<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
NHancement Technologies Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPIES
NHANCEMENT TECHNOLOGIES INC.
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 6, 1998
To Our Stockholders:
PLEASE TAKE NOTICE that a Special Meeting (the "SPECIAL MEETING") of
Stockholders of NHancement Technologies Inc. (the "COMPANY"), will be held on
July 6, 1998 at 9:00 a.m. P.D.T. at the principal offices of the Company located
at 39420 Liberty Street, Suite 250, Fremont, California 94538, for the following
purposes:
1. To consider and vote upon a proposal to approve the issuance of 30,000
shares of Series A Convertible Preferred Stock of the Company, $0.01 par
value per share, pursuant to a Securities Purchase Agreement entered into
between the Company and certain purchasers.
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Stockholders of record at the close of business on May 11, 1998 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. Any stockholder attending the Special Meeting may vote in person, even
if such stockholder previously signed and returned a proxy.
By Order of the Board of Directors
Douglas S. Zorn
Executive Vice President, Chief
Financial
Officer, Treasurer and Secretary
Fremont, California
June , 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 3
PRELIMINARY COPIES
NHANCEMENT TECHNOLOGIES INC.
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
JULY 6, 1998
The accompanying proxy is solicited by the Board of Directors of NHancement
Technologies Inc., a Delaware corporation ("NHANCEMENT" or the "COMPANY"), for
use at the Company's Special Meeting of Stockholders (the "SPECIAL MEETING") to
be held July 6, 1998, or any adjournment thereof, for the purposes set forth in
the accompanying Notice of Special Meeting. The date of this Proxy Statement is
June , 1998, the approximate date on which this Proxy Statement and the
accompanying form of proxy were first sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting stockholders by mail through its regular employees, the Company will
request banks and brokers, and other custodians, nominees and fiduciaries, to
solicit their customers who have stock of the Company registered in the names of
such persons and will reimburse them for their reasonable, out-of-pocket costs.
The Company may use the services of its officers, directors, and others to
solicit proxies, personally or by telephone, without additional compensation.
Subject to the following adjustments, only stockholders of record as of the
close of business on May 11, 1998 (the "RECORD DATE"), will be entitled to vote
at the Special Meeting and any adjournment thereof. As of that date, according
to the Company's transfer agent, there were 4,907,523 shares of Common Stock of
the Company, par value $0.01 per share ("COMMON STOCK"), issued and outstanding
and twelve thousand five hundred (12,500) shares of Series A Convertible
Preferred Stock, par value $0.01 per share ("PREFERRED STOCK"), issued and
outstanding. The number of shares of Common Stock available for voting at the
Special Meeting totals 4,436,500. The difference between the above and the
number of issued and outstanding shares is attributable to the exclusion of an
aggregate of 524,478 shares held in escrow in connection with the Company's
acquisition of Advantis Network & System Sdn Bhd and the Company's pending
acquisition of Infotel Technologies Pte Ltd and the addition of 53,455 shares
issuable to former BioFactors, Inc. stockholders pursuant to the merger of
BioFactors, Inc. into a wholly-owned subsidiary of the Company during 1997.
Stockholders may vote in person or by proxy. Each holder of shares of Common
Stock available for voting is entitled to one (1) vote for each share of stock
held on the proposal presented in this Proxy Statement. The holders of Preferred
Stock shall vote with the holders of Common Stock as a single class, with each
share of Preferred Stock entitled to the number of votes that he or she would
have if such shares were converted into Common Stock as of the Record Date. The
Company's By-Laws provide that one-third of all of the shares of the stock
entitled to vote, whether present in person or represented by proxy, shall
constitute a quorum for the transaction of business at the meeting. Abstentions
and broker non-votes will be counted in determining the number of shares present
for purposes of establishing a quorum for the transaction of business, but will
not be voted in favor of the proposal and will have the same effect as a vote
against the proposal.
Approval of the transaction described in the proposal set forth in this
Proxy Statement (the "PROPOSAL") will require the affirmative vote of a majority
of the shares of the Company's Preferred Stock and Common Stock, voting together
as a single class, present or represented at the Special Meeting. Esmond T.
Goei, Douglas S. Zorn, James S. Gillespie, Gary L. Nemetz and Santanu Das,
directors and principal stockholders of the Company, have entered into
agreements with the purchasers under that certain Securities Purchase Agreement
described in the Proposal pursuant to which such stockholders have agreed to
vote an aggregate of 1,144,293 shares of the Company's Common Stock in favor of
the Proposal. In addition, The Endeavour
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Capital Fund S.A. and AMRO INTERNATIONAL S.A. (collectively, the "INVESTORS"),
as the holders in the aggregate of one hundred percent (100%) of the outstanding
shares of Preferred Stock, have also indicated their intention to vote all
shares over which they exercise voting control in favor of the Proposal. The
Investors are the sole purchasers under the Securities Purchase Agreement
described in the Proposal set forth in this Proxy Statement and acquired their
Preferred Stock upon the initial closing under such Agreement. Under the
Company's Certificate of Designations, as amended, relating to the Preferred
Stock, the Investors are entitled to that number of votes equal to the number of
votes they would have if their shares of Preferred Stock were converted into
Common Stock as of the Record Date (i.e., 583,516 shares). Accordingly,
stockholders holding in the aggregate securities representing 34.4% of the
voting power of the Company's securities have already agreed to vote in favor of
the Proposal.
All valid proxies received prior to the meeting will be voted. All shares
represented by a proxy will be voted, and where a stockholder specifies by means
of the proxy a choice with respect to any matter to be acted upon, the shares
will be voted in accordance with the specification so made. If no choice is
indicated on the proxy, the shares will be voted in favor of the proposal. A
stockholder giving a proxy has the power to revoke his or her proxy, at any time
prior to the time it is voted, by delivering to the Secretary of the Company a
written instrument revoking the proxy or a duly executed proxy with a later
date, or by attending the meeting and voting in person.
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<PAGE> 5
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Preferred Stock as of April 30,
1998, by (a) each person known to the Company to own beneficially more than 5%
of the Company's Common Stock and Preferred Stock, (b) each of the Company's
directors, (c) the Company's Chief Executive Officer and the four other most
highly compensated executive officers of the Company for the fiscal year ended
December 31, 1997, whose salary and incentive compensation for the fiscal year
ended December 31, 1997 exceeded $100,000, and (d) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- PREFERRED STOCK
BENEFICIALLY OWNERSHIP BENEFICIALLY OWNERSHIP
NAMES AND ADDRESSES OWNED(1) %(1) OWNED %(1)
------------------- ------------ --------- --------------- ---------
<S> <C> <C> <C> <C>
James S. Gillespie........................... 815,000(2) 18.3% -- --
198 Country Club Drive
Incline Village, Nevada 89451
Esmond T. Goei............................... 404,849(3) 8.6% -- --
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Douglas S. Zorn.............................. 383,097(4) 8.2% -- --
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Gary L. Nemetz............................... 132,726(5) 2.9% -- --
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025
Santanu Das.................................. 33,593(6) * -- --
14 Hunter Ridge Road
Monroe, Connecticut 06468
James H. Boyle............................... -- * -- --
4564 Daffodil Trail
Plano, Texas 75093
The Endeavour Capital Fund S.A............... 311,526(7) 6.6% 6,250 50.0%
c/o Endeavour Management Inc.
14/14 Divrei Chaim St
Jerusalem 94479 Israel
AMRO INTERNATIONAL S.A....................... 311,526(8) 6.6% 6,250 50.0%
50 ULTRA FINANCE
Gross Munster Platz 26
Zurich LH 8022
Switzerland
Directors and Executive Officers............. 1,779,264(9) 35.1% 12,500 100.0%
as a Group (9 persons)
</TABLE>
- ---------------
* Less than 1%
(1) In performing all calculations above, the number of issued and outstanding
shares excludes 91,454 shares held in escrow in connection with the
Company's acquisition of all the issued and outstanding shares of the
capital stock of Advantis Network & System Sdn Bhd, a Malaysian
corporation, and 433,024 shares held in escrow in connection with the
Company's pending acquisition of all the issued and outstanding shares of
capital stock of Infotel Technologies Pte Ltd, a Singapore corporation.
Such number includes 53,455 shares of the Company's Common Stock issuable
to former BioFactors, Inc. ("BFI") stockholders pursuant to the merger of
BFI into a wholly-owned subsidiary of the Company on February 3, 1997.
(2) Includes warrants to purchase 27,500 shares of Common Stock.
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(3) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 210,417 shares of Common Stock, and
warrants to purchase 51,518 shares of Common Stock.
(4) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 182,285 shares of Common Stock, and
warrants to purchase 61,375 shares of Common Stock.
(5) Includes 46,025 shares beneficially owned by Admiral Capital Corporation, as
to which Mr. Nemetz has sole voting and investment power, options that are
presently exercisable or that will become exercisable within 60 days to
purchase 8,438 shares at an exercise price of $4.00 per share, 1,563 shares
at $3.50 per share and warrants to purchase 55,000 shares at $4.80 per
share.
(6) Includes a warrant to purchase 26,875 shares of Common Stock.
(7) Represents the number of shares of Common Stock receivable upon conversion
of the Preferred Stock held by The Endeavour Capital Fund S.A. assuming
conversion as of April 30, 1998.
(8) Represents the number of shares of Common Stock receivable upon conversion
of the Preferred Stock held by AMRO INTERNATIONAL S.A. assuming conversion
as of April 30, 1998.
(9) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 402,703 shares of Common Stock and
warrants to purchase 222,269 shares of Common Stock.
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PROPOSAL
TO APPROVE THE ISSUANCE OF 30,000 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
Securities Purchase Agreement
The Board of Directors has authorized the issuance of a total of 30,000
shares of Series A Convertible Preferred Stock ("PREFERRED STOCK") to the
Investors at a price of $100.00 per share pursuant to a Securities Purchase
Agreement executed as of April 13, 1998 (the "SECURITIES PURCHASE AGREEMENT"). A
copy of the Securities Purchase Agreement is attached as Annex A to this Proxy
Statement. The Securities Purchase Agreement provides that the Preferred Stock
shall be issued to the Investors in the following amounts and at the following
times: 12,500 shares upon the execution of the Securities Purchase Agreement,
which occurred on April 13, 1998, 5,000 shares upon the date which is sixty (60)
calendar days after the effective date of a Registration Statement on Form S-3
(the "REGISTRATION STATEMENT") filed with the Securities and Exchange Commission
(the "SEC") to register the Common Stock into which the Preferred Stock may
convert, which became effective on June 2, 1998; 5,000 shares upon the date
which is ninety (90) calendar days after the effective date of the Registration
Statement; and 7,500 shares upon the date which is one hundred twenty (120)
calendar days after the effective date of the Registration Statement.
After the purchase of the of the initial 12,500 shares, the Investors are
not required to purchase any additional Preferred Stock 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 trading volume for the Common Stock for the thirty (30)
consecutive trading days ending the day before such closing date is less than
twenty thousand (20,000) shares.
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-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 (the "CERTIFICATE OF DESIGNATIONS"),
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 Market Price
(as defined in the Certificate of Designations) of the Company's Common Stock
falls below $2.00 per share. A copy of the Certificate of Designations is
attached as Annex B to this Proxy Statement.
The holders of Preferred Stock, for those shares of Preferred Stock which
have not otherwise been converted to Common Stock, will be entitled to receive
when and as declared by the Board of Directors of the Company, dividends at a
rate of five percent per annum. Such dividends shall be cumulative and shall be
payable within sixty (60) days following the end of each fiscal year of the
Company. Currently, the Board of Directors of the Company does not anticipate
declaring any dividends with respect to either the Preferred Stock or Common
Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of shares of Preferred Stock, (which have not otherwise been
converted to Common Stock) will be entitled to be paid out of the assets of the
Company available for distribution to all stockholders $100.00 per share,
adjusted for stock splits, combinations or other recapitalizations of the
Preferred Stock, plus an amount equal to all declared and unpaid dividends,
prior to any amounts being paid to the holders of Common Stock.
Each share of Preferred Stock is entitled to that number of votes equal to
the largest number of whole shares of Common Stock into which such Preferred
Stock may be converted as of the close of business on the record date fixed for
any meeting of the stockholders of the Company. In general, the holders of
Preferred Stock and Common Stock vote together as single class on all matters.
However, the approval of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the Preferred Stock outstanding at the time of any vote,
voting as a single, separate class, must be obtained before the Company may (i)
purchase, redeem or acquire any of its Common Stock or other equity security
(other than the redemption of Preferred Stock pursuant to
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the Company's Certificate of Designations, repurchases of shares from directors,
officers, employees or consultants of the Company, or of any subsidiary of the
Company pursuant to agreements under which the Company has the option, but not
the obligation, to repurchase such shares); (ii) authorize or issue, or obligate
itself to issue, any equity securities senior to the Preferred Stock as to
dividend or liquidation preferences; or (iii) amend the Company's Certificate of
Incorporation to reduce the dividend rate on the Preferred Stock or exchange the
seniority rights of the holders of such Preferred Stock as to the payment of
dividends, (iv) reduce the amount payable to the holders of the Preferred Stock
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company, (v) change the relative seniority of the liquidation preferences of the
holders of such Preferred Stock, or (vi) cancel or modify the conversion rights
provided for in the Company's Certificate of Designations with respect to the
Preferred Stock.
Under the terms of the Securities Purchase Agreement, the Company is
subject to certain cash penalties if it is unable to deliver to the Investors
the Common Stock receivable upon conversion of the Preferred Stock in a timely
fashion (i.e., from $100 to $200 per day for any day beyond the specified
delivery date). Similarly, in the event the Company is unable to issue the
shares of Common Stock receivable upon conversion of the Preferred Stock as a
result of the provisions of the Company's Certificate of Incorporation or
applicable securities market regulations, the Company may also be required,
among other things, to redeem such unconverted Preferred Stock at a price based
on a percentage or multiple of the highest closing bid price for the Company
Common Stock during the period commencing upon such a redemption request and
ending upon the actual redemption date.
Pursuant to the terms of the Registration Right Agreement (the
"REGISTRATION RIGHTS AGREEMENT") entered into concurrently with the Securities
Purchase Agreement by and among the Company and the Investors, the Company was
required to prepare and file a registration statement with the SEC covering the
shares of Common Stock receivable upon conversion of the Preferred Stock within
twenty-one (21) calendar days after the initial closing of the Securities
Purchase Agreement. In this regard, the Company is subject to cash penalties if
it fails to file a registration statement in proper form with the SEC within the
time period specified in the Registration Rights Agreement or is unable to have
such registration statement declared effective within the time periods specified
in the Registration Rights Agreement. Such cash penalties are based on a
percentage (either 2% or 3%) of the purchase price of the Preferred Stock for
periods during which the Company fails to satisfy the above criteria. The
Company failed to file the registration statement prior to the expiration of the
above twenty-one (21) day period. As a result, the Company is subject to the
penalties provided in the Registration Rights Agreement. To date, the Investors
have not asserted any claims pursuant to the applicable penalty provisions of
the Registration Rights Agreement, although there can be no assurance that such
rights will not be asserted at a later date. A copy of the Registration Rights
Agreement is attached as Annex C to this Proxy Statement.
The Company intends to use the funds received as a result of the sale of
Preferred Stock pursuant to the Securities Purchase Agreement for general
working capital purposes and to fund a portion of the acquisition of Infotel
Technologies Pte Ltd, a company organized under the laws of Singapore
("INFOTEL"), which is a provider of radar system integration, turnkey project
management services and test instrumentation. On January 16, 1998, and as
subsequently amended, the Company and Infotel entered into an agreement for the
acquisition of all of the issued and outstanding capital stock of Infotel by the
Company. The basic terms of the acquisition agreement require an initial cash
payment of approximately $2.3 million, notes payable by the Company to the
Infotel stockholders of approximately $2.0 million (with payment subject to
Infotel achieving certain 1998 and 1999 profitability targets), and the issuance
of 431,000 shares of the Company's Common Stock, which number of shares may
increase based on certain price protections afforded the Infotel stockholders.
There is no assurance that this transaction will close as scheduled or that the
Company will be able to secure the financing necessary to complete the
acquisition. Consummation of the transaction is contingent upon the Company's
obtaining third party financing necessary to complete the acquisition, the
closing of which must occur, if at all, by no later than June 24, 1998. In the
event that the transaction fails to close by June 24, 1998, the Company is
obligated to pay a termination fee in the amount of approximately $300,000 plus
interest.
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<PAGE> 9
In an effort to obtain funds to close the Infotel acquisition pending
consummation of the Series A Preferred Stock financing, the Company recently
entered into negotiations with the Investors under the Securities Purchase
Agreement and certain members of the Company's management to borrow an aggregate
of up to $1,400,000, comprised of approximately $750,000 from the Investors and
approximately $650,000 from members of the Company's management. It is currently
anticipated that such bridge financing would be made pursuant to ninety day,
unsecured promissory notes bearing ten percent (10%) interest per annum issued
by the Company. The proceeds from such loans, if consummated, would be used
primarily to complete the Infotel acquisition. There can be no assurances,
however, that such negotiations will result in consummation of the above loans
on the described terms or on any other terms.
Shareholder approval of the issuance of the Preferred Stock and related
actions contemplated pursuant to the Securities Purchase Agreement is not
required under the Delaware General Corporation Law, the Company's Certificate
of Incorporation, or the Company's Bylaws. However, such approval is required in
order to maintain the Company's inclusion in The Nasdaq Stock Market SmallCap
System.
Nasdaq Stockholder Approval Requirement
The Company's Common Stock is traded on the over-the-counter market and is
quoted on The Nasdaq Stock Market SmallCap System. In order to qualify for
inclusion in The Nasdaq Stock Market SmallCap System, it is necessary that the
Company satisfy certain financial and other criteria set forth in The Nasdaq
Marketplace Rules (the "RULES"). In addition, in order to maintain such
inclusion under the Rules, the Company must, among other things, follow certain
corporate governance procedures, including obtaining stockholder approval in
connection with certain corporate transactions.
Rule 4310(c)(25)(H) of the Rules requires stockholder approval of the
issuance of securities by an issuer under various circumstances. In particular,
Subsection (i)c.d. of paragraph (H) requires stockholder approval prior to the
issuance of securities in the following situations:
"d. In connection with a transaction other than a public offering
involving:
1. the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors or substantial shareholders of the Company equals
20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
2. the sale or issuance by the company of common stock (or
securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock."
