 72,100 $ (382,500) $ 114,700 $(1,168,700)
==========================================================================================
COMMON SHARES - DENOMINATOR
Basic weighted average common
shares outstanding 4,228,500 4,506,300 3,519,300 4,471,400
Options and warrants 55,500 -- 95,300 --
==========================================================================================
Diluted weighted average common
shares outstanding 4,284,000 4,506,300 3,614,600 4,471,400
==========================================================================================
</TABLE>
Options and warrants to purchase 1,009,300 shares of Common Stock and
Preferred Stock convertible into 614,200 shares of Common Stock were
outstanding during the first half of 1998 but were not included in the
computation of diluted loss per common share because the effect would be
antidilutive.
9. SUBSEQUENT EVENTS
On July 27, 1998, a Preferred Stockholder converted all its remaining
outstanding Preferred Stock and accrued dividends (aggregating $312,500)
into 238,900 shares of the Company's Common Stock at a per share price of
$1.31. This brought his total number of Common shares converted from
Preferred Stock and associated dividend to 475,700 with an average price
per share of $1.33. As of the same date, the Company's other Preferred
Stockholder converted 1,300 shares of Preferred Stock and accrued dividends
of $1,900, into 100,000 shares of the Company's Common Stock at a per share
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<PAGE> 15
price of $1.31. This brought his total number of Common shares converted
from Preferred Stock and associated dividend to 163,500 with an average
price per share of $1.37. This Preferred Stockholder had 4,000 shares of
Preferred Stock remaining after the July 27th date.
On July 2, 1998, the Company issued options, pursuant to the Company's
Incentive Stock Option Plan, to purchase 257,000 shares of its common stock
to thirteen employees at fair market value ($2.0625 per share). These
option vest over four years with 25% vesting after one-year and the
remainder prorated over an additional 36 months.
Per the revised terms of the Infotel Technologies (Pte) Ltd acquisition
agreement, the Company was obligated to pay two former Infotel shareholders
an aggregate of S$500,000 (US$295,000 at current translation rates) if
their personal guarantees with two Singapore banks were not released by
July 22, 1998. On July 20, 1998, the last of these personal guarantees was
released. Accordingly, the Company has been relieved of any such payment
obligation.
Based on Management's recommendation, the Board of Directors of
NHancement Technologies Inc. approved on July 30, 1998 a resolution
changing the year-end of the Company and its subsidiaries to September 30.
An annual report on Form 10-KSB will be filed for the nine-month transition
period ending September 30, 1998.
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 VERSUS JUNE 30, 1997
The following contains forward-looking statements regarding future events or
the future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth herein.
GENERAL
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"). On February 3,
1997, prior to the February 4, 1997 consummation of the initial public offering
("IPO") of the Company's Common Stock, BFI merged with a subsidiary of
NHancement whereupon BFI, as the surviving corporation, became a wholly-owned
subsidiary of NHancement. The BFI merger was accounted for in a manner similar
to a pooling-of-interests. Also, on February 3, 1997, the Company acquired Voice
Plus, Inc. ("VPI" or "Voice Plus"), a California corporation, and a systems
integrator and national distributor of voice processing equipment, pursuant to a
transaction by which VPI merged with a subsidiary of NHancement, whereupon VPI,
as the surviving corporation, became a wholly-owned subsidiary of NHancement.
The VPI acquisition was accounted for as a purchase, and, accordingly, the
results of VPI's operations were included in the Company's financial statements
commencing February 3, 1997.
For financial accounting purposes, BFI was deemed to be the acquiror of VPI.
However, NHancement is considered to be the successor in interest of BFI and
references herein to the Company signify BFI and its successor NHancement.
Effective as of November 12, 1997, BioFactors, Inc., was merged with and
into Voice Plus, Inc., in a statutory merger intended to qualify, for federal
income tax purposes, as a reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended. Voice Plus was the surviving corporation in
the merger transaction with BioFactors, and the separate existence of BioFactors
ceased on the effective date of the merger. The operations of the combined
entity are being conducted under the name Voice Plus(R), which is headquartered
in Fremont, California. Voice Plus remains a wholly-owned subsidiary of
NHancement.
On December 15, 1997, NHancement purchased one hundred percent (100%) of the
shares of Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"). As a result of the acquisition, Advantis became a wholly-owned
subsidiary of NHancement. Advantis is a telecommunications systems integrator
located in Malaysia. The operations of the entity are being conducted under the
name of "Advantis Network & System Sdn Bhd," which is headquartered in Kuala
Lumpur, Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997.
On June 22, 1998, NHancement purchased one hundred percent (100%) of the
shares of Infotel Technologies (Pte) Ltd (`Infotel'), a Singapore corporation.
As a result of the acquisition, Infotel became a wholly-owed subsidiary of
NHancement. Infotel is an integrator of infrastructure communications equipment
products, providing radar system integration, turnkey project management
services and test instrumentation, as well as a portfolio of communication
equipment in Asia. The operations of the entity are being conducted under the
name of "Infotel Technologies (Pte) Ltd," which is headquartered in
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<PAGE> 17
Singapore. The acquisition was accounted for as a purchase, and, accordingly,
the results of Infotel's operations were included in the Company's financial
statements commencing June 22, 1998.
The business of NHancement is conducted by its operating company
subsidiaries: Voice Plus, Inc., Advantis Network & System Sdn Bhd, and Infotel
Technologies (Pte) Ltd. The financial data presented for the six months ended
June 30, 1997 includes results of operations for six months of BFI, five months
of VPI and did not include Advantis or Infotel. The financial data presented for
the six months ended June 30, 1998 includes six months' operating results of
BFI, VPI and Advantis, and eight days of Infotel.
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
=====================================================================================
SIX MONTHS ENDED
JUNE 30
-------------------
1997 1998
=====================================================================================
<S> <C> <C>
Net sales 100.0% 100.0 %
Cost of sales 53.0% 60.0 %
Gross profit 47.0% 40.0 %
Research and development 1.1% 0.0 %
Selling , marketing and administrative expenses 36.4% 52.3 %
Amortization of excess of cost over net assets acquired 6.0% 4.3 %
Income (loss) from operations 3.4% (16.7)%
Other income (expense) 0.1% 1.2 %
Income (loss) before income taxes 3.6% (15.5)%
Income taxes 0.7% 0.6 %
Net income (loss) 2.8% (16.0)%
=====================================================================================
</TABLE>
The Company's primary focus in the first half of 1998 was as an integrator
and distributor of voice processing and telecommunications systems for
businesses, which operations were conducted through the Company's VPI and
Advantis subsidiaries, and to a lesser extent, Infotel. Only five months of
VPI's sales were recorded in the Company's financial statements during 1997.
VPI's net sales for the second quarter of 1998 as a stand-alone business
increased 15% from $2.6 million for the three months ended June 30, 1997 to $3.0
million for the three months ended June 30, 1998. On a year-to-date basis, VPI's
net sales were substantially unchanged from a year ago. However, because 1997
includes only five months of sales and 1998 includes six months, sales were down
by almost $1 million due to the shortfall in the first quarter of 1998. VPI's
revenues historically are almost exclusively derived from the sale of Centigram
products, and in the fourth quarter of 1997, persistent rumors of Centigram's
intention to sell its Customer Premise Equipment ("CPE") business were
wide-spread in the marketplace. As a result of the uncertainty in the
marketplace concerning the Centigram product, customers for large Centigram
systems delayed making buying decisions that resulted in the Company's revenue
shortfall reported in the first quarter of 1998. Early in the second quarter of
1998, the uncertainty surrounding the Centigram product was resolved favorably
resulting in a resumption of several major customer orders and a return to
historical VPI sales levels. Revenues from maintenance, parts and small systems,
which have historically represented approximately 20% of VPI sales, during the
first half of 1998 remained at or above historical levels and are expected to
remain strong.
Based on the estimated future undiscounted operating cash flows of its
related business, the Company periodically evaluates the carrying value of
goodwill. Due to issues not known by management at the time of the VPI
acquisition, the estimated future undiscounted operating cash flows of VPI were
calculated to be less than those estimated at the time of its acquisition and
less than the carrying amount of the excess of cost over net assets acquired. On
December 31, 1997, the Company recorded an impairment loss of
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<PAGE> 18
$4,084,300, representing the difference between the carrying amounts of goodwill
over its estimated fair value. The remaining balance of the VPI goodwill is
$1,500,000 and the useful life was reduced from ten years to five years.
Existing customers will be faced with buying decisions that will often include
total replacements of their existing voice processing systems, such sales
opportunities are open for competitors to present other solutions and diminishes
much of the advantage that the current supplier has with the customer.
Management estimates future revenue growth in 1998 and 1999 due to our Year 2000
program which was implemented to identify potential customers with voice
processing systems which are not year 2000 compliant. Management believes that
after 1999, revenues for legacy systems will decline and that VPI revenues will
come increasingly from new technologies and products that are just now being
introduced to the marketplace. The Company is in the process of repositioning
the VPI subsidiary to take advantage of the new trends in the voice processing
industry, specifically the migration from legacy systems to the new NT
computer-based systems of the future. This transition required the addition of
several new management members and new technological capabilities within the VPI
subsidiary resulting in significant expense to the Company. In April of 1998,
the Company announced that James B. Linkous accepted the position of General
Manager of VPI and that James Gillespie, who was previously in that position,
became a part-time consultant to the Company. Mr. Linkous has been tasked with
strengthening the sales infrastructure and expanding VPI's product offering. He
is also expected to be a key player in integrating Voice Plus with NHancement's
growing operations in the U.S. and overseas.