Pursuant to the terms of Securities Purchase Agreement, 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 (5) trading days ending on
the signing of the Securities Purchase Agreement or (ii) 75% of the five-day
closing bid price at the time of each requested conversion. As a result, the
shares of Common Stock to be issued upon conversion of the Preferred Stock will
be issued, if at all, for less than the greater of book or market value of such
shares. In addition, assuming the issuance of all thirty thousand (30,000)
shares of Series A Convertible Preferred Stock pursuant to the Securities
Purchase Agreement, the Company will have issued in excess of 20% (i.e., 28.5%
assuming conversion as of the Record date) of the number of shares of Common
Stock outstanding immediately before such issuance. Accordingly, in order to
comply with Rule 4310(c)(25)(H) of the Nasdaq Marketplace Rules, it will be
necessary for the Company to obtain stockholder approval of the transactions
contemplated pursuant to the Securities Purchase Agreement.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR APPROVAL OF THE ISSUANCE OF 30,000 SHARES
OF SERIES A CONVERTIBLE PREFERRED STOCK
PURSUANT TO THE TERMS OF THE SECURITIES PURCHASE AGREEMENT.
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 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 of 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.
The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. The
financial data presented for the three months ended March 31, 1997 includes
results of operations for only three months of BFI, two months of VPI and none
of Advantis. The financial data presented for the three months ended March 31,
1998 includes three months' operating results of BFI, VPI and Advantis.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31,
1997
NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
------ ------
<S> <C> <C>
Net sales.................................................. 100.0% 100.0%
Cost of sales.............................................. 44.5% 69.9%
Gross profit............................................... 55.5% 30.1%
Research, selling and administrative expenses.............. 44.4% 89.5%
Amortization of excess of cost over net assets acquired.... 6.9% 8.2%
Income (loss) from operations......................... 4.2% (67.2)%
Other income (expense)..................................... (0.5)% 2.6%
Income (loss) before income taxes.......................... 3.7% (64.6)%
Income taxes............................................... .7% --
Net income (loss).......................................... 3.0% (64.6)%
----- -----
</TABLE>
The Company's primary focus in the first quarter 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. Only two months of VPI's revenues were recorded in the
Company's financial statements during 1997. VPI's net revenues as a stand-alone
business decreased 67% from $2.3 million for the three months ended March 31,
1997 to $1.0 million for the three months ended March 31, 1998. The decrease in
revenue was anticipated as the backlog had eroded during 1997 and at year-end
was well below $1.0 million. The Company'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
premises equipment ("CPE") business were wide-spread in the marketplace. In
early March 1998 Centigram made a public announcement that it had signed a
letter of intent with Mitel Corporation for the sale of its CPE business (the
closing of which occurred in early May). As a result of the uncertainty in the
marketplace concerning the Centigram product, customers for large Centigram
systems delayed making buying decisions. This accounted for most of the
shortfall in the first quarter revenues, as the Company did not record any
revenues from large system orders in the period. Management believes that much
of the uncertainty surrounding the Centigram product has been resolved with the
Company's major customers and that this issue will not have a significant
adverse impact on VPI's business after the second quarter of 1998. Revenues from
maintenance, parts and small systems during the first quarter were at or above
historical levels and are expected to remain strong.
In addition, during April 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 United States
and overseas.
The Company's Advantis subsidiary, a telecommunications system integrator
located in Malaysia was acquired on December 15, 1997. Net sales include three
months of Advantis' results in 1998 but are not included in 1997 first quarter
data. On a stand-alone basis, net sales decreased from $2.7 million to $0.3
million for the first quarter 1998 versus the first quarter 1997. Over 50% of
Advantis' net sales in 1997 were earned during the first quarter of 1997, which
was due to the completion of several one-time large projects. Due to the current
instability of the Malaysian currency, any new implementation projects were
delayed.
The Company has decided to pursue a buyer for its FACTOR 1000(R) technology
and products, as no significant FACTOR 1000 revenue was generated in 1997 or
1998.
Gross margins in 1998 decreased to 30.1% from 55.5% in 1997; about 10% of
the decrease was attributable to Advantis, the remainder to VPI. VPI's gross
margin on a stand-alone basis decreased from 57.0% to 39.8% as the fixed cost
component of cost of sales was spread over a smaller revenue base for the
quarter. VPI's variable cost of
10
<PAGE> 12
goods sold as a percentage of sales is comparable in 1998 to 1997 cost of goods
sold. Based on anticipated VPI's revenue increases over the next several
quarters, the gross margin is expected to improve.
Company-wide research, selling and administrative ("RS&A") expenses as a
percentage of net sales were up to 89.5% for 1998 versus 44.4% for 1997.
However, on a standalone basis, the 1998 and 1997 RS&A expense was approximately
$1.2 million in both periods. The increase in RS&A expense as a percentage of
net sales is due to the same level of RS&A expenses for 1998 as compared to 1997
being spread over a smaller revenue base.
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
reserved specifically for the funding of future acquisitions. 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 $162,500 of cost and expenses) had been received as of the
initial date of filing of the Company's first quarter report on Form 10-QSB,
with the remainder to be received subject to the terms of the Preferred Stock
financing. However, the issuance of the $3.0 million of Series A Convertible
Preferred Stock that is convertible into shares of Common Stock at a 25%
discount, which will be reflected as a preferred stock dividend, 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.
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 $2.0 million; (ii) market capitalization of
$35.0 million; or (iii) net income of $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 Convertible 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. While
the Company presently meets and believes that in the future it will be in a
position to continue to meet these listing requirements, such belief is
dependent in part upon the Company completing the Infotel acquisition, the
financing for which had not been completed as of the date of this Proxy
Statement. 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 continue to meet these
listing requirements and become delisted, there would be a serious impact on the
Company's ability to raise funds in the future.
During the first quarter of 1998, net cash used in operating activities was
$0.5 million, consisting primarily of the net loss for the period and cash used
to pay accounts payable and accrued liabilities, which was partially offset by
accounts receivable collections. Net cash provided by investing and financing
activities totaled
11
<PAGE> 13
$0.1 million consisting principally of additional borrowings made under
Advantis' line of credit. At March 31, 1998, the Company's working capital was
$0.4 million, and cash and cash equivalents totaled $0.9 million. The current
ratio decreased from 1.3 to 1 at December 31, 1997 to 1.1 to 1 at March 31,
1998, primarily due to reduced revenues for VPI.
As of March 31, 1998, the Company had outstanding debt of approximately
$0.8 million inclusive of associated accrued interest. The Company has been
offered a $2.0 million credit line with a U.S. major bank with an advance rate
of 80% of eligible accounts receivable, but has chosen not to finalize the
agreement at this time.
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 company-wide business systems software. It is anticipated that all
major capital expenditures will be financed through equipment leases and 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. 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. The completion of the pending Infotel transaction requires a
substantial payment.
As of March 31, 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.
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, it
will not have an impact on the financial condition or results of operations of
the Company upon adoption.
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. Because of the recent issuance
of this standard, management 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, will be 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 will not
need to be modified based upon current operations. Results of operations and
financial position will be unaffected by implementation of this standard.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY FOR THE
FISCAL YEAR ENDED DECEMBER 31, 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"), 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 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., a Delaware corporation
and a wholly-owned subsidiary of NHancement, was merged with and into Voice
Plus, Inc., a California corporation and a wholly-owned subsidiary of
NHancement, 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 of "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
Lampur, 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.
The business of NHancement will be conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. For the
year ended December 31, 1996, the historical financial statement information
includes the separate accounts of BFI without giving effect to the business
combinations of BFI and VPI occurring immediately prior to the IPO, or to the
IPO. For the year ended December 31, 1997, the historical financial statement
information gives effect to the business combinations of BFI and VPI occurring
immediately prior to the IPO, the IPO and the acquisition of Advantis. The
historical financial statement information presented for 1997 includes twelve
months of BFI operations, approximately eleven months of VPI operations and
sixteen days of Advantis operations and gives effect to the business
combinations and the IPO.
13
<PAGE> 15
RESULTS OF OPERATIONS
NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
------ ------
<S> <C> <C>
Net revenues............................................. 100.0% 100.0%
Cost of goods sold....................................... 16.2% 57.3%
Gross margin............................................. 83.8% 42.7%
Research, selling and administration expenses............ 240.0% 94.2%
Operating loss......................................... (156.2)% (51.5)%
Other income (expense)................................... (73.3)% 0.4%
Loss before income taxes................................. (229.5)% (51.1)%
Income taxes............................................. 0.0% 0.0%
Net loss................................................. (229.5)% (51.1)%
</TABLE>
In 1996, the Company's resources were devoted to development of BFI's
employee impairment testing systems and pursuing the acquisition of VPI, which
became a wholly-owned subsidiary of the Company in February 1997. BFI's net
revenues in 1997 were negligible ($23,000) compared to $796,000 in 1996. The
revenues in 1996 were primarily due to the recording of the $700,000 final
payment from SportsTrac on a $1.0 million one-time fee recorded in connection
with a sublicensing agreement signed in 1995 for BFI's technology for
sports-related applications. The Company has decided to pursue a buyer for its
FACTOR 1000 technology and products, as no significant FACTOR 1000 revenue is
anticipated for 1998.
The Company's primary focus in 1997 was as an integrator and distributor of
voice processing and telecommunications systems for businesses, which operations
were conducted through the Company's VPI subsidiary. Only eleven months of VPI's
revenues were recorded in the Company's financial statements during 1997, for a
total of $8.8 million. VPI's net revenues, as a stand-alone business and on an
annualized basis, increased 9.1% from $8.8 million for the year ended December
31, 1996 to $9.6 million for the year ended December 31, 1997. The increase in
VPI net revenues between 1996 and 1997 was due primarily to the sale of larger
voice processing systems, multiple installations and reduction of its order
backlog. The order backlog eroded during 1997 and at year-end was less than $1.0
million. VPI revenues in the fourth quarter of 1997 were about $500,000 below
the 1997 run rate, and management expects sales levels to continue to be well
below 1997 run rates in the first and second quarters of 1998. The projections
for the first quarter are estimated at less than 50% of recent historical levels
and is an indication of why the impairment loss was taken on the VPI
acquisition. Additionally, the Company's revenues are almost exclusively derived
from the sale of Centigram products and any termination or adverse change in the
Company's distributor relationship with Centigram would have a material adverse
impact upon the Company's voice processing business. Centigram has publicly
announced that it has hired a third party firm to identify potential buyers for
its CPE business. If Centigram's CPE business is sold to an entity which does
not permit third parties such as the Company to continue to distribute the CPE
products, there would be a significant adverse impact upon the Company's
business for an indeterminate period of time until new supplier relationships
could be established.
The Company's Advantis subsidiary, a telecommunications systems integrator
located in Malaysia, was acquired on December 15, 1997 and added less than one
month, or $245,000, to the Company's net revenues during 1997. Advantis net
revenues, as a stand alone business on a preacquisition and annualized basis,
increased 170.6% from $1.7 million in the fiscal year ended March 31, 1996 to
$4.6 million in the fiscal year ended March 31, 1997, due mainly to the sale of
larger systems and projects. The Malaysian currency weakened substantially in
1997 and future softening of the Ringgit could have a material adverse effect on
Advantis' business.
Gross margins in 1997 decreased to 42.7% from 83.8% in 1996. Gross margins
in 1996 related only to FACTOR 1000 sublicensing revenues which were extremely
high as a result of the receipt of a $700,000
14
<PAGE> 16
sublicense payment with minimal related expense. No significant revenues from
the commercial release of the FACTOR 1000 system were recorded in 1997. The
gross margin in 1997 is associated almost exclusively with the Company's VPI
subsidiary whose gross margin, as a stand-alone business, increased slightly to
44.0% in 1997 compared to 41.4% in 1996 due to larger system sales. Advantis
contributed only about $63,000 to the Company's gross margin. As a stand alone
business, Advantis' gross margin fell 4.5% as a percent of sales from 1996 to
1997, but increased in dollar amount from $345,700 in 1996 to $749,100 in 1997,
due mainly to ramp up costs associated with the sale of larger systems and
projects. Due to the recent substantial change in the value of the Malaysian
Ringgit, the Company is considering hedging currencies in 1998 to protest its
gross margins. The Company, to date, has little experience with currently
hedging transactions and this inexperience may result in an adverse affect on
the Company's business.
Company-wide research, selling and administrative ("RS&A") expenses as a
percentage of net revenues were abnormally high during 1996 as compared to 1997
for the following reasons: (i) during most of 1996, BFI continued development of
the FACTOR 1000 system, working closely with a few beta customers; (ii) most of
the operating costs in 1996 were expended on the efforts to find complementary
businesses to acquire that would provide a viable marketing channel for the
FACTOR 1000 system; and (iii) during 1996 significant expenditures were made in
connection with unconsummated mergers and indirect expenditures were made in
connection with the impending VPI merger and to prepare for the IPO. The
majority of RS&A expenses in 1997 were associated with the Company's VPI
subsidiary. For VPI, as a stand-alone business, RS&A in 1997 increased 55.7% as
a percent of revenues to 86.3% compared to 30.6% in 1996 due to (i) an
impairment loss of $4.1 million which reduced the carrying value of the excess
of cost over net assets acquired relating to the VPI acquisition , (ii) the
recording of eleven months of amortization of the excess of cost over net assets
acquired totaling $565,000 relating to the VPI acquisition and (iii) additional
expenses associated with being a public reporting company. The Company recorded
only insignificant RS&A expenses (approximately $36,000) for its newly acquired
Advantis subsidiary during 1997. Advantis' RS&A, as a stand alone business,
increased 4.2% as a percent of revenues year over year, due mainly to ramp up
costs associated with increased revenue and accelerated revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complementary businesses and products is an
element of the Company's business strategy, none of the proceeds of the IPO were
reserved specifically for the funding of future acquisitions. 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
$750,000 has been received, with the remainder to be received subject to certain
terms as follows: $500,000 with the filing of an S-3 registration statement,
$500,000 60 days thereafter, $500,000 30 days thereafter and $750,000 30 days
thereafter, with a larger portion of the proceeds to be used for the acquisition
of Infotel.
During 1997, net cash used in operating activities was $2.9 million,
consisting primarily of cash used to pay accounts payable and accrued
liabilities. Net cash provided by investing and financing activities totaled
$4.2 million. Net proceeds from the IPO were $6.5 million, and cash acquired
from the VPI and Advantis acquisitions was $0.8 million, of which a portion of
these funds was utilized to repay approximately $2.0 million of outstanding
nonconvertible debt and interest accrued at rates between 10% and 12% per annum,
and $1.3 million of debt incurred in connection with the VPI acquisition. At
December 31, 1997, the Company's working capital was $1.1 million and cash and
cash equivalents totaled $1.4 million. The current ratio increased from 0.13 to
1 at December 31, 1996 to 1.3 to 1 at December 31, 1997, primarily due to funds
received by the Company in its IPO and net assets associated with the Company's
acquisitions. The reduced
15
<PAGE> 17
level of revenues projected for VPI and the corresponding reduction of income in
the first quarters of 1998 will result in a net use of cash from operations and
a reduction of current ratio.
As of December 31, 1997, the Company had outstanding debt of approximately
$0.5 million inclusive of associated accrued interest. The Company has been
offered a $2 million accounts receivable credit line with a United States major
bank with an advance rate of 80% of eligible receivables but has chosen not to
finalize the agreement at this time.
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 company-wide business systems software. It is anticipated that all
major capital expenditures will be financed through equipment leases and will
not require significant direct outlays of cash.
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources, together with the remaining net
proceeds of the IPO, are adequate to meet the working capital cash needs of the
Company and to meet anticipated capital needs during the next 12 months.
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.
ACCOUNTING STANDARDS
The Company was not affected by its adoption of Statement of Financial
Accounting Standards No. 128, Earnings per Share, which established a different
method of calculating earnings per share than was previously used in accordance
with Accounting Principal Board No. 15, Earnings per Share, and provides for the
calculation of basic and diluted earnings per share. This statement was
effective for the Company's year ending December 31, 1997 and required that all
prior earnings be restated to reflect its retroactive application.
During 1997, the Financial Accounting Standards Board released its
Statement of Financial Accounting Standards (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. The objective of SFAS No. 130 is to report a measure of all changes
in the equity of an enterprise that result from transactions and other economic
events of the period. 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, it will not have an impact on the financial condition or results of
operations of the Company upon adoption.
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. Because of the recent issuance
of this standard, management 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, will be unaffected by implementation of this
standard.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits
("SFAS No. 132"). SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement 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 the period 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
16
<PAGE> 18
current operations. Results of operations and financial position will be
unaffected by implementation of this standard.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant seasonal variations,
although net sales may be affected in the future by overall hiring trends and
the concentration of vacations of key employees of client companies during the
summer months or during holiday periods, which can delay product installations
resulting in the postponement of the recognition of revenues.
YEAR 2000 DISCLOSURE
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 or results of
operations.
The Company distributes products from third party voice 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 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 for the Year 2000 of 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 assurances 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 and/or results of operations.
The Company acquired Advantis Network & Systems Sdn Bhd, a Malaysian
company, on December 15, 1997. Additionally, the Company signed a definitive
agreement on January 16, 1998, to acquire Infotel Technologies Pte Ltd
("Infotel"), a company organized under the laws of Singapore. 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 or results of operations. 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 products. 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 timely
to complete resolution of them. The Company has also 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.
17
<PAGE> 19
FINANCIAL STATEMENTS
The Company's financial statements for the fiscal years ended December 31,
1997 and 1996 are shown on pages F-1 through F-22. The Company's financial
statements (unaudited) for the three months ended March 31, 1998 and 1997 are
shown on pages F-23 - F-31. The accounting firm of BDO Seidman, LLP, has been
engaged as the Company's independent accountant for the past two years and its
Report of Independent Certified Public Accountants for fiscal 1997 and 1996 is
shown on page F-2.
STATEMENT REGARDING ACCOUNTANTS' REPRESENTATIVES
Representatives of the principal accountants for the current year and for
the most recently completed fiscal year: (i) are expected to be present at the
Special Meeting; (ii) will have the opportunity to make a statement if they
desire to do so; and (iii) are expected to be available to respond to
appropriate questions.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There was no adverse opinion or disclaimer of opinion or disagreement on
any matter of accounting principles or practices in BDO Seidman, LLP's report on
the financial statements for the fiscal year ended December 31, 1997.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business that the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next annual
meeting of the stockholders of the Company must have been received by the
Company at its offices at 39420 Liberty Street, Suite 250, Fremont, California
94538, on or before January 15, 1998, and satisfied the conditions established
by the Securities and Exchange Commission for stockholder proposals to be
included in the Company's proxy statement for that meeting.