The Company's Advantis subsidiary, a telecommunications system integrator
located, in Malaysia, was acquired on December 15, 1997. Net sales include six
months of Advantis' results in 1998. Advantis results are not included in 1997
data. On a stand-alone basis, net sales decreased from $0.6 million to $0.14
million for the second quarter 1998 versus the second quarter 1997. Due to the
current instability of the Malaysian currency and economy, new implementation
projects were delayed. Management expects near term revenues to remain sluggish
and well below historical levels with continued price pressures that will result
in low margins for the Advantis subsidiary. As a result of these negative
pressures, management expects Advantis sales levels to be only marginally higher
than the first half of 1998 with continuing losses narrowing to a break-even for
the fourth quarter of 1998. Further, management estimates that the Ringget and
the economy in Malaysia will continue to be weak well into 1999. Under the terms
of the Advantis acquisition agreement, this lower level of business and
corresponding balance sheet weakness has resulted in reducing the contingent
purchase price payable by the Company for Advantis. A total of 91,500 shares of
the Company's Common Stock held in escrow is being forfeited by Advantis
shareholders, and an additional 230,000 shares that are based on Advantis'
achieving certain profitability targets (approximately RM1.7 million or about
US$450,000 for 1998 and 1999) are in jeopardy of not being earned. Management
will continue to monitor the carrying value of the goodwill recorded in
connection with the Advantis acquisition given expected near-term and estimated
future cash flows. Should cash flows continue to be less than expected, an
impairment loss may need to be recorded in a future period.
The Company's newest subsidiary, Infotel Technologies, (Pte) Ltd, was
acquired on June 22, 1998. Infotel is located in Singapore, one of the strongest
economies in Asia. Net sales for the eight days (June 22 - June 30, 1998) were
$0.2 million. Although Singapore is forecasting zero growth for its economy for
1998, management expects the operations of Infotel to continue to be profitable
due to its blue chip customer base and position in the recession resistant
communications markets. Infotel has been profitable since its inception in 1984.
Infotel's annual revenues and profits for 1998 currently are projected to be
only slightly lower than 1997 levels with revenues of S$17,486 million
(US$10,861) and profits of S$1.15 million (US$675,000), due principally to the
weakness of the Singapore dollar.
The Company has decided to pursue a buyer for its FACTOR 1000 technology and
products, which generated no significant revenue in 1997 or 1998.
Gross margins in the first six months 1998 declined to 40.0% from 47.0% in
1997. VPI's gross
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<PAGE> 19
margin on a stand-alone basis increased during the second quarter of 1998 as
compared to the first quarter of 1998 from 39.8% to 45.2%. After a very weak
first quarter of 1998, margins returned to historical levels in the second
quarter of 1998, as fixed costs were absorbed over a larger revenue base in the
second quarter. The product costs related to VPI's revenues of 39.5% were
identical for the six month periods under comparison. Advantis' gross margin,
which was not included in the six-month period of 1997, was 107% of 1998 first
half sales, due to an inability to cover fixed costs during a period of
decreased sales volumes. The gross margin for Infotel was 48.1% of sales or
$113,000 for the eight days included in the current period.
The Company incurred no research and development expenses in the first half
of 1998 compared to $42,800 in the first half of 1997, as all research and
development activities relating to the FACTOR1000 technology were terminated
when the decision to sell this technology was made at the end of 1997.
Company-wide selling, marketing and administrative ("SM&A") expenses as a
percentage of net sales increased to 52.3% for first half of 1998 versus 36.4%
for the same period in 1997. However, on a quarterly basis, SM&A expenses as a
percent of net sales improved to 39.0% for the quarter compared to 52.3%
year-to-date. VPI on a stand-alone basis declined to 27.3% for the second
quarter compared to 71.7% for the first quarter, due primarily to the fixed cost
component of SM&A expenses being spread over a larger second quarter revenue
base. VPI's SM&A expenses as a percent of net revenue increased 3.0% when the
second quarter of 1998 is compared to the same period in 1997 due entirely to
increased salaries within the sales department. Corporate overhead costs in the
first half of 1998 increased by about $400,000 over the same period in the prior
year. This increase was due to the following: (i) professional fees increased
about $100,000 as a result of aborted acquisitions and financings, (ii)
increased costs of about $225,000 related to the additional reporting
requirements of a public company, and (iii) recruitment fees of $75,000 related
to new key employee hires in 1998. Total SM&A expenses for Advantis in the first
half of 1998 decreased by about $110,000 when compared to the same period in the
prior year, however as a percent of net revenue it continued to increase (7.4%
in 1997 versus 32.6% in 1998) as sales continued to decline. SM&A expense for
Advantis for the first six months of 1998 totaled $126,900, and these expenses
were not included in the operating results presented for 1997. SM&A for Infotel
totaled $51,000 for the eight day's its was owned by NHancement during the
reporting period, which was immaterial to the first half results in 1998.
No SM&A expenses were included for Infotel in the data presented for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complimentary businesses and products is an
element of the Company's business strategy, none of the proceeds of the IPO were
used specifically for the funding of future acquisitions. With the proceeds of
the IPO exhausted, if a cash payment in excess of available working capital is
required to make an acquisition, the Company will need to obtain additional debt
or equity financing. Debt financing may require the Company to pay significant
amounts of interest and principal payments, thus reducing the resources
available to expand its existing businesses. Equity financing may dilute the
Company's existing stockholders' interest in the assets or earnings of the
Company. There can be no assurance that the Company will be able to obtain
either debt or equity financing if and when it is needed for acquisitions or
general working capital purposes or that, if available, such financing will be
available on terms the Company deems acceptable. The inability of the Company to
obtain such financing will likely have a material adverse effect on the
Company's growth and acquisition strategy. The Company recently negotiated an
equity financing for $3.0 million, of which $1,250,000 (less $202,600 of costs
and expenses) had been received as of the date of the filing of this report,
with the remainder to be received subject to the terms of the Preferred Stock
financing and receipt of stockholder approval. Under the terms of the financing
the Preferred Stock is convertible into Common Stock at a 25% discount. This
conversion discount will result in a $1.0 million preferred stock dividend which
will result in a decrease in the income or increase in the loss applicable to
Common Stock in computing the net income or loss per
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<PAGE> 20
share in the event the entire $3.0 million financing is completed. Through June
30, 1998, the Company has recorded a deemed dividend of $416,700.
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on or about April 16, 1998, Nasdaq informed the Company
that it no longer met the requirements for continued listing on the Nasdaq
SmallCap Market System. Specifically, the Company failed to meet the
requirements of Nasdaq Marketplace Rule 4310(c)(2) which requires that an
issuer maintain (i) net tangible assets of two million dollars ($2,000,000);
(ii) market capitalization of thirty-five million dollars ($35,000,000); or
(iii) net income of five hundred thousand dollars ($500,000) in the most
recently completed fiscal year or in two of the last three most recently
completed fiscal years. This deficiency was remedied by the Company in April
1998 as a result of the initial closing of the Preferred Stock financing, as
reflected in the Company's unaudited financial statements as of April 30, 1998,
as filed with the Securities and Exchange Commission under a Form 8-K on May 21,
1998. The Company has met the requirements each month since April 30, 1998,
however, there can be no assurance that the Company will in fact meet these
requirements in any future period.
If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny stock" rules, and as a result, an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock. Although the Company currently meets
NASDAQ's listing requirements, should the Company fail to meet listing
requirements and become delisted it would have a serious impact on its ability
to raise funds in the future.
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<PAGE> 21
During the first six months of 1998, net cash used in operating activities
was $1.1 million, consisting primarily of the net loss, an increase in accounts
receivable and prepaid expenses offset by decreases in inventory and accounts
payable. Net cash provided by investing and financing activities totaled $2.33
million consisting of bridge loans of $1.4 million and $1.0 million in net
proceeds from Preferred Stock. At June 30, 1998, the Company's working capital
was $0.8 million, and cash and cash equivalents totaled $2.5 million. The
current ratio remained at 1.1 to 1 at June 30, 1998 which is comparable to the
prior quarter end.
As of June 30, 1998, the Company had outstanding interest bearing debt of
approximately $2.1 million inclusive of associated accrued interest.
The Company's management estimates that it will incur about $500,000 in
capital expenditures during the next 12 months, about $300,000 of which
represents hardware, software and implementation consulting related to the
ongoing implementation of Company-wide business systems. It is anticipated that
all major capital expenditures will be financed through equipment leases and,
except for approximately $200,000 related to implementation consulting, will not
require significant direct outlays of cash.
Based upon its present plans, management believes that operating cash flow,
available cash and available credit are adequate to meet the working capital
cash needs of the Company and to meet anticipated capital needs during the next
12 months. The Company has secured an account receivable credit facility within
its VPI subsidiary for up to $2.0 million, which it plans to replace by the end
of August 1998 with a new bank credit facility. The Company is also pursuing a
new bank line of credit for its Singapore subsidiary of about S$6.0 million
(US$3.5 million), which the Company anticipates will be completed in August
1998. Infotel currently has no debt and has about US$2.27 million in cash on its
balance sheet at June 30, 1998. As a result of the removal of the uncertainties
surrounding the future availability of the Centigram product and management's
positioning of the VPI subsidiary to focus on expanding its product offering and
its Year 2000 project, VPI has returned to profitability in the three months
ending June 30, 1998. Our smallest subsidiary, Advantis which operates in
Malaysia, is expected to experience sluggish revenues for the remainder of 1998,
while transitioning from small losses currently to break-even for the fourth
quarter of 1998. Our newest acquisition, Infotel is expected to show a small
revenue growth for the remainder of 1998, while maintaining profits at slightly
below historical levels. On a consolidated basis, the Company anticipates
remaining future quarters in the current fiscal year to be
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<PAGE> 22
profitable.
Although the Company intends to issue shares of Common Stock as its primary
method of financing acquisitions, it anticipates that additional funds will be
required to successfully implement its acquisition program, and it will use
various methods to finance acquisitions, including the payment of cash, for this
purpose.
As of June 30, 1998, the Company had a gross deferred tax asset of
approximately $3,072,000. Since the Company could not determine that it was more
likely than not that the gross deferred tax asset would be realized, a 100%
valuation allowance was provided.