By Order of the Board of Directors
Douglas S. Zorn
Secretary
June , 1998
18
<PAGE> 20
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated financial statements
Consolidated balance sheet as of December 31, 1997........ F-3
Consolidated statements of operations for the years ended
December 31, 1996 and 1997............................. F-4
Consolidated statements of stockholders' equity (deficit)
for the years ended December 31, 1996 and 1997......... F-5
Consolidated statements of cash flows for the years ended
December 31, 1996 and 1997............................. F-6
Summary of accounting policies............................ F-8
Notes to the consolidated financial statements............ F-12--F-22
</TABLE>
F-1
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and the Stockholders of
NHancement Technologies Inc. and Subsidiaries
Fremont, California
We have audited the accompanying consolidated balance sheet of NHancement
Technologies Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 8 to the consolidated financial statements, the
Company purchases substantially all of its inventory requirements from one
vendor. Additionally, this vendor has announced its intentions to sell its
customer premise equipment business which services the largest portion of the
Company's current business.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NHancement
Technologies Inc. and Subsidiaries at December 31, 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California
April 13, 1998
F-2
<PAGE> 22
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
CURRENT
Cash and cash equivalents (Note 8)........................ $ 1,363,200
Accounts receivable, less allowance for doubtful accounts
of $515,000 (Note 8).................................... 3,005,200
Inventory................................................. 536,200
Current portion of notes receivable from stockholders
(Notes 2 and 7)......................................... 109,500
Income tax receivable..................................... 172,000
Prepaid expenses and other (Note 3)....................... 179,300
------------
TOTAL CURRENT ASSETS........................................ 5,365,400
------------
PROPERTY AND EQUIPMENT
Office equipment.......................................... 694,500
Computers................................................. 312,300
Automobiles............................................... 221,800
Furniture and fixtures.................................... 82,800
------------
1,311,400
Less accumulated depreciation............................... 608,600
------------
PROPERTY AND EQUIPMENT, NET................................. 702,800
------------
Excess of cost over net assets acquired of Voice Plus, Inc.
(Note 1).................................................. 1,500,000
Excess of cost over net assets acquired of Advantis, net of
accumulated amortization of $4,200 (Note 1)............... 987,100
Long-term portion of notes receivable from stockholders
(Notes 2 and 7)........................................... 157,500
Deferred acquisition costs (Note 1)......................... 49,600
Other assets................................................ 142,500
------------
$ 8,904,900
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Lines of credit (Note 3).................................. $ 192,100
Current portion of long-term debt (Notes 3 and 7)......... 296,500
Deferred revenue.......................................... 1,057,000
Accounts payable.......................................... 1,392,200
Accrued liabilities....................................... 440,600
Payable to affiliates (Note 7)............................ 426,700
Payable to stockholders (Note 7).......................... 58,200
Accrued professional fees................................. 159,800
Payroll related liabilities............................... 249,200
------------
TOTAL CURRENT LIABILITIES................................... 4,272,300
LONG-TERM DEBT, net of current portion (Notes 3 and 7)...... 157,500
------------
TOTAL LIABILITIES........................................... 4,429,800
------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 8 and 12)
STOCKHOLDERS' EQUITY (Notes 4 and 5)
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding at December
31, 1997................................................ --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 4,437,000 shares issued and outstanding at
December 31, 1997....................................... 44,400
Additional paid-in capital................................ 18,020,600
Accumulated deficit....................................... (13,601,200)
Cumulative translation gain............................... 11,300
------------
TOTAL STOCKHOLDERS' EQUITY.................................. 4,475,100
------------
$ 8,904,900
============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE> 23
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
NET REVENUES, including $700,000 from the sale of sublicense
in 1996
(Note 8).................................................. $ 796,400 $ 8,983,000
Cost of sales............................................... 129,200 5,149,500
----------- -----------
GROSS PROFIT................................................ 667,200 3,833,500
----------- -----------
OPERATING EXPENSES
Research and development.................................... 98,400 87,900
Selling, marketing and administrative (Note 7)............ 1,812,800 3,726,900
Amortization of excess of cost over net assets acquired,
including impairment loss of $4,084,300 (Note 1)....... -- 4,649,100
----------- -----------
TOTAL OPERATING EXPENSES.................................... 1,911,200 8,463,900
LOSS FROM OPERATIONS........................................ (1,244,000) (4,630,400)
OTHER INCOME (EXPENSE)
Interest income........................................... -- 136,900
Interest expense.......................................... (582,000) (97,700)
Other..................................................... (2,000) --
----------- -----------
TOTAL OTHER INCOME (EXPENSE)................................ (584,000) 39,200
----------- -----------
NET LOSS.................................................... $(1,828,000) $(4,591,200)
=========== ===========
BASIC AND DILUTIVE NET LOSS PER COMMON SHARE................ $ (4.20) $ (1.18)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 435,400 3,883,300
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 24
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT GAIN TOTAL
--------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996................. 93,200 $1,000 $ 4,972,600 $(7,182,000) $ -- $(2,208,400)
Issuance of common stock with notes
payable (Note 4)....................... 303,400 3,000 199,300 -- -- 202,300
Issuance of common stock for payment of
salaries and outside service fees
(Note 7)............................. 216,200 2,100 142,000 -- -- 144,100
Issuance of warrants with notes payable
(Note 5)............................. -- -- 50,000 -- -- 50,000
Net loss................................. -- -- -- (1,828,000) -- (1,828,000)
--------- ------- ----------- ------------ ------- -----------
BALANCE, December 31, 1996............... 612,800 6,100 5,363,900 (9,010,000) -- (3,640,000)
Common stock issued for Voice Plus,
Inc. acquisition (Note 1)............ 1,312,500 13,100 4,666,900 -- -- 4,680,000
Sale of common stock in an Initial
Public Offering, net of stock
issuance costs of $1,660,200 (Note
11).................................. 2,045,000 20,500 6,499,300 -- -- 6,519,800
Conversion of debt and accrued interest
into common stock (Note 11).......... 258,200 2,600 1,030,000 -- -- 1,032,600
Issuance of common stock options for
payment of outside service fees...... -- -- 3,800 -- -- 3,800
Common stock issued for Advantis
acquisition (Note 1)................. 208,500 2,100 456,700 -- -- 458,800
Cumulative translation gain -Advantis.... 11,300 11,300
Net loss................................. -- -- -- (4,591,200) -- (4,591,200)
--------- ------- ----------- ------------ ------- -----------
BALANCE, December 31, 1997............... 4,437,000 $44,400 $18,020,600 $(13,601,200) $11,300 $ 4,475,100
========= ======= =========== ============ ======= ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 25
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1997
------------------------------------------------ ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,828,000) $(4,591,200)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and other amortization....................... 36,200 159,500
Amortization of excess cost over net assets acquired,
including impairment loss.............................. -- 4,649,100
Amortization of discount and debt issue costs on notes
payable................................................ 252,300 --
Compensation related to grant of stock options and common
stock.................................................. 34,100 3,800
Other..................................................... -- 8,800
Changes in operating assets and liabilities:
Accounts receivable.................................... 15,000 (265,600)
Notes receivable, related party........................ 700,000 --
Income tax receivable.................................. -- (172,000)
Inventory.............................................. 1,200 653,900
Prepaid expense and other.............................. 29,800 (89,300)
Other assets........................................... -- (48,100)
Deferred revenue....................................... (723,900) (459,900)
Accounts payable....................................... 200,800 (1,283,700)
Other current liabilities.............................. 609,400 (1,442,600)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES....................... (673,100) (2,877,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred acquisition costs................................ (100,100) (188,000)
Cash acquired from VPI and Advantis acquisitions.......... -- 851,900
Note receivable from stockholder.......................... -- (63,000)
Purchases of property and equipment....................... (12,500) (252,500)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (112,600) 348,400
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering of common stock, net
of offering costs...................................... -- 6,519,800
Deferred stock offering costs............................. (376,200) 376,200
Proceeds from long-term debt........................... 1,170,000 --
Principal payments on long-term debt................... (118,500) (1,814,000)
Principal payments on long-term debt due stockholder... -- (1,250,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 675,300 3,832,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (110,400) 1,303,100
CASH AND CASH EQUIVALENTS, beginning of year................ 170,500 60,100
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 60,100 $ 1,363,200
=========== ===========
SUPPLEMENTAL DATA:
Interest paid............................................... $ 35,400 $ 267,700
Income taxes paid........................................... $ -- $ 191,200
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE> 26
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
In 1996, the Company issued 178,700 shares of its Common Stock to three
officers in lieu of cash compensation. The aggregate value of these shares
totaled $119,700, of which $110,000 was for payment of deferred compensation
accrued in 1994 (see Note 7).
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 (see Note 1).
On February 4, 1997, the Company issued 258,200 shares of its Common Stock
as repayment of certain notes payable and accrued interest thereon (see Note
11).
On December 15, 1997, the Company issued 208,500 shares of its Common Stock
in exchange for all the outstanding shares of Advantis pursuant to a purchase
and plan of merger agreement (see Note 1).
F-7
<PAGE> 27
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
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 (see Note 11),
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. ("VPI" or
"Voice Plus"), a California corporation, 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"). 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 reorganization 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.
The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. (see Note
1).
BUSINESS
The Company, via its Voice Plus subsidiary, is a systems integrator and
distributor of voice processing equipment. VPI also provides various services
including equipment installation, technical support and ongoing maintenance.
Revenues generated by Voice Plus represented approximately 97% of total 1997
consolidated net revenues. VPI maintains offices in the states of California,
New York, Georgia, Arizona, Utah and Texas.
In March 1998, the Company formalized a plan to exit from the business
related to its FACTOR 1000(R) product, which measures human sensorimotor skills
to determine an individual's performance readiness and fitness to perform, given
the resources required to develop a market for the product and the need to
dedicate its financial resources to its other core businesses. The remaining
assets and liabilities associated with the FACTOR 1000(R) product at December
31, 1997 and the related revenues and expenses for the year then ended were
insignificant. Management does not expect to incur a loss on the planned sale
during 1998 of the FACTOR 1000(R) product. The Company's FACTOR 1000(R) system
is based upon the Critical Tracking Task (CTT) software, which is exclusively
licensed from Systems Technology Inc. (STI) in Hawthorne, California. The
license agreement with STI is effective through November 2008 and grants the
Company the right to issue sublicenses during the term of the agreement.
Under the terms of a sublicense agreement entered into with SportsTrac,
Inc., a company whose chief executive officer is a minority stockholder and
former executive officer of the Company, the Company has
F-8
<PAGE> 28
granted an exclusive world-wide sublicense for sports and
on-field-athletic-performance related uses of the FACTOR 1000(R) system through
November 2008. In connection with this agreement, the Company recognized
$700,000 in revenue in 1996 and is entitled to royalties of 8.5% of cash
receipts from the sale of products or services containing the licensed
technology. During 1997, the company received $900 relating to these ongoing
royalties.
The Company's subsidiary, Advantis Network & Systems Sdn Bhd, is an
integrator of communications systems in Malaysia, designing, integrating and
installing communications systems that range from highly sophisticated systems
to simplistic infrastructure cabling. Advantis also provides various services
including equipment installation, technical support and ongoing maintenance.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its wholly-owned subsidiaries Voice Plus, Inc. and
Advantis Network & System Sdn Bhd since their respective dates of acquisition
(see Note 1). Significant intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION
The Company recognizes revenue under several methods as dictated by the
nature of the service or product provided and the terms of the sales agreement.
Generally, system sales are recognized when all significant uncertainties about
customer acceptance of the system have been resolved. Once system installation
is complete, seller obligations, including estimated future technical support
costs, are immaterial. Revenue from maintenance contracts is prorated over the
life of the contract, normally one year, although the entire amount of the
contract is collected at the beginning of the term. Services, labor and the sale
of parts, upgrades, moves, adds and changes are recorded in the period shipped
or provided. Revenue on the sale of a FACTOR 1000(R) system is recognized when
the system has been installed and the Company's related contractual training and
support obligations are substantially complete. Revenue based on the sublicense
of the FACTOR 1000(R) system is recognized as payment is received.
INVENTORY
Inventory consists primarily of systems and system components and is valued
at the lower of cost (first-in, first-out method) or market.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or their
estimated useful life. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired ("goodwill"), which relates to
the Company's acquisition of Voice Plus, Inc. and Advantis Network & System Sdn
Bhd, is being amortized over a five to ten year period using the straight-line
method.
LONG-LIVED ASSETS
Long-lived assets are evaluated for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life, assets to be paid or otherwise disposed of
are not subject to further
F-9
<PAGE> 29
depreciation or amortization. In determining whether an impairment exists, the
Company uses undiscounted future cash flows compared to the carrying value of
the asset.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are recognized
based on the temporary differences between the financial statement and income
tax bases of assets, liabilities and carryforwards using enacted tax rates.
Valuation allowances are established for deferred tax assets when realization is
not deemed more likely than not.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used in preparing these consolidated
financial statements include those assumed in computing the fair value of
goodwill. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under this standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted to
continue to account for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose pro forma net income (loss) and
earnings (loss) per share as if the fair value method had been adopted. The
Company has elected to continue to account for stock-based compensation under
APB No. 25.
NET LOSS PER SHARE
Effective for the year ended December 31, 1997, the Company adopted the
provisions of SFAS No. 128, Earnings per Share. SFAS No. 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. Because of losses in 1996 and
1997, calculations under SFAS No. 128 were the same as those under the prior
method. Options and warrants to purchase 534,400 and 1,154,100 shares were
outstanding during the years ended December 31, 1996 and 1997 but were not
included in the computation of diluted loss per common share because the effect
would be antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), 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
F-10
<PAGE> 30
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Management believes that the Company's current financial
statement disclosures will not need to be significantly modified based upon
current operations. Results of operations and financial position, however, will
be unaffected by future implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, ("SFAS No.
131") which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. 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 the period beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management 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, will be unaffected by implementation of this standard.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosures about Pensions and Other Post Retirement Benefits
("SFAS No. 132"). 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 the period 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.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiary are translated
at the exchange rate on the balance sheet date, while revenues and expenses are
translated at average rates prevailing during the period. Translation
adjustments are reported as a component of stockholders' equity.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable
and debt. The carrying value of cash and accounts receivable approximate fair
value based upon the liquidity and short-term nature of the assets. The carrying
value of short-term and long-term debt approximates the fair value based upon
short-term and long-term borrowings at market rate interest.
F-11
<PAGE> 31
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACQUISITIONS
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 common stock for every four shares of BFI common stock. Pursuant to
the BFI Merger agreement, NHancement assumed (i) the obligations of BFI's
outstanding stock options, by which assumption the optionee has the right to
purchase 5.625 shares of NHancement Common Stock for every 10 shares of BFI
common stock the optionee could have purchased prior to the BFI Merger at an
exercise price per share equal to 80% of the IPO Price, (ii) the obligations of
BFI's issued and outstanding warrants in accordance with their terms, and (iii)
the obligations of the Registration Rights Agreement dated as of September 1,
1996, and NHancement issued to certain holders of BFI notes, warrants to
purchase an aggregate of 109,900 shares of NHancement's common stock,
exercisable commencing one year from the close of the IPO at an exercise price
of 120% of the IPO Price.
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. In connection with the VPI Acquisition, the
Company entered into a three-year employment agreement with the president and
sole stockholder of VPI, pursuant to which the Company pays a base salary of
$150,000 per year, commissions of approximately $200,000 per year and an annual
performance based bonus. The employment agreement provides that, if the Company
materially breaches the agreement or terminates the employee without "cause,"
the Company will continue to pay base salary and 50% of the commissions for the
duration of the term and, in the event of a material breach by the Company, the
two promissory notes will be accelerated and immediately become due and payable.
In addition, the Company paid signing bonuses in the aggregate amount of
$170,000 to three employees of VPI. The bonuses, of which 50% was paid upon
consummation of the IPO and the remainder was paid in August 1997, were not
contingent upon continued employment.
F-12
<PAGE> 32
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price and fair value of net assets acquired in the VPI
Acquisition are summarized as follows:
<TABLE>
<S> <C>
Consideration:
Common stock -- 600,000 selling shares.................... $2,400,000
Long-term notes........................................... 1,500,000
Common stock -- 712,500 shares subject to lockup
agreements............................................. 2,280,000
----------
Total consideration......................................... 6,180,000
----------
Calculation of goodwill:
Net assets acquired(1).................................... 1,012,200
Cost of acquisition....................................... (270,100)
----------
742,100
----------
Excess of cost over net assets acquired..................... $5,437,900
==========
</TABLE>
- ---------------
(1) Net assets of $390,600 and an increase of estimated fair value of (i)
inventories of $486,300 and (ii) equipment of $135,300. The increase in
valuation of inventories is based on estimated selling prices less a
reasonable profit allowance for installation and selling effort. The
increase in valuation of fixed assets is based on physical counts valued at
current replacement cost.
The carrying value of goodwill is periodically evaluated by the Company
based on the estimated future undiscounted operating cash flows of the related
business. Because of an anticipated change in voice processing technology over
the next several years and uncertainties regarding the Company's distributor
relationship with its principal supplier, Centigram Communications Corporation
(see Note 8), the estimated future undiscounted operating cash flows of Voice
Plus, Inc. are 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 at
December 31, 1997. As such, the Company has recorded an impairment loss of
$4,084,300, representing the difference between the carrying amount of goodwill
over its estimated fair value. Fair value was determined using estimated future
cash flows of Voice Plus, Inc., discounted at 20%. In addition, the useful life
of the $1,500,000 balance of the goodwill of Voice Plus, Inc. at December 31,
1997 was reduced from ten years to five years.
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 merged with NHancement, whereupon Advantis became a wholly-owned
subsidiary of NHancement.
The purchase price and fair value of net assets acquired in the Advantis
acquisition are summarized as follows:
<TABLE>
<S> <C>
Consideration:
Common stock -- 208,500 shares subject to lockup
agreements............................................. $458,800
Calculation of goodwill:
Net liabilities assumed........................... (394,100)
Cost of acquisition............................... (138,400)
(532,500)
--------
Excess of cost over net assets acquired..................... $991,300
========
</TABLE>
In addition to the above consideration, the Advantis stockholders are
entitled to receive up to an additional 321,500 shares of the Company's common
stock if certain profit and accounts receivable collection goals are attained.
F-13
<PAGE> 33
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary combines the consolidated results
of operations of the Company, Voice Plus and Advantis as if the acquisitions had
occurred January 1, 1996 and January 1, 1997. The pro forma information gives
effect to certain adjustments, including the amortization of excess cost over
net assets acquired, the increase in corporate overhead resulting from the
renegotiation of employment agreements with key management employees of VPI,
additional depreciation expense resulting from recording certain equipment of
VPI at estimated fair values and additional interest expense on notes payable to
the former stockholder of VPI. This pro forma summary does not necessarily
reflect results of operations as they would have been if the Company, Voice Plus
and Advantis had constituted a single entity during such periods and is not
necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Net revenues............................................. $13,411,900 $14,209,700
Loss before income taxes................................. (1,136,200) (4,913,800)
----------- -----------
Net loss................................................. $(1,136,300) $(4,914,400)
=========== ===========
Basic and diluted loss per share:
Net loss per common share................................ $ (0.58) $ (1.17)
Weighted average shares.................................. 1,955,900 4,208,400
</TABLE>
2. NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1997, notes receivable from stockholders consist of the
following:
<TABLE>
<S> <C>
Note receivable, principal due in monthly payments of
$2,600, including interest at the Base Lending Rate
("BLR") in Malaysia plus 2.25% (12.65% at December 31,
1997) through April 2012.................................. $204,000
Note receivable from an officer of the Company, interest at
7%, with principal and unpaid interest due April 1998..... 63,000
267,000
Less current portion........................................ 109,500
--------
$157,500
========
</TABLE>
F-14
<PAGE> 34
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable to the former sole stockholder of Voice Plus,
Inc. pursuant to the terms of the acquisition of Voice
Plus, Inc. in February 1997, interest at medium term
T-bill rate (5.3% at December 31, 1997).(1)............... $250,000
Term loan with a financial institution in Malaysia,
guaranteed by the officers of Advantis, principal due in
monthly payments of $2,600, including interest at the BLR
plus 2.25% per annum (12.65% at December 31, 1997) through
April 2012.(2)............................................ 204,000
454,000
Less current portion........................................ 296,500
--------
$157,500
========
</TABLE>
- ---------------
(1) Pursuant to the terms of the VPI stock purchase agreement, the Company
issued an unsecured promissory note in the principal amount of $1,000,000,
bearing interest at the medium term T-bill rate to the sole stockholder of
Voice Plus. Early repayment was based on the profitability of Voice Plus,
with the unpaid balance, if any, due on the third anniversary of the
consummation of the merger. As of December 31, 1997, this note and all
accrued interest was paid in full. The Company also issued an unsecured
promissory note in a principal amount of $500,000, bearing interest at the
medium term T-bill rate to the sole stockholder of Voice Plus. Principal
repayment of $62,500 per quarter plus all accrued interest is to be made for
each quarter that Voice Plus is profitable (as defined) by one dollar, with
the balance due on the third anniversary of the consummation of the merger.