YEAR 2000 COMPLIANCE
The Company has begun to conduct a review of its internal computer systems
to identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve any such problems. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Software programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to or
replacement of existing software, the Year 2000 problems will not pose
significant operational problems for the Company's domestic computer systems.
The Company believes that the costs associated with any such upgrade or
replacement of software will not be material, and that all such changes will be
implemented by the end of calendar year 1998. However, if such modifications are
not made in a timely manner, or are not made properly, the Company may be unable
to implement appropriate Year 2000 solutions, which could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
The Company distributes products from third party product equipment
manufacturers, some of which are susceptible to Year 2000 problems. During
fiscal year 1997, the Company initiated a review of the products its domestic
subsidiary, VPI, distributes to determine which, if any, are not capable of
recognizing the year 2000. Communications were initiated with all of the
manufacturers of such products to determine the nature and extent of any Year
2000 problems. Where potential computer problems of the Year 2000 products used
or distributed by the Company have been identified, these manufacturers have
stated that they have committed resources to resolving such problems prior to
year 2000. However, there can be no assurance that these manufacturers will, in
fact, timely complete the resolution of their Year 2000 problems or, even if
timely completed, that those solutions will be acceptable in the marketplace.
The solution to be provided by some manufacturers will involve a significant
upgrade cost to the end user, which may give rise to disputes and/or litigation
between the end user and the manufacturer, which may also involve the Company.
The costs of such possible disputes or litigation could be significant, thereby
resulting in a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
The Company has begun, but has not yet completed, its review of the internal
computer systems of Advantis and Infotel to identify the systems in each company
that are not Year 2000 compliant; thus, at this time the Company has not been
able to determine whether Year 2000 problems (if any) will pose a significant
operational problem for the computer systems of either of these two companies,
and whether those operational problems, if any, would result in a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows. Similarly, the Company has not yet begun its review of
third-party products distributed by Advantis or Infotel to determine the nature
and extent of Year 2000 problems, if any, with such product. As a result, the
Company is currently unable to determine whether there are any Year 2000
problems associated with such third-party products and, if so, whether the
manufacturers will be able to timely resolve any such problems. The Company also
has not been able to determine whether the legal systems of Malaysia and
Singapore would result in more or less litigation exposure to the Company and
its subsidiaries if there are disputes between the end user of a product
installed by either Advantis or Infotel, and the manufacturer.
ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board released its SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of comprehensive income and its components in the entity's
financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS No. 130 does not address issues of
recognition or measurement for comprehensive income and its components, and
therefore, its implementation on January 1, 1998 had no impact on the financial
condition or results of operations of the Company.
The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
Statement, which is also effective for fiscal years beginning after December 15,
1997, requires reporting of financial and descriptive information about
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Management is in the process of
analyzing which subsidiaries qualify as reportable operating segments under SFAS
No. 131 and has been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosure. Results of operations and financial
position, however, are unaffected by implementations of this standard.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 Employer's Disclosures about Pensions and Other Post Retirement Benefits.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
post retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when previous related accounting standards
were issued. SFAS No. 132 is effective for financial statements for fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated unless the information is not readily available, in
which case the notes to the financial statements should include all available
information and a description of the information not available. Management
believes that the Company's current financial statement disclosures do not need
to be modified based upon current operations. Results of operations and
financial position are unaffected by implementation of this standard.
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging
-22-
<PAGE> 23
instrument, the gain or loss is recognized in income in the period of change.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. However, in light of the
recent acquisitions of Advantis and Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.
-23-
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c)
<TABLE>
<CAPTION>
RECENT SALES OF UNREGISTERED SECURITIES
TITLE OF AGGREGATE FORM OF
DATE OF NHANCEMENT NUMBER OF PURCHASE CONSIDER-
CLASS OF PURCHASERS (1) SALE SECURITIES SHARES PRICE ATION
----------------------- ---- ---------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Two purchasers in the 04/13/98 Series A 1,250 (2) (2)
Company's Private Placement Convertible
Preferred Stock
Five Holders of Capital Stock 06/22/98 Common Stock 433,024 (3) (3)
of Infotel
</TABLE>
- -----------------------------------------------
(1) The sales of securities to, and the exchanges of securities with, the
individuals identified in the table above were made in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"), and/or Regulation D promulgated thereunder.
(2) On April 13, 1998, the Company closed the initial tranche of a
$3,000,000 private placement of its Series A Convertible Preferred
Stock. At such closing, the investors purchased a total of 12,500
shares of the Company's Series A Convertible Preferred Stock for an
aggregate cash purchase price of $1,250,000. Subject to stockholder
approval and certain additional conditions relating to the future
stock price and trading volume of the Company's Common Stock, the
investors are obligated to purchase additional shares of the Company's
Series A Preferred Stock as follows: 7,500 shares two (2) business
days after the date the Company obtains stockholder approval of the
issuance of additional shares of Series A Preferred Stock (the "First
Additional Tranche"), 5,000 shares upon the date which is thirty (30)
calendar days after the closing of the First Additional Tranche (the
"Second Additional Tranche"), and 5,000 shares upon the date which is
thirty (30) calendar days after the closing of the Second Additional
Tranche. The Preferred Stock is convertible into shares of Common
Stock at the lesser of (i) the average closing bid price of the Common
Stock for the five trading days ending on the signing of the
Securities Purchase Agreement or (ii) 75% of the five (5) day average
closing bid price at the time of each requested conversion. At any
time prior to conversion, the Company has the option under the
Certificate of Designations, as amended, relating to such Preferred
Stock, to redeem the outstanding Preferred Stock, in whole or part, at
a redemption price of $118.00 per share if the five (5) day average
closing bid price of the Company's Common Stock falls below $2.00 per
share.
(3) On June 22, 1998, the Company consummated the acquisition of Infotel
Technologies Pte Ltd ("Infotel") pursuant to which the Company
acquired all of the issued and outstanding shares of Infotel for
consideration consisting of cash in the amount of S$3,780,000 (U.S.
$2,356,300 at a translation rate of $1.62) and 433,024 shares of
Common Stock of the Company paid to each of the five Infotel
shareholders pro rata proportional to his Infotel share ownership.
Additionally, the Infotel shareholders have the opportunity to receive
up to maximum of S$3,200,000 (approximately U.S. $1,844,000 at current
rates) in additional cash payments if Infotel exceeds certain minimum
profit levels for its next two (2) fiscal years ending June 30, 1998
and 1999.
(d) On February 4, 1997, the Company and Chatfield Dean & Company, its
underwriter, completed an initial public offering of 2,300,000 shares of
$0.01 par value Common Stock, of which 1,700,000 shares were sold by the
Company and 600,000 shares, representing a portion of the consideration
for the outstanding shares of VPI, were sold by a stockholder of the
Company (Commission file number 333-15563). On February 11, 1997, the
underwriters exercised an option to purchase from the Company an
additional 345,000 shares of Common Stock to cover over-allotments. The
use of proceeds by the Company through June 30, 1998 was as follows
(amounts are actual unless indicated as estimates):
-24-
<PAGE> 25
<TABLE>
<S> <C>
Gross Proceeds to the Company $8,180,000
Underwriters Discounts and Commissions 572,600
Underwriters Non-accountable Expenses 245,400
Other Expenses 831,700
----------
Total Expenses 1,649,700
----------
Net Offering Proceeds to the Company $6,530,300
==========
Use of Net Offering Proceeds:
Purchase and installation of equipment $ 220,000
Repayment of Indebtedness 2,485,400
Repayment of Indebtedness to Affiliates 391,100
Bonuses to Officers 250,000
Secured Loans ($60,000 to Officer) 360,000
Working Capital (estimated) 2,823,800
Cash in Banks $ --
==========
</TABLE>
ITEM 5. OTHER INFORMATION
As described in the footnotes to the unaudited financial statements
for the quarter ended June 30, 1998, the Company's Board of Directors has
approved a change in fiscal year end from December 31 to September
30. Accordingly, the Company's 1999 fiscal year will commence on October
1, 1998.
However, the Company has not yet scheduled a date for its 1998 Annual
Meeting of Stockholders, which is expected to be held subsequent to
September 30, 1998 and prior to December 31, 1998. Accordingly, any
stockholder proposals submitted pursuant to Rule 14a-8 of the Securities
Exchange Act of 1934, as amended, for inclusion in the Proxy Statement
relating to the Company's 1998 Annual Meeting of Stockholders or outside
the processes set forth in such Rule and intended to be presented at the
Company's 1998 Annual Meeting of Stockholders, must be received by the
Company at its offices at 39420 Liberty Street, Suite 250, Fremont,
California 94538, a reasonable time before the Company mails the proxy
materials for such meeting to its stockholders. All such proposals must
additionally meet the stockholder eligibility and other requirements of
the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of the Quarterly Report on Form
10-QSB
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
2.1 Securities Purchase Agreement, dated as of April 13, 1998, by and
among the Company, The Endeavour Capital Fund S.A. and AMRO
INTERNATIONAL S.A., incorporated by reference to Exhibit 10.29 to
the Company's Form 10-KSB, SEC File No. 0-21999, as filed with
the Securities and Exchange Commission on April 15, 1998.
2.2 Agreement relating to the sale and purchase of 500,000 ordinary
shares in the Capital of Infotel Technologies (Pte) Ltd
("INFOTEL"), dated as of January 19, 1998, by and between the
Company and the stockholders of Infotel (the "SALE AGREEMENT"),
incorporated by reference to Exhibit 2.1 contained in the
Company's Registration Statement on Form S-3 (Commission File No.
333-52709), as initially filed with the Securities and Exchange
Commission on May 14, 1998.
2.3 Letter agreement amending the Sale Agreement, dated as of April
2, 1998, by and between the Company and the stockholders of
Infotel ("SUPPLEMENT NO. 1"), incorporated by reference to
Exhibit 2.2 contained in the Company's Registration Statement on
Form S-3 (Commission File No. 333-52709), as initially filed with
the Securities and Exchange Commission on May 14, 1998.