As of December 31, 1997 a principal balance of $250,000 remained unpaid.
(2) A stockholder has pledged certain owned real property as collateral on this
loan. All proceeds of the loan were advanced by the Company's Advantis
subsidiary to the stockholder. The Company has recorded a note receivable
from the stockholder and a related loan payable under the credit facility.
Under the terms of the stockholder loan agreement, repayments including
interest, will match the Company's payments due under the term loan.
Future minimum principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- --------
<S> <C>
1998.............................................. $296,500
1999.............................................. 14,200
2000.............................................. 14,200
2001.............................................. 14,200
2002.............................................. 14,200
Thereafter........................................ 100,700
--------
$454,000
========
</TABLE>
At December 31, 1997, the Company's financing arrangements include the
following credit facilities with financial institutions in Malaysia:
- A $64,300 overdraft facility for working capital expiring June 1998 and
bearing interest at the BLR plus 2.0% (12.4% at December 31, 1997). At
December 31, 1997, $37,000 was outstanding under this overdraft facility.
Included in prepaid expenses and other is a cash deposit of $25,700 which
is pledged as collateral and restricted for repayment of this facility.
F-15
<PAGE> 35
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- A $192,000 credit facility for overdraft, letters of credit and trust
receipts which expired in February, 1998 and bearing interest at the BLR
plus 2.25%. Management is currently in the process of negotiating renewal
terms. At December 31, 1997, $155,100 was outstanding under this credit
facility.
- A $385,900 facility collateralized by eligible accounts receivable, used
for document advances, letters of credit and trust receipts bearing
interest at the BLR plus 2.25% and expired in February, 1998. Management
is currently in the process of negotiating renewal terms. No borrowings
were outstanding at December 31, 1997.
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock with
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of the Company's common stock (see Note 12).
Common Stock
In February 1997, pursuant to the BFI Merger Agreement, all outstanding
shares of BFI common stock were exchanged for the Company's Common Stock. The
consolidated financial statements have been retroactively restated to give
effect to the 3-for-4 exchange ratio in connection with the BFI Merger (see Note
1). Accordingly, all references in the consolidated financial statements to
share amounts and per share amounts have been adjusted to reflect the BFI Merger
exchange.
In connection with the issuance of various notes payable during 1996, BFI
issued to the note holders an aggregate of 303,400 shares of BFI common stock at
$0.01 per share. During 1996, the Company recorded $202,300, in debt issue costs
based on the estimated fair value of $0.67 per share.
On February 3, 1997, the Company issued 1,312,500 shares of its common
stock and $1,500,000 in promissory notes to the sole stockholder of VPI in
exchange for all of the outstanding shares of VPI, and VPI became a wholly-owned
subsidiary of the Company (see Note 1).
Immediately preceding the Company's IPO, certain of the holders of the
Company's convertible notes had those notes, and any accrued interest thereon,
converted into 258,200 shares of the Company's common stock (See Note 11).
On February 4, 1997, the Company completed an IPO of its shares, selling
2,045,000 shares of its common stock, including the over-allotment, to the
public and raising approximately $6.5 million net of fees and expenses. In
addition, the former sole stockholder of VPI sold 600,000 of his shares of
Company stock in the IPO (See Note 11).
Effective December 15, 1997, the Company issued 208,500 shares of the
Company's common stock for all of the outstanding shares of Advantis Network &
Systems Sdn Bhd. Further, depending upon Advantis collecting certain accounts
receivable prior to June 30, 1998 and meeting certain profit targets over the
following two years, the Company could be obligated to issue up to an additional
321,500 shares of its common stock to the former Advantis stockholders (see Note
1).
F-16
<PAGE> 36
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTIONS AND WARRANTS
Stock Options
BFI's Stock Option Plan adopted in February 1994 (the BFI Plan) provided
for the granting of 976,500 stock options (after giving effect to the 3-for-4
exchange ratio in connection with the BFI Merger). Upon consummation of the BFI
Merger (see Note 1), the stock options outstanding under BFI's Plan were re-
granted by the Company and are subject to the terms of the Equity Incentive Plan
adopted by the Company and approved by its stockholders on January 23, 1997. At
its August 1997, stockholders meeting, the stockholders of the Company approved
an increase to the Company's stock option plan of 500,000 shares. The Equity
Incentive Plan is administered by the Company's Board of Directors. Options
granted may be either incentive stock options, as defined in the Internal
Revenue Code, or non-qualified options. The stock options are exercisable over a
period determined by the Board of Directors, but no longer than ten years after
the date of grant. The vesting schedule for incentive stock options usually
covers a three or four year period ranging from one-third immediately and the
remainder equally over the next two years to 25% at the end of the first year
and the remainder monthly over the next three years. Vesting for non-qualified
stock options is determined on a grant-by-grant basis. Incentive stock options
must have an exercise price of not less than fair market value of the common
stock on the date of grant (or, for incentive stock options granted to a person
holding more than 10% of the voting power of the Company, options must have an
exercise price equal to 110% of the fair market value, and be exercisable for a
period of five years). The aggregate fair value of the common stock subject to
options granted to an optionee that are exercisable for the first time by an
optionee during any calendar year may not exceed $100,000. Options generally
expire three months following termination of employment. The Company recorded no
compensation expense related to grants and exercise of stock options in 1996 and
$3,800 in 1997.
The following table summarizes transactions pursuant to the Company's Plan:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION PRICE REMAINING
PER AVAILABLE CONTRACTUAL
SHARE OUTSTANDING EXERCISABLE FOR GRANT LIFE
------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
January 1, 1996....................... $3.20 492,200 277,400 484,300 9.8 years
Granted............................... 3.20 42,200 -- (42,200) 10 years
Became exercisable.................... 3.20 -- 110,000 --
----- --------- ------- -------- ---------
December 31, 1996..................... 3.20 534,400 387,400 442,100 8.8 years
===== ========= ======= ======== =========
Added to option reserve............... -- -- 500,000
Canceled.............................. 3.20 (126,600) (59,800) 126,600
Granted............................... 3.15 746,300 -- (746,300) 10 years
Became exercisable.................... 3.50 -- 113,000 --
----- --------- ------- -------- ---------
December 31, 1997..................... $3.16 1,154,100 440,600 322,400 9 years
===== ========= ======= ======== =========
</TABLE>
The Company applies APB Opinion. No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for the plan. Under APB
Opinion No. 25, because the exercise price of the Company's stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
the Company to provide pro forma information regarding net loss as if
compensation cost for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in FASB Statement No.
123. The Company estimates the fair value of each stock option at the grant date
by using a modified Black-Scholes pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997, respectively:
F-17
<PAGE> 37
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
no dividend yield for any year; expected volatility of near-zero and 20%;
risk-free interest rates of 6.65% and 6.6%; and expected lives of approximately
three to five years. The weighted average fair value of options granted in 1996
and 1997 was $0.77 and $0.99.
Under the accounting provisions of FASB Statement No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net loss
As reported............................................. $(1,828,000) $(4,591,200)
Pro forma............................................... $(1,837,000) $(4,749,100)
Per share as reported................................... $ (4.20) $ (1.18)
Per share pro forma..................................... $ (4.22) $ (1.22)
</TABLE>
The above pro forma information includes only the effects of 1996 and 1997
grants. Because options potentially vest over several years and additional
awards are made each year, the results shown above may not be representative of
the effects on net earnings in future years.
Warrants
In connection with certain debt financing and the IPO, the Company has
granted various warrants to purchase common stock. The following schedule
summarizes the activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED AVERAGE
WARRANT PRICE REMAINING
PER SHARE OUTSTANDING CONTRACTUAL LIFE
------------- ----------- ----------------
<S> <C> <C> <C>
January 1, 1996............................... $37.23 7,200 4.5 years
Warrants issued in connection with debt
financing................................... $ 4.80 609,900
------ ------- ---------
December 31, 1996............................. $ 5.18 617,100 3.0 years
Warrants issued to Underwriter in connection
with Initial Public Offering................ $ 4.80 230,000
------ ------- ---------
December 31, 1997............................. $ 5.08 847,100 2.6 years
====== ======= =========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company's impairment testing business exposes it to potential
litigation (i) by employees of companies using the FACTOR 1000(R) system if the
employee's employment relationship is affected thereby and (ii) by third parties
who may be indirectly affected by the Company's services or products. Product
and service liability insurance is expensive, to the extent it is available at
all. As of December 31, 1997, the Company maintained general liability insurance
in the amount of $2.0 million per occurrence and $2.0 million in the aggregate,
and an umbrella policy with a $5.0 million limit which was obtained in
connection with the VPI Acquisition. The Company maintains product liability
insurance of $2.0 million per occurrence and $2.0 million in the aggregate.
The Company's FACTOR 1000(R) product is based on licensed technology.
Accordingly, the Company is required to pay a royalty of up to 8.5% of sales of
the related product. Beginning January 1997, the license agreement also provides
for a minimum aggregate payment over each three-year period of $150,000. In
addition, the Company's license permits the sublicense of the CTT technology and
requires that the Company make payments to its licensor on such sublicensing
arrangements as follows: (i) a royalty payment of 8.5% on up to $250,000 of the
initial sublicense fee and 50% of any sublicense fee in excess of $250,000; and
(ii) a royalty payment equal to 50% of the sublicense fee, which amount must be
at least 4.25% of the sublicensee's
F-18
<PAGE> 38
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gross contract revenue. The Company's ability to sell its product is dependent
on the continuation of this license. See business section of summary of
accounting policies regarding the Company's March 1998 formalization of a plan
to exit from the business related to its FACTOR 1000(R) product.
The Company leases certain property consisting of corporate and sales
office facilities and equipment under operating leases that expire at varying
dates through August 2000. Certain facility leases require the Company to pay
real estate taxes, maintenance and utilities. Future minimum annual commitments
under these leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1998.............................................. $311,000
1999.............................................. 316,000
2000.............................................. 166,000
--------
$793,000
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $44,500 and
$287,500.
The Company has entered into employment agreements with two officers that
provide for specified severance payments should the Company terminate the
executive's employment with the Company, other than for cause. The amount to be
paid is two years' base salaries and bonuses. In addition, pursuant to an
employment agreement with the President of the Voice Plus subsidiary, should the
Company terminate the executive's employment with the Company, other than for
cause, the Company is obligated to make certain severance payments. The amount
to be paid through the end of his employment agreement on February 3, 2000 is
his base salary of $150,000 per annum and 50% of the commissions he would have
earned during the period. In addition, the Company has entered into two-year
employment agreements with two VPI employees which expire in January 1999 and
provide for an annual base salary of $65,000, sales commissions payable pursuant
to an annual sales compensation plan and performance-based bonus payments.
7. RELATED PARTY TRANSACTIONS
In June 1996, BFI issued an aggregate of 178,700 shares of its common stock
to three of its officers in lieu of cash compensation; and, in June 1996, BFI
issued an aggregate of 37,500 shares to two of its directors for services
rendered. These shares were valued at $0.67 per share. In connection therewith,
$110,000 was accrued as deferred compensation to officers as of December 31,
1995, and the Company recorded an additional $9,700 of compensation expense and
$25,000 of outside service fees in 1996.
On November 5, 1996, two of BFI's officers, VPI and a company controlled by
a director of BFI purchased $135,000, $50,000 and $50,000, respectively, of
unsecured promissory notes pursuant to Unit Subscription Agreements. These
borrowings were subsequently repaid, utilizing proceeds from the IPO in February
1997 (see Note 11).
At December 31, 1997, the Company had notes receivable from stockholders
totaling $267,000 (see Note 2).
At December 31, 1997, the Company owed $250,000 to a stockholder of the
Company in connection with the acquisition of Voice Plus (see Note 3). During
1997, the Company paid $1,250,000 in principal and $36,100 in interest to this
stockholder.
At December 31, 1997, the Company's Advantis subsidiary owed $426,700 for
various inventory purchases from certain companies whose directors are also
stockholders of the Company.
At December 31, 1997, the Company's Advantis subsidiary owed $58,200 to
certain stockholders for expenses paid by these stockholders on behalf of the
Company.
F-19
<PAGE> 39
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's Advantis subsidiary leases its corporate facilities from an
entity that is partially owned by a minority stockholder of the Company. The
lease commenced in November 1996, and its terms provide for annual payments of
$42,500 through October 1999.
8. CONCENTRATION RISK
Revenues from one customer accounted for approximately 88% of total net
revenues during the year ended December 31, 1996. Revenues from two customers
accounted for approximately 19% and 7% of total net revenues during the year
ended December 31, 1997. Included in accounts receivable at December 31, 1997 is
$270,000 and $500,600 due from these two customers.
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States and Malaysia. The Company
performs ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
The Company's Voice Plus subsidiary historically purchases substantially
all of its inventory requirements from one vendor, Centigram Communications
Corporation ("Centigram"). Any termination or adverse change in the Company's
distributor relationship with Centigram would have a material adverse impact
upon the Company's voice processing business. Centigram has publicly announced
that it has hired a third party firm to identify potential buyers for its
customer premise equipment business which may adversely effect the largest
portion of the Company's current business. The effect on the Company cannot be
fully determined at this time. In addition, the Company depends upon Centigram
to offer products which are competitive with products offered by other
manufacturers as to technological advancement, reliability and price. If
Centigram's competitors should surpass Centigram in any of these qualities, the
Company may be required to establish alternative strategic relationships. Any
such development would have an adverse effect on the Company's business for an
indeterminate period of time until new supplier relationships could be
established. Included in accounts payable at December 31, 1997, is $668,100 due
to Centigram.
Cash and cash equivalents are held principally at three high quality
financial institutions. At times, such balances may be in excess of the FDIC
insurance limit.
9. INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. As of December 31, 1997, the Company's net operating
losses for federal income tax purposes were approximately $6 million, and expire
between the years 2008 and 2012. For state income tax purposes, as of December
31, 1997, the Company had net operating loss carryforwards of approximately
$47,000 which expire in 2002. The use of Federal net operating loss
carryforwards is subject to an annual limit of approximately $250,000 as the
Company has incurred an "ownership change". Subject to the approval of the tax
authorities of Malaysia, the Company's Malaysian subsidiary has a $30,000
unabsorbed tax loss carryforward as of December 31, 1997.
Deferred tax assets at December 31, 1997 consist primarily of the
following:
<TABLE>
<S> <C>
Cash to accrual change for tax purposes..................... $ 462,000
Reserves and accrued liabilities............................ 199,700
Net operating loss carryforwards............................ 2,095,400
2,757,100
Less valuation allowance.................................... (2,757,100)
-----------
Net deferred tax asset...................................... $ --
===========
</TABLE>
F-20
<PAGE> 40
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company established a 100% valuation allowance
for the gross deferred tax asset since management could not determine that it
was more likely than not that the deferred tax asset can be realized.
10. EMPLOYEE COMPENSATION AND BENEFITS
The Company's Voice Plus subsidiary has a 401(k) profit sharing plan in
which all qualifying employees with a minimum of 1,000 hours of service at year
end are eligible to participate. Matching contributions are made at the
discretion of the Company's Board of Directors. The Company pays all fees to
administer the plan. Total expense under this plan was $48,100 for the year
ended December 31, 1996. There were no matching contributions during the year
ended December 31, 1997.
Advantis, as a Malaysian company, is obligated to pay a minimum
contribution equivalent to 12% of employee salaries to a fund administered by
the government. Contributions in excess of 12% are discretionary. The
contribution expense for the period from December 15, 1997 (acquisition date) to
December 31, 1997 amounted to $1,400.
11. 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. The Company's common stock is quoted on The NASDAQ
Stock Market SmallCap System. In connection with the closing of the IPO, the
Company converted certain notes and related accrued interest in an aggregate
amount of $1,032,600 to common stock and issued warrants for various amounts of
common stock for every $1,000 of notes.
12. PROPOSED ACQUISITION AND FINANCING
On January 16, 1998, the Company entered into a definitive agreement to
acquire all of the issued and outstanding shares of capital stock of Infotel
Technologies Pte Ltd ("Infotel"), a company organized under the laws of
Singapore which provides radar system integration, turn key project management
services, test instrumentation, as well as a wide portfolio of communication
equipment. Consummation of the transaction is contingent upon the Company
obtaining third party financing on terms satisfactory to the Company by April
13, 1998 or such later date as agreed upon by the parties. The Company recently
closed a financing to be used in part to pay the cash portion of the Infotel
acquisition. Under the terms of the financing, the Company will not receive
sufficient funds in the time needed to meet the terms of the Infotel
acquisition. Consequently, the Company has requested an extension from the
Infotel shareholders and has received confirmation of their intention to grant
an extension subject to several concessions. This acquisition will not close
under its terms unless an extension is granted and the initial cash portion of
the purchase price is funded. The basic terms of the acquisition agreement
require an initial cash payment of about $2.3 million, performance payments
based on profits in 1998 and 1999 of about $2 million and 431,000 shares of
NHancement's Common Stock, subject to certain price protections.
On April 9, 1998, the Company signed a $3.0 million Convertible Preferred
Stock financing agreement. Under the terms of the agreement, the Company
received $750,000 (less certain commissions and expenses) upon signing, and will
receive $500,000 upon filing of an S-3 registration statement, $500,000 sixty
days after the effective date of the registration statement, $500,000 thirty
days thereafter and the final $750,000
F-21
<PAGE> 41
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thirty days thereafter. The Preferred Stock bears a 5% cumulative dividend and
has a liquidation preference equal to the original purchase price plus cumulated
but unpaid dividends. If the Company's common stock trades for a thirty day
average below $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 million in excess of the first two payments aggregating
$1,250,000. 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 cumulated 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 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 at the 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 Company intends to utilize the proceeds of this financing to pay
a portion of the initial cash payment on the pending Infotel acquisition and for
working capital.
F-22
<PAGE> 42
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
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.
F-23
<PAGE> 43
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998
------------
<S> <C>
CURRENT
Cash and cash equivalents................................. $ 935,900
Accounts receivable, less allowance for doubtful accounts
of $515,000............................................ 1,601,500
Notes receivable from stockholders........................ 112,000
Inventory................................................. 526,400
Prepaid expenses and other................................ 330,700
Income tax receivable..................................... 225,600
------------
TOTAL CURRENT ASSETS........................................ 3,732,100
------------
PROPERTY AND EQUIPMENT...................................... 1,289,700
Less accumulated depreciation.......................... 631,500
------------
PROPERTY AND EQUIPMENT, net................................. 658,200
------------
Excess of cost over net assets acquired of Voice Plus, Inc.,
net of accumulated amortization of $75,000................ 1,425,000
Excess of cost over net assets acquired of Advantis, net of
accumulated amortization of $29,000....................... 962,300
Long-term portion of notes receivable from stockholders..... 162,600
Deferred acquisition costs.................................. 119,400
Other assets................................................ 131,200
------------
$ 7,190,800
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit........................................... 311,000
Accounts payable.......................................... 839,800
Accrued liabilities....................................... 436,700
Payable to affiliates..................................... 440,600
Deferred revenue.......................................... 1,032,800
Current portion of long-term debt......................... 298,000
------------
TOTAL CURRENT LIABILITIES................................... 3,358,900
LONG-TERM DEBT, net of current portion...................... 162,500
------------
TOTAL LIABILITIES........................................... 3,521,400
------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares
authorized,
no shares issued and outstanding....................... --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 4,437,000 shares issued and outstanding.... 44,400
Additional paid-in capital................................ 18,020,600
Accumulated deficit....................................... (14,387,500)
Cumulative translation adjustment......................... (8,100)
------------
TOTAL STOCKHOLDERS' EQUITY.................................. 3,669,400
------------
$ 7,190,800
============
</TABLE>
F-24
<PAGE> 44
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
NET SALES................................................... $1,431,900 $1,216,500
Cost of sales............................................... 636,600 850,000
---------- ----------
GROSS PROFIT................................................ 795,300 366,500
---------- ----------
OPERATING EXPENSES
Research and development.................................... 23,700 --
Selling, marketing and administrative....................... 611,900 1,089,300
Amortization of excess of cost over net assets acquired..... 98,900 99,800
---------- ----------
TOTAL OPERATING EXPENSES.................................... 734,500 1,189,100
---------- ----------
INCOME (LOSS) FROM OPERATIONS............................... 60,800 (822,600)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income............................................. 38,400 21,600
Interest expense............................................ (46,200) (26,500)
Other....................................................... -- 41,200
---------- ----------
(7,800) 36,300
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................... 53,000 (786,300)
---------- ----------
INCOME TAXES................................................ 10,400 --
---------- ----------
NET INCOME (LOSS)........................................... $ 42,600 $ (786,300)
---------- ----------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE........ $ 0.02 $ (.18)
---------- ----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
2,682,000 4,436,500
OPTIONS AND WARRANTS........................................ 125,100 --
---------- ----------
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 2,807,100 4,436,500
========== ==========
</TABLE>
F-25
<PAGE> 45
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
PAR VALUE ADDITIONAL TRANSLATION
------------------- PAID-IN- ACCUMULATED GAIN
SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
--------- ------- ----------- ------------ ----------- ----------
<S> <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
Cumulative translation loss
Advantis.................. (19,400) (19,400)
Net loss.................... -- -- -- (786,300) -- (786,300)
--------- ------- ----------- ------------ -------- ----------
BALANCE, March 31, 1998..... 4,436,500 $44,400 $18,020,600 $(14,387,500) $ (8,100) $3,669,400
========= ======= =========== ============ ======== ==========
</TABLE>
F-26
<PAGE> 46
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 42,600 $ (786,300)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and other amortization....................... 126,200 153,400
Other..................................................... -- (19,400)
Changes in operating assets and liabilities:
Accounts receivable.................................... 420,000 1,403,700
Income tax receivable.................................. -- (53,600)
Inventory.............................................. 17,400 9,800
Prepaid expenses and other............................. (220,300) (223,700)
Other assets........................................... 51,700 6,200
Accounts payable and other current liabilities......... (2,405,000) (1,032,400)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES....................... (1,967,400) (542,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from VPI Acquisition........................ 851,900 --
Purchase of property and equipment........................ (35,200) (9,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... 816,700 (9,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under line of credit........................ -- 124,000
Principal payment of long-term debt....................... (1,814,000) --
Proceeds from initial public offering of common stock, net
of offering costs...................................... 6,962,200 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 5,148,200 124,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,997,500 (427,300)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 60,100 1,363,200
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 4,057,600 $ 935,900
=========== ===========
</TABLE>
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.
F-27
<PAGE> 47
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.(TM) ("VPI" or "Voice
Plus"), a California corporation, 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.
The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd.
2. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The accompanying consolidated financial statements as of March 31, 1998 and
for the three months ended March 31, 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.
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.
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity.
Because of a net loss during the three months ended March 31, 1998 options and
warrants to purchase 1,116,600 shares of common stock were outstanding but were
not included in the computation of diluted loss per common share because the
effect would be antidilutive.
F-28
<PAGE> 48
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. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future statement disclosures. Results of operations and financial
position, however, will be unaffected by 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. Because of the recent issuance of this standard,
management 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, 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.
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
F-29
<PAGE> 49
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.
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 March 31, 1998, no additional options of the
Company's Common Stock were granted.
6. PENDING ACQUISITION AND FINANCING
On January 16, 1998, the Company entered into a definitive agreement to
acquire all of the issued and outstanding shares of capital stock of Infotel
Technologies Pte Ltd ("Infotel"), a Singapore company which provides radar
system integration, turnkey project management services, test instrumentation,
as well as a wide portfolio of communication equipment. Consummation of the
transaction is contingent upon the Company obtaining third party financing
necessary to complete the acquisition, the closing of which must occur, if at
all, by no later than June 24, 1998. The basic terms of the acquisition
agreement require an initial cash payment of about $2.3 million, notes payable
of approximately $2.0 million (with payment subject to Infotel achieving certain
1998 and 1999 profitability targets), and the issuance of 431,000 shares of
NHancement's Common Stock. In the event that the transaction fails to close by
June 24, 1998, the Company is obligated to pay a termination fee in the amount
of $300,000 plus interest.
On April 13, 1998, the Company signed a $3.0 million Convertible Preferred
Stock financing agreement. Under the terms of the agreement, the Company had
been paid $1,250,000 as of the initial date of filing of the Company's first
quarter report on Form 10-QSB (less commissions and certain other costs and
expenses of approximately $162,500) and, subject to satisfaction of certain
conditions specified in the stock purchase agreement documentation, will receive
$500,000 sixty days after the effective date of an S-3 registration statement,
$500,000 thirty days thereafter and the final $750,000 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 the Company's common stock trades for a five day average
(immediately prior to a closing date under the Convertible Preferred Stock
financial agreement) below $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
F-30
<PAGE> 50
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 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 issuance of the $3.0 million of Series A Convertible Preferred
Stock that is convertible into shares of Common Stock at a 25% discount, which
will be reflected as a preferred stock dividend, 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. The Company intends to utilize the
proceeds of this financing to pay a portion of the initial cash payment on the
pending Infotel acquisition and for working capital.
7. SUBSEQUENT EVENTS
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) 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 Convertible Preferred Stock financing (see Note 6),
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. While the Company presently meets and believes that in the future
it will be in a position to continue to meet these listing requirements, such
belief is dependent in part upon the Company completing the Infotel acquisition,
the financing for which had not been completed as of the date of this Proxy
Statement. There can be no assurance that the Company will in fact meet these
requirements in any future period. (See "Liquidity and Capital Resources".)
8. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of BioFactors, VPI and Advantis, for the three months ended March 31,
1998 and 1997, as if the VPI and Advantis acquisitions had occurred at the
beginning of the respective periods, after giving effect to certain adjustments,
including the amortization of excess of costs over assets acquired, interest
expense on notes payable to stockholder, additional salaries, and recalculation
of estimated income taxes. The following unaudited pro forma summary does not
necessarily reflect the results of operations as they would have been had the
VPI and Advantis acquisitions occurred at the beginning of the periods presented
and is not necessarily indicative of the results of operations for any future
period.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Net sales........................................... $4,981,400 $1,216,500
Cost of sales....................................... 3,350,100 850,000
Gross profit........................................ 1,431,300 366,500
Total operating expenses (includes amortization of
excess of cost over net assets acquired).......... 1,242,600 1,189,100
Income (loss) from operations....................... 188,700 (822,600)
Other income (expense).............................. (4,100) 41,200
Income (loss) before income taxes................... 184,600 (786,300)
Income taxes........................................ 9,500 --
Net income (loss)................................... $ 175,100 $ (786,300)
Net income (loss) per common share.................. $ 0.05 $ (.18)
Weighted average common and common equivalent shares
outstanding....................................... 3,563,200 4,436,500
========== ==========
</TABLE>
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ANNEX A
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance set
forth below, is entered into by and between NHANCEMENT TECHNOLOGIES, INC., a
Delaware corporation, with headquarters located at 39420 Liberty Street, Suite
250, Fremont, CA 94538 (the "Company"), and each entity named on a signature
page hereto (each, a "Buyer").
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, shares of Series A Convertible Preferred Stock,
$0.01 par value per share (the "Convertible Preferred Stock"), of the Company,
which which will be convertible into shares of Common Stock, $0.01 par value per
share, of the Company (the "Common Stock"), upon the terms and subject to the
conditions of such Convertible Preferred Stock, and subject to acceptance of
this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions. (i) The undersigned hereby agrees to
initially purchase from the Company shares of the Convertible Preferred Stock in
the amount set forth on the signature page of this Agreement (the "Initial
Preferred Stock"), out of a total offering of $3,000,000 of such Convertible
Preferred Stock, and having the terms and conditions set forth in the
Certificate of Designations, Preferences and Relative, Participating, Optional
and Other Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Preferred Stock of the Company attached hereto
as Annex I (the "Certificate of Designations"). The purchase price for the
Initial Preferred Stock shall be as set forth on the signature page hereto and
shall be payable in United States Dollars.
(ii) As used herein, the term "Preferred Stock" means the Initial Preferred
Stock and the Additional Preferred Stock (as defined below), unless the context
otherwise requires.
(iii) As used herein, the term "Securities" means the Preferred Stock and
the Common Stock issuable upon conversion of the Preferred Stock.
(iv) As used herein, the term "Purchase Price" means the purchase price for
the Initial Preferred Stock or the Additional Preferred Stock, as the case may
be.
(v) As used herein, the term "Initial Closing Date" means the date of the
closing of the purchase and sale of the Initial Preferred Stock, as provided
herein.
(vi) As used herein, the term "Additional Closing Date" means the date of
the closing of the purchase and sale of the relevant Additional Preferred Stock,
as provided herein.
(vii) As used herein, the term "Closing Date" means the relevant Initial
Closing Date or Additional Closing Date, as the case may be.
(viii) As used herein, the term "Market Price of the Common Stock" means
(x) the average closing bid price of the Common Stock for the five (5) trading
days ending on the trading day immediately before the date indicated in the
relevant provision hereof as reported by Bloomberg, LP or, if not so reported,
as reported
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on the over-the-counter market or (y) if the Common Stock is listed on a stock
exchange, the closing price on such exchange on the date indicated in the
relevant provision hereof, as reported in The Wall Street Journal.
(ix) As used herein, the term "Effective Date" means the effective date of
the Registration Statement covering the Registrable Securities (as that term is
defined in the Registration Rights Agreement defined below).
b. Form of Payment; Delivery of Preferred Stock.
(i) The Buyer shall pay the Purchase Price for the relevant Preferred Stock
by delivering immediately available good funds in United States Dollars to the
escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions
attached hereto as Annex II (the "Joint Escrow Instructions") on the date prior
to the relevant Closing Date.
(ii) No later than the relevant Closing Date, but in any event promptly
following payment by the Buyer to the Escrow Agent of the relevant Purchase
Price, the Company shall deliver one or more certificates representing the
relevant Preferred Stock, duly executed by or on behalf of the Company
(collectively, the "Certificate"), to the Escrow Agent.
(iii) By signing this Agreement, each of the Buyer and the Company, subject
to acceptance by the Escrow Agent, agrees to all of the terms and conditions of,
and becomes a party to, the Joint Escrow Instructions, all of the provisions of
which are incorporated herein by this reference as if set forth in full.
c. Method of Payment. Payment into escrow of the Purchase Price shall be
made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: -
Not later than 5:00 p.m., New York time, on the date which is two (2) New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Escrow Agent by
facsimile, the Buyer shall deposit with the Escrow Agent the Purchase Price for
the Initial Preferred Stock in currently available funds. Time is of the essence
with respect to such payment, and failure by the Buyer to make such payment,
shall allow the Company to cancel this Agreement.
d. Escrow Property. The Purchase Price and the Certificate delivered to
the Escrow Agent as contemplated by Sections 1(b) and (c) hereof are referred to
as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant to the
Registration Statement (as that term is defined in the Registration Rights
Agreement defined below), the Buyer is purchasing the Preferred Stock and will
be acquiring the shares of Common Stock issuable upon conversion of the
Preferred Stock (the "Converted Shares") for its own account for investment only
or as agent for other "accredited investors" (as that term is used in paragraph
2(b) below) and not with a view towards the public sale or distribution thereof
and not with a view to or for sale in connection with any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in
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any way by the Company or any of its affiliates or selling agents), to protect
its own interests in connection with the transactions described in this
Agreement, and the related documents, and (iv) able to afford the entire loss of
its investment in the Securities.
c. All subsequent offers and sales of the Preferred Stock and the shares of
Common Stock representing the Converted Shares (such Common Stock sometimes
referred to as the "Shares") by the Buyer shall be made pursuant to registration
of the Shares under the 1933 Act or pursuant to an exemption from registration.
d. The Buyer understands that the Preferred Stock are being offered and
sold to it in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Preferred Stock.
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including Annex V hereto. The
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity to obtain and to review an unfiled draft of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as provided to the Buyer under cover of a copy of a letter, dated March 8,
1998 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities involves a
high degree of risk.
g. The Buyer understands that no United States federal or state agency or
any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
i. Notwithstanding the provisions hereof or of the Preferred Stock, in no
event (except if the Company is in default under any of the terms of the
Certificate of Designations or any of the Transaction Agreements, as defined
below and the Purchaser has asserted such default) shall the holder be entitled
to convert any Preferred Stock to the extent that, after such conversion, the
sum of (1) the number of shares of Common Stock beneficially owned by the Buyer
and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Preferred Stock), and (2) the number of shares of Common Stock issuable upon the
conversion of the Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by the Buyer
and its affiliates of more than 9.99% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided
in clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that, except as provided
in Annex V hereto:
a. Concerning the Preferred Stock and the Shares. The Preferred Stock has
been duly authorized, and when issued, will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder. There are no preemptive rights of any
stockholder of the Company, as such, to acquire the Preferred Stock or the
Shares.
b. Reporting Company Status. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly qualified as a foreign
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corporation to do business and is in good standing in each jurisdiction where
the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or condition (financial or otherwise) of the Company. The Company has registered
its Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock is
listed and traded on The NASDAQ/SmallCap Market. The Company has received no
notice, either oral or written, with respect to the continued eligibility of the
Common Stock for such listing, and the Company has maintained all requirements
for the continuation of such listing.
c. Authorized Shares. The Company has sufficient authorized and unissued
Shares as may be reasonably necessary to effect the conversion of the Preferred
Stock. The Converted Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Preferred Stock in accordance with the
terms of the Certificate of Designations will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement and
Stock. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as Annex IV (the "Registration Rights Agreement"), and the
transactions contemplated thereby, have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company and
this Agreement is, and the Registration Rights Agreement, when executed and
delivered by the Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium, and other similar laws affecting the enforcement of creditors'
rights generally; and the Preferred Stock will be duly and validly authorized
and, when executed and delivered on behalf of the Company in accordance with
this Agreement, will be a valid and binding obligation of the Company in
accordance with its terms, subject to general principles of equity and to
bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Company, the issuance of the Securities,
and the consummation by the Company of the other transactions contemplated by
this Agreement, the Registration Rights Agreement, and the Preferred Stock do
not and will not conflict with or result in a breach by the Company of any of
the terms or provisions of, or constitute a default under (i) the articles of
incorporation or by-laws of the Company, each as currently in effect, (ii) any
indenture, mortgage, deed of trust, or other material agreement or instrument to
which the Company is a party or by which it or any of its properties or assets
are bound, including any listing agreement for the Common Stock except as herein
set forth, (iii) to its knowledge, any existing applicable law, rule, or
regulation or any applicable decree, judgment, or order of any court, United
States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, or (iv) the Company's listing agreement for its Common Stock, except
such conflict, breach or default which would not have a material adverse effect
on the Company or on the transactions contemplated herein.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC Filings. None of the Company's SEC Documents contained, at the time
they were filed, any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
made therein in light of the circumstances under which they were made, not
misleading. The Company has since January 1, 1997 timely filed all requisite
forms, reports and exhibits thereto with the SEC.
h. Absence of Certain Changes. Since January 1, 1998, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), or results of
operations of the Company, except as disclosed in the Company's SEC Documents.
Since January 1,
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1998, except as provided in the Company's SEC Documents, the Company has not (i)
incurred or become subject to any material liabilities (absolute or contingent)
except liabilities incurred in the ordinary course of business consistent with
past practices; (ii) discharged or satisfied any material lien or encumbrance or
paid any material obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business consistent with past
practices; (iii) declared or made any payment or distribution of cash or other
property to stockholders with respect to its capital stock, or purchased or
redeemed, or made any agreements to purchase or redeem, any shares of its
capital stock; (iv) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practices; (v) suffered any substantial losses or waived
any rights of material value, whether or not in the ordinary course of business,
or suffered the loss of any material amount of existing business; (vi) made any
changes in employee compensation, except in the ordinary course of business
consistent with past practices; or (vii) experienced any material problems with
labor or management in connection with the terms and conditions of their
employment.
i. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally or as disclosed in the
Company's SEC Documents) that has not been disclosed in writing to the Buyer
that (i) would reasonably be expected to have a material adverse effect on the
business or financial condition of the Company , (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement or any of the agreements
contemplated hereby (collectively, including this Agreement, the "Transaction
Agreements"), or (iii) would reasonably be expected to materially and adversely
affect the value of the rights granted to the Buyer in the Transaction
Agreements.
j. Absence of Litigation. Except as set forth in the Company's SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business or financial condition, or results of operation of the
Company and its subsidiaries taken as a whole or the transactions contemplated
by any of the Transaction Agreements or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, any of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Section 3(e)
hereof, no Event of Default (or its equivalent term), as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (or its equivalent term) (as so defined in such agreement), has occurred
and is continuing, which would have a material adverse effect on the Company's
financial condition or results of operations.
l. Prior Issues. During the twelve (12) months preceding the date hereof,
the Company has not issued any convertible securities. The presently outstanding
unconverted principal amount of each such issuance as at April 8, 1998 are set
forth in Annex V.
m. No Undisclosed Liabilities or Events. The Company has no liabilities or
obligations other than those disclosed in the Company's SEC Documents or those
incurred in the ordinary course of the Company's business since January 1, 1998,
and which individually or in the aggregate, do not or would not have a material
adverse effect on the properties, business, condition (financial or otherwise),
or results of operations of the Company. No event or circumstances has occurred
or exists with respect to the Company or its properties, business, condition
(financial or otherwise), or results of operations, which, under applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed.