</TABLE>
-25-
<PAGE> 26
<TABLE>
<S> <C>
2.4 Form of letter agreement amending the Sale Agreement, as amended
by Supplement No. 1, dated as of April 22, 1998, by and between
the Company and the stockholders of Infotel ("SUPPLEMENT NO. 2"),
incorporated by reference to Exhibit 2.3 contained in the
Company's Registration Statement on Form S-3 (commission File No.
333-52709), as initially filed with the Securities and Exchange
Commission on May 14, 1998.
2.5 Letter agreement amending the Sale Agreement, as amended by
Supplement No. 1 and Supplement No. 2, dated as of June 22, 1998,
by and between the Company and the stockholders of Infotel,
incorporated by reference to Exhibit 2.4 contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
3.1 Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on January 27, 1997, as amended
by Certificate of Designations, as filed with the Delaware
Secretary of State on April 9, 1998, as further amended by
Amended Certificate of Designations, as filed with the Delaware
Secretary of State on April 13, 1998, incorporated by reference
to the document bearing the same exhibit number as contained in
the Company's Form 10-KSB, as filed with the Securities and
Exchange Commission on April 15, 1998.
3.2 Amended and Restated Bylaws, incorporated by reference to the
document bearing the same exhibit number as contained in
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and
Exchange Commission on January 13, 1997.
4.1 Form of certificate evidencing common Stock, $.01 par value, of
the Company, incorporated by reference to the document bearing
the same exhibit number as contained in Registrant's Registration
Statement on Form SB-2 (Commission File No. 333-15563), as filed
with the Securities and Exchange Commission on November 5, 1996.
4.2 Form of Series A Preferred Stock Certificate, incorporated by
reference to Exhibit 4.5 to the Company's Form 10-KSB, SEC File
No. 0-21999, as filed with the Securities and Exchange Commission
on April 15, 1998.
10.1 Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to AMRO
INTERNATIONAL S.A. ("AMRO"), incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.2 Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to Endeavour
Capital Fund S.A. ("ENDEAVOUR"), incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.3 Letter agreement, dated as of June 15, 1998, amending Securities
Purchase Agreement, dated as of April 13, 1998, by and among the
Company, AMRO and Endeavour, incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.4 Letter agreement, dated as of June 12, 1998, by and among the
Company, Esmond T. Goei, Douglas S. Zorn and James S. Gillespie,
incorporated by reference to the document bearing the same
exhibit number as contained in the Company's Form 8-K, as filed
with the Securities and Exchange Commission on July 7, 1998.
</TABLE>
-26-
<PAGE> 27
10.5 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $125,000 payable by the Company to Esmond T.
Goei, incorporated by reference to the document bearing the same
exhibit number as contained in the Company's Form 8-K, as filed
with the Securities and Exchange Commission on July 7, 1998.
10.6 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $225,000, payable by the Company to Douglas
S. Zorn, incorporated by reference to the document bearing the
same exhibit number as contained in the Company's Form 8-K, as
filed with the Securities and Exchange Commission on July 7,
1998.
10.7 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $300,000, payable by the Company to James S.
Gillespie, incorporated by reference to the document bearing the
same exhibit number as contained in the Company's Form 8-K, as
filed with the Securities and Exchange Commission on July 7,
1998.
10.8 Form of Escrow Instructions related to Securities Purchase
Agreement, dated as of April 13, 1998, incorporated by reference
to Exhibit 10.30 to the Company's Form 10-KSB, SEC File No.
0-21999, as filed with the Securities and Exchange Commission on
April 15, 1998.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K dated April 13, 1998 was filed with the Commission
on May 21, 1998 reporting matters under Item 5 (Other Events). The Report
contained the Company's Unaudited Consolidated Balance Sheet as of April 30,
1998 and Unaudited Consolidated Statement of Operations for the Four Months
Ended April 30, 1998.
-27-
<PAGE> 28
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NHANCEMENT TECHNOLOGIES INC.
By: /s/ Esmond T. Goei
--------------------------------------
Date: September 8, 1998 Esmond T. Goei
Chairman of the Board,
Chief Executive Officer and President
By: /s/ Douglas S. Zorn
--------------------------------------
Date: September 8, 1998 Douglas S. Zorn
Executive Vice President,
Treasurer and Chief Financial Officer
-28-
<PAGE> 29
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
2.1 Securities Purchase Agreement, dated as of April 13, 1998, by and
among the Company, The Endeavour Capital Fund S.A. and AMRO
INTERNATIONAL S.A., incorporated by reference to Exhibit 10.29 to
the Company's Form 10-KSB, SEC File No. 0-21999, as filed with
the Securities and Exchange Commission on April 15, 1998.
2.2 Agreement relating to the sale and purchase of 500,000 ordinary
shares in the Capital of Infotel Technologies (Pte) Ltd
("INFOTEL"), dated as of January 19, 1998, by and between the
Company and the stockholders of Infotel (the "SALE AGREEMENT"),
incorporated by reference to Exhibit 2.1 contained in the
Company's Registration Statement on Form S-3 (Commission File No.