There are no proposals currently under consideration or currently anticipated to
be under consideration by the Board of Directors or the executive officers of
the Company which proposal would (x) change the charter or by-laws of the
Company, each as currently in effect, with or without shareholder approval,
which change would reduce or otherwise adversely affect the rights and powers of
the shareholders of the Common Stock or (y) materially or substantially change
the business, assets or capital of the Company, including its interests in
subsidiaries.
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n. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property is
bound.
o. No Integrated Offering. Neither the Company nor any of its affiliates
nor any person acting on its or their behalf has, directly or indirectly, at any
time since January 1, 1997, made any offer or sales of any security or solicited
any offers to buy any security under circumstances that would eliminate the
availability of the exemption from registration under Rule 506 of Regulation D
in connection with the offer and sale of the Securities as contemplated hereby.
p. Dilution. The number of Shares issuable upon conversion of the
Preferred Stock may increase substantially in certain circumstances, including,
but not necessarily limited to, the circumstance wherein the trading price of
the Common Stock declines prior to the conversion of the Preferred Stock. The
Company's executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded,
in its good faith business judgment, that such issuance is in the best interests
of the Company. The Company specifically acknowledges that its obligation to
issue the Shares upon conversion of the Preferred Stock is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Preferred
Stock have not been and are not being registered under the provisions of the
1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company and opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Preferred Stock and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective Registration Statement, certificates and other
instruments representing any of the Securities shall bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to enter into
the Registration Rights Agreement on or before the Closing Date.
d. Filings and Shareholder Consent. (i) The Company undertakes and agrees
to make all necessary filings in connection with the sale of the Preferred Stock
to the Buyer under any United States laws and
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regulations applicable to the Company, or by any domestic securities exchange or
trading market, and to provide a copy thereof to the Buyer promptly after such
filing.
(ii) The Company undertakes and agrees to take all steps necessary to have
a vote of the shareholders of the Company regarding authorization of the
Company's issuance to the holders of the Preferred Stock of shares of Common
Stock in excess of twenty percent (20%) of the outstanding shares of Common
Stock on the Initial Closing Date or any Additional Closing Date, whichever is
higher on or before the Effective Date in accordance with NASDAQ Rule
4301(c)(25)(H)(i)(d)(2). The Company will recommend to the shareholders that
such authorization be granted and will seek proxies from shareholders not
attending the meeting (if such meeting is required to effectuate such
authorization) naming a director or officer of the Company as such shareholder's
proxy and directing the proxy to vote, or giving the proxy the authority to
vote, in favor of such authorization. The Company has obtained the commitment of
each director and officer of the Company owning, directly or indirectly, shares
of the Common Stock or who might be designated as a proxy for shareholders that
such director or officer will vote such shares and any proxy given to him or her
(except to extent specifically directed otherwise in a proxy) in favor of such
authorization. Upon determination that the shareholders have voted in favor of
such authorization, the Company shall cause its counsel to issue to the Buyer an
unqualified opinion (the "Authorization Opinion") that such authorization has
been duly adopted by all necessary corporate action of the Company and that the
Company will be able to issue, without restriction as to the number of such
shares, all shares of Common Stock as may be issuable upon conversion of the
Preferred Stock and without any limits imposed by the Cap Regulations (as
defined below) adopted on or before and in effect on the date of the
Authorization Opinion. The Authorization Opinion shall state that the Buyer may
rely thereon in connection with the transactions contemplated regarding the
Additional Preferred Stock and its holdings of the Preferred Stock.
e. Reporting Status. So long as the Buyer beneficially owns any of the
Preferred Stock, the Company shall file all reports required to be filed with
the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall
not terminate its status as an issuer required to file reports under the 1934
Act even if the 1934 Act or the rules and regulations thereunder would permit
such termination. The Company will take all reasonable action under its control
to continue the listing and trading of its Common Stock on The NASDAQ/SmallCap
Market and will comply in all material respects with the Company's reporting,
filing and other obligations under the by-laws or rules of the National
Association of Securities Dealers, Inc. ("NASD") or The NASDAQ/SmallCap Market.
f. Use of Proceeds. The Company will use the proceeds from the sale of the
Preferred Stock (excluding amounts paid by the Company for legal fees, finder's
fees and escrow agent fees in connection with the sale of the Preferred Stock)
for internal working capital purposes and for payment of the purchase price of
Infotel Technologies (PTE) Ltd., a company incorporated in Singapore, and shall
not, directly or indirectly, use such proceeds for any loan to or investment in
any other corporation, partnership, enterprise or other person, including any of
its affiliates, or to repay any debt to any of its affiliates.
g. Certain Agreements. The Company covenants and agrees that it will not,
without the prior written consent of the Buyer, enter into any subsequent or
further offer or sale of Common Stock or securities convertible into Common
Stock with any third party on any date which is earlier than the later of (A)
one hundred eighty (180) days after the Effective Date or (B) one hundred twenty
(120) days after the last Additional Closing Date.
h. Future Purchases. (i) The Buyer hereby unconditionally and irrevocably
agrees to purchase from the Company, and the Company hereby unconditionally and
irrevocably agrees to issue to the Buyer additional shares of Preferred Stock
(collectively, the "Additional Preferred Stock") having a liquidation amount of
up to the relevant Additional Tranche identified in subparagraph (h)(ii) below
multiplied by a fraction, of which the numerator is the principal amount of the
Initial Preferred Stock and the denominator is $1,250,000. The Additional
Preferred Stock shall be issued and acquired in three tranches (each, an
"Additional Tranche"), on the terms and subject to the conditions hereinafter
provided.
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(ii) The first Additional Tranche (the "First Additional Tranche") and the
second Additional Tranche (the "Second Additional Tranche") shall be for
$500,000 each. The third Additional Tranche (the "Third Additional Tranche")
shall be for $750,000.
(iii) The closing for the First Additional Tranche shall occur on the date
(the "First Additional Closing Date") which is sixty (60) days after the
Effective Date, unless otherwise agreed to by the Company and the Buyer. The
closing for the Second Additional Tranche shall occur on the date (the "Second
Additional Closing Date") which is thirty (30) days after the First Additional
Closing Date, unless otherwise agreed to by the Company and the Buyer. The
closing for the Third Additional Tranche shall occur on the date (the "Third
Additional Closing Date") which is thirty (30) days after the Second Additional
Closing Date, unless otherwise agreed to by the Company and the Buyer. The
closing of each Additional Tranche shall be conducted upon the same terms and
conditions as those applicable to the Initial Preferred Stock. Each of the First
Additional Closing Date, the Second Additional Closing Date and the Third
Additional Closing Date is referred to as an "Additional Closing Date."
(iv) On the relevant Additional Closing Date, (A) the Registration
Statement required to be filed under the Registration Rights Agreement shall
continue to be effective, and (B) the representations and warranties of the
Company contained in Section 3 hereof shall be true and correct in all material
respects (and the Company's issuance of the relevant Additional Preferred Stock
shall constitute the Company's making each such representation and warranty as
of such date) and there shall have been no material adverse changes (financial
or otherwise) in the business or conditions of the Company from the Initial
Closing Date through and including the relevant Additional Closing Date (and the
Company's issuance of the relevant Additional Preferred Stock shall constitute
the Company's making such representation and warranty as of such date).
(v) It shall be a condition to the Buyer's obligation to purchase the
relevant Additional Preferred Stock that, as of the relevant Additional Closing
Date, (A) the Market Price of the Common Stock, as adjusted to reflect any stock
splits, reverse stock splits or stock dividends effected or declared after the
Initial Closing Date, be Two Dollars ($2.00) or more per share, (B) the average
daily trading volume for the Common Stock for the thirty (30) consecutive
trading days ending the day before the Additional Closing Date be twenty
thousand (20,000) or more shares, and (C) the Authorization Opinion shall have
been issued to the Buyer.
i. Available Shares. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to yield two hundred percent (200%) of the number of shares of Common
Stock issuable at conversion as may be required to satisfy the conversion rights
of the Buyer pursuant to the terms and conditions of the Preferred Stock.
j. Limitation on Issuance of Shares. The Company may be limited in the
number of shares of Common Stock it may issue by virtue of (i) the number of
authorized shares or (ii) the applicable rules and regulations of the principal
securities market on which the Common Stock is listed or traded (collectively,
the "Cap Regulations"). The Company agrees whether or not provided in the
Certificate of Designations, (i) the Company will take all steps reasonably
necessary to be in a position to issue shares of Common Stock on conversion of
the Preferred Stock without violating the Cap Regulations and (ii) if, despite
taking such steps, the Company still can not issue such shares of Common Stock
without violating the Cap Regulations, the holder of a share Preferred Stock
which can not be converted as result of the Cap Regulations (each such share, an
"Unconverted Preferred Stock") shall have the option, exercisable in such
holder's sole and absolute discretion, to elect either of the following
remedies:
(x) require the Company to issue shares of Common Stock in accordance
with such holder's notice of conversion at a conversion purchase price
equal to the average of the closing bid price per share of Common Stock for
any five (5) consecutive trading days (subject to certain equitable
adjustments for certain events occurring during such period) during the
sixty (60) trading days immediately preceding the date of notice of
conversion; or
A-8
<PAGE> 59
(y) require the Company to redeem such share of Unconverted Preferred
Stock for an amount (the "Redemption Amount"), payable in cash, equal to:
V
------
CP
x M
where:
"V" means the liquidation preference of a share of Unconverted
Preferred Stock plus any accrued but unpaid dividends thereon;
"CP" means the conversion price in effect on the date of redemption
(the "Redemption Date") specified in the notice from the holder of the
Unconverted Preferred Stock electing this remedy; and
"M" means the highest closing bid price per share of the Common Stock
during the period beginning on the Redemption Date and ending on the date
of payment of the Redemption Amount.
If a holder owns more than one share of Unconverted Preferred Stock, such holder
may elect one of the above remedies with respect to some of such shares of
Unconverted Preferred Stock and the other remedy with respect to other shares of
Unconverted Preferred Stock. The Certificate of Designations shall not contain
any provisions inconsistent with the above terms. The provisions of this
paragraph are not intended to limit the scope of the provisions otherwise
included in the Certificate of Designations.
k. Hedging Transactions. The Company understands that the Buyer may be a
so-called "hedge" fund, and the Company hereby expressly agrees that the Buyer
shall not in any way be prohibited or restricted from any purchases or sales of
any securities or other instruments of, or related to, the Company or any of its
securities, including, but not necessarily limited to, puts, calls, futures
contracts, short sales and hedging and arbitrage transactions. The Buyer
acknowledges that such purchases, sales and other transactions may be subject to
various federal and state securities laws and agrees to comply with all such
applicable securities laws.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the Purchase Price for
the Initial Preferred Stock in accordance with Section 1(c) hereof, the Company
will irrevocably instruct its transfer agent to issue Common Stock from time to
time upon conversion of the Preferred Stock in such amounts as specified from
time to time by the Company to the transfer agent, bearing the restrictive
legend specified in Section 4(b) of this Agreement prior to registration of the
Shares under the 1933 Act, registered in the name of the Buyer or its nominee
and in such denominations to be specified by the Buyer in connection with each
conversion of the Preferred Stock. The Company warrants that no instruction
other than such instructions referred to in this Section 5 and stop transfer
instructions to give effect to Section 4(a) hereof prior to registration and
sale of the Shares under the 1933 Act will be given by the Company to the
transfer agent and that the Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement, and applicable law. Nothing in
this Section shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities. If the
Buyer provides the Company with an opinion of counsel reasonably satisfactory to
the Company that registration of a resale by the Buyer of any of the Securities
in accordance with clause (1)(B) of Section 4(a) of this Agreement is not
required under the 1933 Act, the Company shall (except as provided in clause (2)
of Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Converted Shares, promptly instruct the Company's transfer agent
to issue one or more certificates for Common Stock without legend in such name
and in such denominations as specified by the Buyer.
b. Subject to the completeness and accuracy of the Buyer's representations
and warranties herein, upon the conversion of any Preferred Stock by a person
who is a non-U.S. Person, and following the expiration of any then applicable
Restricted Period (as those terms are defined in Regulation S), the Company,
shall, at its expense, take all necessary action (including the issuance of an
opinion of counsel) to assure that the Company's transfer agent shall issue
stock certificates without restrictive legend or stop orders in the name of
A-9
<PAGE> 60
Buyer (or its nominee (being a non-U.S. Person) or such non-U.S. Persons as may
be designated by Buyer) and in such denominations to be specified at conversion
representing the number of shares of Common Stock issuable upon such conversion,
as applicable. Nothing in this Section 5, however, shall affect in any way
Buyer's or such nominee's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities.
c. (i) The Company will permit the Buyer to exercise its right to convert
the Preferred Stock by telecopying or delivering an executed and completed
Notice of Conversion to the Company and delivering, within five (5) business
days thereafter, the original Preferred Stock being converted to the Company by
express courier, with a copy to the transfer agent.
(ii) The term "Conversion Date" means, with respect to any conversion
elected by the holder of the Preferred Stock, the date specified in the Notice
of Conversion, provided the copy of the Notice of Conversion is telecopied to or
otherwise delivered to the Company in accordance with the provisions hereof so
that is received by the Company on or before such specified date.
(iii) The Company shall, at its expense, take all actions and use all means
necessary and diligent to cause its transfer agent to transmit the certificates
representing the Converted Shares issuable upon conversion of any Preferred
Stock (together with Preferred Stock not being so converted) to the Buyer via
express courier, by electronic transfer or otherwise, within three (3) business
days (such third business day, the "Delivery Date") after (A) the business day
on which the Company has received both of the Notice of Conversion (by facsimile
or other delivery) and the original Preferred Stock being converted (and if the
same are not delivered to the Company on the same date, the date of delivery of
the second of such items) or (B) the date a dividend payment on the Preferred
Stock, which the Company has elected to pay by the issuance of Common Stock, as
contemplated by the Preferred Stock, was due.
d. The Company understands that a delay in the issuance of the Shares of
Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond two (2) business days from the
Delivery Date):
<TABLE>
<CAPTION>
LATE PAYMENT FOR EACH
$10,000 OF PREFERRED STOCK
LIQUIDATION PREFERENCE OR INTEREST
NO. BUSINESS DAYS LATE AMOUNT BEING CONVERTED
---------------------- ----------------------------------
<S> <C>
1................................... $100
2................................... $200
3................................... $300
4................................... $400
5................................... $500
6................................... $600
7................................... $700
8................................... $800
9................................... $900
10.................................. $1,000
>10................................. $1,000+$200 for each Business Day
Late beyond 10 days
</TABLE>
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit the Buyer's right to
pursue actual damages for the Company's failure to issue and deliver the Common
Stock to the Buyer. Furthermore, in addition to any other remedies which may be
available to the Buyer, in the event that the Company fails for any reason to
effect delivery of such shares of Common Stock within two (2) business days
after the Delivery Date, the Buyer will be entitled to revoke the relevant
Notice of Conversion by delivering a notice to such effect to the Company
whereupon the Company
A-10
<PAGE> 61
and the Buyer shall each be restored to their respective positions immediately
prior to delivery of such Notice of Conversion.
e. If, by the relevant Delivery Date, the Company fails for any reason to
deliver the Shares to be issued upon conversion of a Preferred Stock and after
such Delivery Date, the holder of the Preferred Stock being converted (a
"Converting Holder") purchases, in an open market transaction or otherwise,
shares of Common Stock (the "Covering Shares") in order to make delivery in
satisfaction of a sale of Common Stock by the Converting Holder (the "Sold
Shares"), which delivery such Converting Holder anticipated to make using the
Shares to be issued upon such conversion (a "Buy-In"), the Company shall pay to
the Converting Holder, in addition to all other amounts contemplated in other
provisions of the Transaction Agreements, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder. By way of illustration and not
in limitation of the foregoing, if the Converting Holder purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000.
f. In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of the Buyer and its compliance with the
provisions contained in this paragraph, so long as the certificates therefor do
not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
g. The Company will authorize its transfer agent to give information
relating to the Company directly to the Buyer or the Buyer's representatives
upon the request of the Buyer or any such representative. The Company will
provide the Buyer with a copy of the authorization so given to the transfer
agent.
6. DELIVERY INSTRUCTIONS.
The Initial Preferred Stock or the Additional Preferred Stock, as the case
may be, shall be delivered by the Company to the Escrow Agent pursuant to
Section 1(b) hereof, on a delivery against payment basis, no later than on the
relevant Closing Date.
Notwithstanding the foregoing provision or any other provision hereof to
the contrary, the Escrow Agent is authorized and directed to retain in escrow,
out of the Purchase Price proceeds for the Initial Preferred Stock deposited in
escrow with the Escrow Agent, the sum of Five Hundred Thousand Dollars
($500,000; the "Retained Escrow Amount") until the Escrow Agent receives written
confirmation from counsel to the Company that the Registration Statement
complying with the provisions of the Registration Rights Agreement (including,
without limitation, [x] inclusion of all concepts specified therein, [y] after
affording counsel for the Initial Holder, as defined in the Registration Rights
Agreement the opportunity to review and comment on the draft of the Registration
Statement and [z] not including any statement therein to which such counsel to
the Initial Holder reasonably objected) has been filed with the SEC (the "Filing
Confirmation"). Upon receipt of the Filing Confirmation by the Escrow Agent, the
Escrow Agent shall release the Retained Escrow Amount to the Company as
contemplated by the Joint Escrow Instructions.