333-52709), as initially filed with the Securities and Exchange
Commission on May 14, 1998.
2.3 Letter agreement amending the Sale Agreement, dated as of April
2, 1998, by and between the Company and the stockholders of
Infotel ("SUPPLEMENT NO. 1"), incorporated by reference to
Exhibit 2.2 contained in the Company's Registration Statement on
Form S-3 (Commission File No. 333-52709), as initially filed with
the Securities and Exchange Commission on May 14, 1998.
2.4 Form of letter agreement amending the Sale Agreement, as amended
by Supplement No. 1, dated as of April 22, 1998, by and between
the Company and the stockholders of Infotel ("SUPPLEMENT NO. 2"),
incorporated by reference to Exhibit 2.3 contained in the
Company's Registration Statement on Form S-3 (commission File No.
333-52709), as initially filed with the Securities and Exchange
Commission on May 14, 1998.
2.5 Letter agreement amending the Sale Agreement, as amended by
Supplement No. 1 and Supplement No. 2, dated as of June 22, 1998,
by and between the Company and the stockholders of Infotel,
incorporated by reference to Exhibit 2.4 contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
3.1 Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on January 27, 1997, as amended
by Certificate of Designations, as filed with the Delaware
Secretary of State on April 9, 1998, as further amended by
Amended Certificate of Designations, as filed with the Delaware
Secretary of State on April 13, 1998, incorporated by reference
to the document bearing the same exhibit number as contained in
the Company's Form 10-KSB, as filed with the Securities and
Exchange Commission on April 15, 1998.
3.2 Amended and Restated Bylaws, incorporated by reference to the
document bearing the same exhibit number as contained in
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and
Exchange Commission on January 13, 1997.
4.1 Form of certificate evidencing common Stock, $.01 par value, of
the Company, incorporated by reference to the document bearing
the same exhibit number as contained in Registrant's Registration
Statement on Form SB-2 (Commission File No. 333-15563), as filed
with the Securities and Exchange Commission on November 5, 1996.
</TABLE>
-29-
<PAGE> 30
<TABLE>
<S> <C>
4.2 Form of Series A Preferred Stock Certificate, incorporated by
reference to Exhibit 4.5 to the Company's Form 10-KSB, SEC File
No. 0-21999, as filed with the Securities and Exchange Commission
on April 15, 1998.
10.1 Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to AMRO
INTERNATIONAL S.A. ("AMRO"), incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.2 Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to Endeavour
Capital Fund S.A. ("ENDEAVOUR"), incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.3 Letter agreement, dated as of June 15, 1998, amending Securities
Purchase Agreement, dated as of April 13, 1998, by and among the
Company, AMRO and Endeavour, incorporated by reference to the
document bearing the same exhibit number as contained in the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on July 7, 1998.
10.4 Letter agreement, dated as of June 12, 1998, by and among the
Company, Esmond T. Goei, Douglas S. Zorn and James S. Gillespie,
incorporated by reference to the document bearing the same
exhibit number as contained in the Company's Form 8-K, as filed
with the Securities and Exchange Commission on July 7, 1998.
10.5 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $125,000 payable by the Company to Esmond T.
Goei, incorporated by reference to the document bearing the same
exhibit number as contained in the Company's Form 8-K, as filed
with the Securities and Exchange Commission on July 7, 1998.
10.6 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $225,000, payable by the Company to Douglas
S. Zorn, incorporated by reference to the document bearing the
same exhibit number as contained in the Company's Form 8-K, as
filed with the Securities and Exchange Commission on July 7,
1998.
10.7 Promissory Note, dated as of June 12, 1998, in the original
principal amount of $300,000, payable by the Company to James S.
Gillespie, incorporated by reference to the document bearing the
same exhibit number as contained in the Company's Form 8-K, as
filed with the Securities and Exchange Commission on July 7,
1998.
10.8 Form of Escrow Instructions related to Securities Purchase
Agreement, dated as of April 13, 1998, incorporated by reference
to Exhibit 10.30 to the Company's Form 10-KSB, SEC File No.
0-21999, as filed with the Securities and Exchange Commission on
April 15, 1998.
27.0 Financial Data Schedule
</TABLE>
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,503
<SECURITIES> 0
<RECEIVABLES> 5,741
<ALLOWANCES> 736
<INVENTORY> 1,958
<CURRENT-ASSETS> 10,823
<PP&E> 1,784
<DEPRECIATION> 680
<TOTAL-ASSETS> 16,726
<CURRENT-LIABILITIES> 10,051
<BONDS> 0
0
688
<COMMON> 52
<OTHER-SE> 5,752
<TOTAL-LIABILITY-AND-EQUITY> 16,726
<SALES> 4,611
<TOTAL-REVENUES> 4,611
<CGS> 2,767
<TOTAL-COSTS> 2,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (713)
<INCOME-TAX> 26
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (858)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