7. CLOSING DATE.
a. The Initial Closing Date shall occur on the date which is the first NYSE
trading day after the fulfillment or waiver of all closing conditions pursuant
to Sections 8 and 9 hereof or such other date and time as is mutually agreed
upon by the Company and the Buyer. The date of an Additional Closing Date shall
be
A-11
<PAGE> 62
the date specified by either party to other on at least ten (10) business days'
advance notice to the other; provided, however, that it shall be a condition of
such Additional Closing Date that , on or before such date, each of the
conditions contemplated by Section 4(h) and by Sections 8 and 9 hereof shall
have either been satisfied or been waived by the party in whose favor such
conditions run.
b. Each closing of the purchase and issuance of Preferred Stock shall occur
on the relevant Closing Date at the offices of the Escrow Agent and shall take
place no later than 12:00 Noon, New York time, on such day or such other time as
is mutually agreed upon by the Company and the Buyer.
c. Notwithstanding anything to the contrary contained herein, the Escrow
Agent will be authorized to release the Escrow Property only upon satisfaction
of the conditions set forth in Sections 8 and 9 hereof. The Certificates
representing the relevant Preferred Stock shall be delivered by the Company to
the Escrow Agent pursuant to Section 1(b) hereof no later than on the relevant
Closing Date.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Preferred
Stock to the Buyer pursuant to this Agreement on the relevant Closing Date is
conditioned upon:
a. The execution and delivery of this Agreement by the Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the purchase price for the relevant Preferred Stock
in accordance with this Agreement;
c. The accuracy on such Closing Date of the representations and warranties
of the Buyer contained in this Agreement, each as if made on such date, and the
performance by the Buyer on or before such date of all covenants and agreements
of the Buyer required to be performed on or before such date; and
d. There shall not be in effect any law, rule or regulation prohibiting or
restricting the transactions contemplated hereby, or requiring any consent or
approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock on the relevant Closing Date is conditioned upon:
a. The execution and delivery of this Agreement and the Registration Rights
Agreement by the Company;
b. Delivery by the Company to the Escrow Agent of the Certificate
representing the relevant Preferred Stock in accordance with this Agreement;
c. The accuracy in all material respects on such Closing Date of the
representations and warranties of the Company contained in this Agreement. each
as if made on such date, and the performance by the Company on or before such
date of all covenants and agreements of the Company required to be performed on
or before such date;
d. On such Closing Date, the Registration Rights Agreement shall be in full
force and effect and the Company shall not be in default thereunder;
e. On such Closing Date, the Buyer shall have received an opinion of
counsel for the Company, dated such Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, substantially to the effect set forth in
Annex III attached hereto;
f. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits or adversely
effects any of the transactions contemplated by this Agreement or the
Transaction Documents, and no proceeding or investigation shall have been
commenced or threatened which may have the effect of prohibiting or adversely
effecting any of the transactions contemplated by this Agreement or the
Transaction Documents;
A-12
<PAGE> 63
g. From and after the date hereof to and including the relevant Closing
Date, the trading of the Common Stock shall not have been suspended by the SEC,
or the NASD and trading in securities generally on the New York Stock Exchange
or The NASDAQ/SmallCap Market shall not have been suspended or limited, nor
shall minimum prices been established for securities traded on The
NASDAQ/SmallCap Market, nor shall there be any outbreak or escalation of
hostilities involving the United States or any material adverse change in any
financial market that in either case in the reasonable judgment of the Buyer
makes it impracticable or inadvisable to purchase the relevant Preferred Stock;
and
h. With respect to each Additional Closing Date, each of the conditions set
forth in Section 4(h) hereof shall have either been satisfied or waived by the
Buyer.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware for contracts to be wholly performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of New York or the state courts
of the State of New York sitting in the City of New York in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions.
b. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
c. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
d. This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto.
e. All pronouns and any variations thereof refer to the masculine, feminine
or neuter, singular or plural, as the context may require.
f. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto.
g. This Agreement may be signed in one or more counterparts, each of which
shall be deemed an original.
h. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
i. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
j. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.
k. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
11. NOTICES.
Any notice required or permitted hereunder shall be given in writing
(unless otherwise specified herein) and shall be deemed effectively given on the
earliest of
(a) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
A-13
<PAGE> 64
(b) the seventh business day after deposit, postage prepaid, in the
United States Postal Service by registered or certified mail, or
(c) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days' advance written notice similarly given to each of the other
parties hereto):
<TABLE>
<S> <C>
COMPANY: NHANCEMENT TECHNOLOGIES, INC.
39420 Liberty Street
Suite 250
Fremont, CA 94538
ATTN: Chief Financial Officer
Telephone No.: (510) 744-3333
Telecopier No.: (510) 744-4003
with a copy to:
Tomlinson Zisko Morosoli & Maser
200 Page Mill Road, 2nd Floor
Palo Alto, CA 94306
ATTN: Cindy Loe, Esq.
Telephone No.: (650) 325-8666
Telecopier No.: (650) 324-1808
BUYER: At the address set forth on the signature page of this
Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
Telephone No.: (212) 689-3322
</TABLE>
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The Company's and the Buyer's representations and warranties herein shall
survive the execution and delivery of this Agreement and the delivery of the
Preferred Stock and payment of the Purchase Price, and shall inure to the
benefit of the Buyer and the Company and their respective successors and
assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
A-14
<PAGE> 65
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by
one of its officers thereunto duly authorized as of the date set forth below.
<TABLE>
<S> <C>
Number of shares of initial preferred stock to be 6,250
purchased:............................................
Aggregate purchase price of such initial preferred $625,000.00
stock:................................................
</TABLE>
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this 13th day of April, 1998.
<TABLE>
<S> <C>
The Endeavour Capital Fund S.A.
- ----------------------------------------------------- ----------------------------------------------
Address Printed Name of Subscriber
c/o Endeavor Management Inc.
14/14 Divrei Chaim St
Jerusalem 94479 Israel
By: /s/ SHMULI MARGULIES
Telecopier No. 972-2-582-4443 ------------------------------------------
(Signature of Authorized Person)
Shmuli Margulies, Director
Printed Name and Title
BVI
- -----------------------------------------------------
Jurisdiction of Incorporation
or Organization
</TABLE>
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and correct and
that it has caused this Securities Purchase Agreement to be duly executed on its
behalf.
NHANCEMENT TECHNOLOGIES, INC.
By: /s/ DOUGLAS S. ZORN
--------------------------------------------------------
Douglas S. Zorn
Title: Chief Financial Officer
Date: April 13, 1998
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by
one of its officers thereunto duly authorized as of the date set forth below.
<TABLE>
<S> <C>
Number of shares of initial preferred stock to be purchased: 6,250
Aggregate purchase price of such initial preferred stock: $625,000.00
</TABLE>
A-15
<PAGE> 66
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this 13th day of April, 1998.
<TABLE>
<S> <C>
- ----------------------------------------------------- AMRO INTERNATIONAL S.A.
Address ----------------------------------------------
SO ULTRA FINANCE Pnted Name of Subscriber
Gross Munster Platz 26
Zurich LH 8022
Switzerland
By: /S/ H. U. BACHOFEN
------------------------------------------
Telecopier No.011-411-262-5515 (Signature of Authorized Person)
H.U. Bachofen, President/Director
Printed Name and Title
Panama
- -----------------------------------------------------
Jurisdiction of Incorporation
or Organization
</TABLE>
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and correct and
that it has caused this Securities Purchase Agreement to be duly executed on its
behalf.
NHANCEMENT TECHNOLOGIES, INC.
By: /S/ DOUGLAS S. ZORN
-----------------------------------------------------
Douglas S. Zorn
Title: Chief Financial Officer
Date: April 13, 1998
A-16
<PAGE> 67
ANNEX B
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
SERIES A PREFERRED STOCK
OF
NHANCEMENT TECHNOLOGIES INC.
------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
------------------------
NHANCEMENT TECHNOLOGIES INC., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article FOUR of its
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation by a special meeting held on April 9, 1998 adopted the following
resolution, which resolution remains in full force and effect on the date
hereof:
RESOLVED, that there is hereby established a series of authorized preferred
stock having a par value of $0.01 per share, which series shall be designated as
"Series A Convertible Preferred Stock", shall consist of Thirty Thousand
(30,000) shares and shall have the following voting powers, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions as follows:
1. Definitions. For purposes of this resolution, the following terms shall
have the following definitions:
1.1 "Board" shall mean the Board of Directors of the Corporation.
1.2 "Common Stock" shall mean the Common Stock of the Corporation.
1.3 "Conversion Price" shall mean the lesser of the Fixed Conversion
Price or the Market Conversion Price on the date the Conversion Rights are
exercised.
1.4 "Conversion Rights" shall have the meaning set forth in Section
4.
1.5 "Corporation"shall mean this corporation.
1.6 "Fixed Conversion Price" shall mean the average closing bid price
of the Common Stock for the five (5) trading days ending on the trading day
immediately before the Original Issue Date, as reported by Bloomberg, LP
or, if not so reported, as reported on the over-the-counter market, as
adjusted herein.
1.7 "Initial Purchase Price" shall mean One Hundred Dollars ($100)
paid for purchase of each share of Preferred Stock.
1.8 "Market Conversion Price" shall mean the Seventy-Five percent
(75%) of the Market Price calculated through the last trading day
immediately before the date the Conversion Rights are exercised in
accordance with Section 4.3.1.
1.9 "Market Price" shall mean the average closing bid price of the
Common Stock for the five (5) trading days ending on the trading day
immediately before the date indicated in the relevant provision hereof (i)
as reported by Bloomberg, LP or, if not so reported, as reported over on
the over-the-counter
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<PAGE> 68
market or (ii) if the Common Stock is listed on a stock exchange, the
closing price on such exchange as reported in The Wall Street Journal.
1.10 "Original Issue Date" means the date the first share of
Preferred Stock is issued.
1.11 "Preferred Stock" shall refer to the Series A Convertible
Preferred Stock of the Corporation.
1.12 "Redemption Date" shall have the meaning set forth in Section
7.1.
1.13 "Redemption Event" shall have the meaning set forth in Section
7.1.
1.14 "Redemption Notice" shall have the meaning set forth in Section
7.3.
1.15 "Redemption Price" shall mean One Hundred Eighteen Dollars
($118.00) plus all unpaid dividends.
1.16 "Subsidiary" shall mean any corporation at least fifty percent
(50%) of whose outstanding voting stock shall at the time be owned,
directly or indirectly, by the Corporation or by one or more such
Subsidiaries.
2. Dividends and Distributions.
2.1 The holders of the outstanding shares of Preferred Stock shall be
entitled to receive, when and as declared by the Board, out of any funds
legally available therefor, dividends at the rate of Five Dollars ($5.00)
per share, per annum, but prorated for any partial year (subject to
appropriate adjustments for stock splits, stock dividends, combinations or
other recapitalizations). Such dividends shall be payable, at the option of
the Board, in cash to the extent permitted by law, in shares of Common
Stock valued at the Conversion Price then in effect plus cash in lieu of
any fractional share or a combination of cash and shares of Common Stock.
Such dividends shall be cumulative and shall be payable within sixty (60)
days following the end of each fiscal year of the Corporation.
2.2 Unless full dividends on the Preferred Stock for the then current
fiscal year shall have been paid or declared and a sum sufficient for the
payment thereof set apart: (i) no dividend whatsoever (other than a
dividend payable solely in Common Stock) shall be paid or declared, and no
distribution shall be made, on the Common Stock or pursuant to Section 2.3
below, and (ii) no shares of Common Stock or Preferred Stock shall be
purchased, redeemed or acquired by the Corporation and no moneys shall be
paid into or set aside, or made available for a sinking fund, for the
purchase, redemption or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock
from directors, officers, employees or consultants of the Corporation or of
any Subsidiary pursuant to agreements under which the Corporation has the
option, but not the obligation, to repurchase such shares upon the
occurrence of certain events, including the termination of employment or to
the redemption of shares of Preferred Stock pursuant to Section 7.
2.3 The holders of the outstanding shares of Common Stock and
Preferred Stock shall at all times be treated as a single class with
respect to dividends and distributions (excluding dividends in or
distributions of shares of Common Stock, but including dividends or
distributions of other securities of the Corporation), other than those set
forth in Sections 2.1 and 2.2 hereof, and, provided the conditions in
Section 2.2 hereof are satisfied, such single class, in addition to the
dividends payable to the Preferred Stock pursuant to Section 2.1, shall be
entitled to dividends when, as and if declared by the Board, out of any
funds legally available therefor; provided, however, that (i) each share of
Preferred Stock shall be entitled to dividends and distributions equal to
the aggregate amount of such dividends and distributions which the holder
of that number of shares of Common Stock into which such shares of the
Preferred Stock may be converted (on the record date fixed for determining
payment of such dividend or distribution) shall be entitled to receive, and
(ii) in any fiscal year the amount of dividends to which the Preferred
Stock shall be entitled under this Section 2.3 shall be reduced by the
amount of dividends declared and paid pursuant to Section 2.1.
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<PAGE> 69
3. Liquidation.
3.1 In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any payment or
declaration and setting apart for payment of any amount shall be made in
respect of the Common Stock, the holder of each share of Preferred Stock
then outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether such
assets are capital, surplus or earnings, an amount equal to One Hundred
Dollars ($100.00) for each share of Preferred Stock (subject to appropriate
adjustments for stock splits, combinations or other recapitalizations of
the Preferred Stock), plus an amount equal to all unpaid dividends, to and
including the date full payment shall be tendered to the holders of
Preferred Stock with respect to such liquidation, dissolution or winding
up. If the assets to be distributed to the holders of the Preferred Stock
upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to permit the payment to
such stockholders of the full preferential amounts as set forth above, then
all of the assets of the Corporation to be distributed shall be distributed
first to the holders of the Preferred Stock pro rata, based on the number
of shares of such stock outstanding.
3.2 After the payment or distribution to the holders of the Preferred
Stock of the full preferential amounts as set forth in Section 3.1, the
holders of the Common Stock then outstanding shall be entitled pro rata,
based on the number of shares of such stock outstanding, to all the
remaining assets of the Corporation.
4. Conversion. The holders of the Preferred Stock shall have the
conversion rights (the "Conversion Rights") set forth in this Section 4. In the
event of a call for redemption of any shares of Preferred Stock pursuant to
Section 7 hereof, the Conversion Rights of the Preferred Stock contained in this
Section 4 shall terminate as to the shares designated for redemption unless
default is made in the payment of the Redemption Price.
4.1 Right to Convert. Each share of the Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, into that number of fully paid and
nonassessable shares of Common Stock (or other securities or property
pursuant to Section 4.6 or 4.7 below) which shall result from dividing the
Initial Purchase Price for the Preferred Stock in effect at the time of
conversion into the Conversion Price.
4.2 Automatic Conversion.
4.2.1 Each share of Preferred Stock shall not be automatically
convertible into Common Stock.
4.3 Mechanics of Voluntary Conversion. The Corporation will permit
any holder of Preferred Stock to exercise its right to convert the
Preferred Stock by telecopying or delivering an executed and completed
notice of conversion to the Corporation and delivering, within five (5)
business days thereafter, the original Preferred Stock certificate being
converted to the Corporation by express courier with a copy to the
Corporation's transfer agent. The term "Conversion Date" means, with
respect to any conversion elected by the holder of the Preferred Stock, the
date specified in the notice of conversion, provided the copy of the notice
of conversion is telecopied to or otherwise delivered to the Corporation in
accordance with the provisions hereof so that it is received by the
Corporation on or before such specified date. The Corporation shall, at its
expense, take all actions and use all means necessary and diligent to cause
its transfer agent to transmit the certificates representing the Common
Stock issuable upon conversion of any Preferred Stock (together with
Preferred Stock not being so converted) to the holder thereof via express
courier, by electronic transfer or otherwise, within three (3) business
days after (i) the business day on which the Corporation has received both
the notice of conversion (by facsimile or other delivery) and the original
Preferred Stock certificate being converted (and if the same are not
delivered to the Corporation on the same date, the date of delivery of the
second of such items) or (ii) the date a dividend payment on the Preferred
Stock, which the Corporation has elected to pay by the issuance of Common
Stock, as contemplated hereunder, was due.
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4.4 Dividend Payment Upon Conversion. Upon any conversion of shares
of Preferred Stock into shares of Common Stock, the Corporation shall pay
all unpaid dividends on the shares of Preferred Stock being converted;
provided, however, that if the Corporation shall be prohibited by law from
making all such payments in cash, the Corporation shall, in lieu of making
a full cash payment of all such accrued and unpaid dividends, make payment
thereof in cash to the extent permitted by law and shall pay the balance in
whole shares of Common Stock, valued at the Conversion Price then in
effect, plus cash in lieu of any fractional share.
4.5 Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time effect a subdivision of the outstanding shares of Common
Stock (or other securities into which the Preferred Stock may be
converted), then, and in each such case, the Fixed Conversion Price as in
effect immediately before such subdivision shall be proportionately
decreased and, conversely, if the Corporation shall at any time combine the
outstanding shares of Common Stock (or other securities into which the
Preferred Stock may be converted), then, and in each such case, the Fixed
Conversion Price as in effect immediately before such combination shall be
proportionately increased.
4.6 Adjustment for Reclassification, Exchange and Substitution. If
the Common Stock (or other securities into which the Preferred Stock may be
converted) shall at any time be reclassified or otherwise changed, whether
by reorganization, spin off, reclassification or otherwise (other than by a
merger, consolidation or sale of assets described in Section 4.7), then,
and in each such event, each share of Preferred Stock shall thereafter be
convertible into the kind and amount of shares of stock and other
securities or property which the holder of that number of shares of Common
Stock (or other securities) into which such share of Preferred Stock shall
be convertible immediately prior to such event would be entitled to receive
upon the occurrence of such event.
4.7 Merger, Consolidation and Sale of Assets. If the Corporation
shall at any time merge or consolidate with or into another corporation
(other than where the Corporation is the surviving corporation and there is
no reclassification or change in the Common Stock or other securities into
which the Preferred Stock may be converted) or shall sell all or
substantially all of its properties and assets to any other person, then,
as a part of such merger, consolidation or sale, provision shall be made to
assure that the holders of Preferred Stock shall thereafter be entitled to
receive, upon conversion of the Preferred Stock, the kind and amount of
shares of stock and other securities or property of the Corporation, or of
the successor corporation resulting from such merger, consolidation or
sale, that the holders of that number of shares of Common Stock (or other
securities) into which the Preferred Stock shall be convertible immediately
prior to such merger, consolidation or sale would be entitled to receive on
such merger, consolidation or sale. In every such case, appropriate
adjustment shall be made in application of the provisions of this Section 4
with respect to the rights of the holders of Preferred Stock after the
merger, consolidation or sale to the end that the provisions of this
Section 4 (including adjustment of the Fixed Conversion Price then in
effect and the kind and amount of shares or other property into which the
Preferred Stock may be converted) shall be applicable after that event, as
nearly equivalent as may be practicable.
4.8 Time of Adjustments to Conversion Price. All adjustments to the
Fixed Conversion Price, unless otherwise specified herein, shall be
effective as of the earlier of:
4.8.1 the date of issue of the security causing the adjustment;
4.8.2 the effective date of a division or combination of shares;
or
4.8.3 the record date of any action of holders of the
Corporation's capital stock of any class taken for the purpose of
dividing or combining shares or entitling stockholders to receive a
distribution or dividends payable in Common Stock.
4.9 Notice of Adjustments. In each case of an adjustment of the
Fixed Conversion Price, the Corporation, at its expense, shall cause the
Chief Financial Officer of the Corporation to compute such adjustment and
prepare a certificate setting forth such adjustment and showing in detail
the facts upon
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which such adjustment is based. The Corporation shall promptly mail a copy
of each such certificate to each holder of Preferred Stock affected by such
adjustment.
4.10 Duration of Adjusted Conversion Price. Following each
adjustment of the Fixed Conversion Price, such adjusted Fixed Conversion
Price shall remain in effect until a further adjustment of such Fixed
Conversion Price hereunder.
4.11 Minimum Adjustment. No adjustment of the Fixed Conversion Price
shall be made in an amount less than One Cent ($0.01) per share (subject to
appropriate adjustments for stock splits and stock dividends, and provided
that at such time as events causing adjustments accumulating One Cent
($0.01) or more have occurred adjustments to the Fixed Conversion Price
shall be made), and no adjustment of the Fixed Conversion Price shall have
the effect of increasing the Fixed Conversion Price above such Fixed
Conversion Price in effect immediately prior to such adjustment (except for
the upward adjustments provided in Section 4.5).
4.12 Notices of Record Date. In the event of any reclassification of
or other change in the capital stock of the Corporation or any merger or
consolidation of the Corporation, transfer of all or substantially all of
the assets of the Corporation to any other person or voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of shares of Preferred Stock, at
least thirty (30) days prior to the record date of such event, a notice
specifying the date on which such event is expected to become effective and
the time, if any, that is to be fixed as to when the holders of record of
shares of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such event.
4.13 Fractional Shares. No fractional shares of Common Stock shall
be issued upon conversion of shares of Preferred Stock. The number of
shares of Common Stock to which a holder of shares of Preferred Stock shall
be entitled shall be based on the aggregate number of shares of Preferred
Stock then being converted by such holder. In lieu of any fractional share
to which such holder would otherwise be entitled, the Corporation shall pay
cash equal to the fair market value of such fraction based on the Market
Price on the date of conversion.
4.14 Reservation of Stock Issuable upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock (or other securities into which the
Preferred Stock may be converted), solely for the purpose of effecting the
conversion of the Preferred Stock, such number of its shares of Common
Stock (or other securities) as shall, from time to time, be sufficient to
effect the conversion of all outstanding shares of Preferred Stock. If at
any time the number of authorized but unissued shares of Common Stock (or
other securities) shall not be sufficient to effect the conversion of all
the Preferred Stock then outstanding, the Corporation will take such
corporate action as may,
in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock (or other securities) to such number of shares
as shall be sufficient for such purpose. If any shares of Common Stock reserved
for the purpose of conversion of shares of Preferred Stock require registration,
qualification or listing with, or approval of, any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Corporation will, in good faith, at its own expense and as
expeditiously as possible, endeavor to secure such registration, qualification,
listing or approval, as the case may be.
4.15 Notices. Any notice required by the provisions of this Section
4 to be given to the holder of shares of Preferred Stock shall be deemed
given five (5) business days after the same has been deposited in the
United States mail, certified or registered, postage prepaid and addressed
to each holder of record at such holder's address appearing on the stock
record books of the Corporation.
4.16 Payment of Taxes. The Corporation will pay all taxes and other
governmental charges (other than taxes based on income) that may be imposed
in respect of the issue or delivery of shares of Common Stock (or other
securities or property) upon conversion of Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in
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the issue and delivery of shares of Common Stock in a name other than that
in which the shares of Preferred Stock so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of any such tax, or has
established to the satisfaction of the Corporation that such tax has been
paid.
4.17 Status of Converted Stock. In case any shares of Preferred
Stock shall be converted pursuant hereto or redeemed pursuant to Section 7,
the shares so converted or redeemed shall be canceled and the authorized
number of shares of Preferred Stock shall be reduced accordingly.
5. Restrictions and Limitations.
5.1 Restrictions. At all times that any shares of Preferred Stock
are outstanding, the Corporation shall not, and shall not permit any
Subsidiary to, without the approval by vote or written consent of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the
Preferred Stock then outstanding, voting as a single, separate class:
5.1.1 Purchase, redeem or otherwise acquire (or pay into, or set
aside for, a sinking fund for such purpose) any Common Stock or any
other equity security; provided, however, that this restriction shall
not apply to the redemption of Preferred Stock pursuant to Section 7 or
to the repurchase of shares of Common Stock from directors, officers,
employees or consultants of the Corporation, or of any Subsidiary,
pursuant to agreements under which the Corporation has the option, but
not the obligation, to repurchase such shares upon the occurrence of
certain events, including termination of employment; or
5.1.2 Authorize or issue, or obligate itself to issue, any equity
security senior to the Preferred Stock as to dividend or liquidation
preferences (but this shall not apply to equity securities with dividend
or liquidation preferences equal or subordinate to the Preferred Stock).
5.2 Amendments to Certificate. The Corporation shall not amend its
Certificate of Incorporation without the approval by vote or written
consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the
Preferred Stock then outstanding if such amendment would:
5.2.1 Reduce the dividend rate on such Preferred Stock or change
the relative seniority rights of the holders of such Preferred Stock as
to the payment of dividends in relation to the holders of any other
Preferred Stock or Common Stock of the Corporation;
5.2.2 Reduce the amount payable to the holders of the Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of such Preferred Stock to the
rights upon liquidation of the holders of any other Preferred Stock or
Common Stock of the Corporation; or
5.2.3 Cancel or modify the Conversion Rights provided in Section 4
hereof.
6. Voting Rights. Except as otherwise expressly provided herein or as
required by law, the holders of the Preferred Stock and Common Stock shall be
entitled to vote on all matters. Each share of Common Stock shall be entitled to
one vote and each share of Preferred Stock shall be entitled to that number of
votes equal to the largest number of whole shares of Common Stock into which
such share of Preferred Stock may be converted as of the close of business on
the record date fixed for any meeting of the stockholders of the Corporation or
the effective date of any written consent of the stockholders of the Corporation
(with any fractional share determined on an aggregate basis for each holder
being rounded up to the next whole share). Except as otherwise expressly
provided herein or as required by law, the holders of Preferred Stock and Common
Stock shall vote together as a single class and not as separate classes.
7. Redemption of Preferred Stock.
7.1 Redemption Price. At any time after the Original Issue Date and
prior to the conversion of a share of Preferred Stock pursuant to the
exercise of Conversion Rights, if the Market Price at any time or from time
to time is less than Two Dollars ($2.00) per share (a "Redemption Event"),
then the Corporation, at the option of the Board, may, at any time it may
lawfully do so, redeem in whole or in part
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the outstanding shares of Preferred Stock by paying cash therefor in the
amount of the Redemption Price, which option shall be exercisable upon and
by the Corporation's providing written notice to the holders of Preferred
Stock (a) within ten (10) days following any Redemption Event or (b) in the
event a holder elects to exercise Conversion Rights within such ten
(10)-day period, within two (2) days following a holder's satisfaction of
the mechanics of voluntary conversion set forth in Section 4.3.1. In the
event the Corporation timely elects to redeem any shares of Preferred Stock
pursuant to the foregoing, the Conversion Rights (including the Conversion
Rights exercised by holder pursuant to subpart (b) of the preceding
sentence) shall immediately cease and terminate without exercise as to the
shares designated by the Corporation for redemption unless default is made
in the payment of the Redemption Price. Any such redemption shall be
consummated within five (5) days following the delivery of the
Corporation's written notice of redemption hereunder (the "Redemption
Date").
7.2 Partial Redemption. In the event of any redemption of only a
part of the outstanding Preferred Stock, the Corporation shall effect such
redemption pro rata among all the holders of the then outstanding Preferred
Stock based on the number of shares of such stock held by each holder.
7.3 Redemption Procedure. At least two (2) days prior to the
Redemption Date, written notice shall be mailed, via next day delivery,
postage prepaid, to each holder of record (at the close of business on the
business day next preceding the day on which notice is given) of Preferred
Stock to be redeemed at such holder's address appearing on the stock record
books of the Corporation, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder,
the Redemption Date, the Redemption Price, the place at which payment may
be obtained and that such holders' Conversion Rights (as set forth in
Section 5 hereof) as to such shares have terminated and calling upon such
holder to surrender to the Corporation, in the manner and at the place
designated, such holder's certificate or certificates representing the
shares to be redeemed (such notice is hereinafter referenced as the
"Redemption Notice"). On or after the Redemption Date, each holder of
shares of Preferred Stock to be redeemed shall surrender such holder's
certificate or certificates representing such shares to the Corporation, in
the manner and at the place designated in the Redemption Notice, and
thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
record owner thereof and each surrendered certificate shall be canceled. In
the event less than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares. From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of
such shares as holders of Preferred Stock of the Corporation (except the
right to receive the Redemption Price without interest upon surrender of
their certificate or certificates) shall cease and terminate with respect
to such shares, and such shares shall not thereafter be transferred on the
books of the Corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the Corporation legally available for
redemption of shares of Preferred Stock on any Redemption Date are
insufficient to redeem the total number of shares of Preferred Stock to be
redeemed on such date, those funds which are legally available will be used
to redeem the maximum possible number of such shares pro rata among the
holders of such shares to be redeemed. The shares of Preferred Stock not
redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds
of this Corporation are legally available for the redemption of shares of
Preferred Stock, such funds will immediately be used to redeem the balance
of the shares which the Corporation has become obligated to redeem on any
Redemption Date but which it has not redeemed.
7.4 Payment. One (1) day prior to the Redemption Date, the
Corporation shall deposit the Redemption Price of all outstanding shares of
Preferred Stock designated for redemption in the Redemption Notice with a
bank or trust company having aggregate capital and surplus in excess of One
Hundred Million Dollars ($100,000,000) as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed. Simultaneously, the Corporation shall deposit irrevocable
instructions and authority to such bank or trust company to immediately
confirm the receipt of such deposit to the holders of the Preferred Stock
being redeemed hereunder and pay (by wire transfer or otherwise as such
holders shall direct), on and after the date fixed for redemption or prior
thereto, the
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Redemption Price of the Preferred Stock to the holders thereof upon
surrender of their certificates. In the event the Corporation fails to
comply with the provisions of this Section 7, the Corporation's redemption
shall be cancelled and any further right to redeem the Preferred Stock
hereunder shall immediately cease and terminate and be of no further force
or effect. Any monies deposited by the Corporation pursuant to this Section
7.4 remaining unclaimed the expiration of two (2) years following the
Redemption Date shall thereafter be returned to the Corporation, provided
that the stockholder to whom such monies would be payable shall be
entitled, upon proof of his ownership of the Preferred Stock and payment of
any bonds requested by the Corporation, to receive such monies but without
interest from the Redemption Date.
8. Construction. A reference in this resolution to any Section shall
include a reference to every Section the number of which begins with the number
of the Section to which reference is specifically made (e.g., a reference to
Section 4.8 shall include a reference to Sections 4.8.1 and 4.8.2).
9. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Preferred Stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Certificate of Incorporation.
10. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Preferred
Stock and qualifications, limitations and restrictions thereof set forth in this
resolution (as such resolution may be amended from time to time) are invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other voting powers, preferences and relative, participating,
optional and other special rights of the Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable voting powers, preferences and relative, participating, optional
and other special rights of the Preferred Stock and qualifications, limitations
and restrictions thereof shall, nevertheless, remain in full force and effect,
and no voting powers, preferences and relative, participating, optional or other
special rights of the Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of the Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by William E. Zisko, its Assistant Secretary this 9th day of April,
1998.
/s/ WILLIAM E. ZISKO
--------------------------------------
William E. Zisko,
Assistant Secretary
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AMENDED
CERTIFICATE OF DESIGNATIONS
OF
SERIES A PREFERRED STOCK
OF
NHANCEMENT TECHNOLOGIES INC.
NHANCEMENT TECHNOLOGIES INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: The Corporation has not issued any shares of Series A Preferred
Stock.
SECOND: The amendment to the Corporation's Certificate of Designations of
Series A Preferred Stock, as filed on April 9, 1998, sets forth in the following
resolution approved by a majority of the Corporation's Board of Directors was
duly adopted in accordance with the provisions of Section 151 of the Delaware
General Corporation Law:
"RESOLVED, that the Certificate of Designations of the corporation be
amended by striking Section 1.8 in its entirety and replacing it with the
following: 1.8 "Market Conversion Price" shall mean the Seventy-Five
percent (75%) of the Market Price calculated through the last trading day
immediately before the date the Conversion Rights are exercised in
accordance with Section 4.3."
"RESOLVED FURTHER, that the Certificate of Designations of the
corporation be amended by striking Section 7.1 in its entirety and
replacing it with the following: 7.1 Redemption Price. At any time after
the Original Issue Date and prior to the conversion of a share of Preferred
Stock pursuant to the exercise of Conversion Rights, if the Market Price at
any time or from time to time is less than Two Dollars ($2.00) per share (a
"Redemption Event"), then within ten (10) days from any Redemption Event,
the Corporation, at the option of the Board, may, at any time it may
lawfully do so, redeem in whole or in part, the outstanding shares of
Preferred Stock by paying cash therefor in the amount of the Redemption
Price, which option shall be exercisable upon and by the Corporation
providing a written notice to the holders of Preferred Stock. In the event
a holder timely elects to exercise the Conversion Rights prior to delivery
by the Corporation of its notice of redemption, the Corporation's option to
redeem any outstanding shares of Preferred Stock pursuant to the foregoing
shall immediately cease and terminate with respect to any shares so
tendered for conversion, unless the holder does not satisfy the mechanics
of voluntary conversion set forth in Section 4.3. In the event that the
Corporation timely elects to redeem any shares of Preferred Stock pursuant
to the foregoing, the Conversion Rights shall immediately cease and
terminate as to the shares properly so designated by the Corporation for
redemption, unless default is made in the payment of Redemption Price. Any
such redemption shall be consummated within five (5) days following the
delivery of the Corporation's written notice of redemption hereunder (the
"Redemption Date")".
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by Douglas Zorn its Secretary this 13th day of April, 1998.
/s/ DOUGLAS ZORN
--------------------------------------
Douglas Zorn, Secretary
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ANNEX C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 13, 1998 (this
"Agreement"), is made by and between NHANCEMENT TECHNOLOGIES, INC., a Delaware
corporation, with headquarters located at 39420 Liberty Street, Suite 250,
Fremont, CA 94538 (the "Company"), and each entity named on a signature page
hereto (each, an "Initial Investor").
WITNESSETH:
WHEREAS, upon the terms and subject to the conditions of the Securities
Purchase Agreement, dated as of April 13, 1998, between the Initial Investor and
the Company (the "Securities Purchase Agreement"; terms not otherwise defined
herein shall have the meanings ascribed to them in the Securities Purchase
Agreement), the Company has agreed to issue and sell to each Initial Investor
shares of Series A Convertible Preferred Stock, $.01 par value per share, of the
Company, in an aggregate purchase price (the "Purchase Price") not exceeding
$3,000,000 (the "Preferred Stock," which term, as used herein shall have the
meaning ascribed to it in the Securities Purchase Agreement); and
WHEREAS, the Preferred Stock are convertible into shares of Common Stock
(the "Conversion Shares") upon the terms and subject to the conditions contained
in the Certificate of Designations; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Investor" means the Initial Investor and any permitted transferee
or assignee who agrees to become bound by the provisions of this Agreement
in accordance with Section 9 hereof.
(ii) "Potential Material Event" means any of the following: (a) the
possession by the Company of material information not ripe for disclosure
in a registration statement, which shall be evidenced by determinations in
good faith by the Board of Directors of the Company that disclosure of such
information in the registration statement would be detrimental to the
business and affairs of the Company; or (b) any material engagement or
activity by the Company which would, in the good faith determination of the
Board of Directors of the Company, be adversely affected by disclosure in a
registration statement at such time, which determination shall be
accompanied by a good faith determination by the Board of Directors of the
Company that the registration statement would be materially misleading
absent the inclusion of such information.
(iii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(iv) "Registrable Securities" means the Conversion Shares.
(v) "Registration Statement" means a registration statement of the
Company under the Securities Act.
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(b) Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the
SEC, as soon as possible after the Closing Date but no later than twenty-one
(21) days following the Initial Closing Date, either a Registration Statement on
Form S-3 or an amendment to an existing Registration Statement, in either event
registering for resale by the Investor a sufficient number of shares of Common
Stock for the Initial Investors to sell the Registrable Securities (or such
lesser number as may be required by the SEC, but in no event less than two
hundred percent (200%) of the aggregate number of shares into which the Initial
Preferred Stock and the Additional Preferred Stock would be convertible at the
time of filing of such Registration Statement (assuming for such purposes that
the maximum Additional Preferred Stock had been issued at such date and that all
Preferred Stock had been eligible to be converted, and had been converted, into
Conversion Shares in accordance with their terms, whether or not such issuance,
eligibility or conversion had in fact occurred as of such date). The
Registration Statement (i) shall include only the Registrable Securities and
150,000 shares of Common Stock held by the Stockholder (as defined in and as
contemplated by the last paragraph of Exhibit 1 annexed hereto) and (ii) shall
also state that, in accordance with Rule 416 and 457 under the Securities Act,
it also covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Preferred Stock resulting from
adjustment in the Conversion Price or to prevent dilution resulting from stock
splits, or stock dividends. The Company will use its reasonable best efforts to
cause such Registration Statement to be declared effective no later than the
earlier of (x) five (5) days after notice by the SEC that it may be declared
effective or (y) sixty (60) days after the Initial Closing Date. If at any time
the number of shares of Common Stock into which the Preferred Stock may be
converted exceeds the aggregate number of shares of Common Stock then
registered, the Company shall, within ten (10) business days, either (i) amend
the Registration Statement filed by the Company pursuant to the preceding
provisions of this Section 2, if such Registration Statement has not been
declared effective by the SEC at that time, to register all shares of Common
Stock into which the Preferred Stock may currently or in the future be
converted, or (ii) if such Registration Statement has been declared effective by
the SEC at that time, file with the SEC an additional Registration Statement on
Form S-3 or other appropriate form to register the shares of Common Stock into
which the Preferred Stock may currently or in the future be converted that
exceed the aggregate number of shares of Common Stock already registered.
(b) Payments by the Company.
(i) If the Registration Statement covering the Registrable Securities
is not filed in proper form with the SEC within twenty-one (21) days after
the Initial Closing Date (the "Required Filing Date"), the Company will
make payment to the Initial Investor in such amounts and at such times as
shall be determined pursuant to this Section 2(b).
(ii) If the Registration Statement covering the Registrable Securities
is not effective (a) within the earlier of (1) five (5) days after notice
by the SEC that it may be declared effective or (2) sixty (60) days
following the Initial Closing Date (the "Required Effective Date"), or (b)
after a Suspension Period (as defined below), then the Company will make
payments to the Initial Investor in such amounts and at such times as shall
be determined pursuant to this Section 2(b).
(iii) The amount (the "Periodic Amount") to be paid by the Company to
the Initial Investor shall be determined as of each Computation Date (as
defined below) and such amount shall be equal to (A) two percent (2%) of
the purchase price paid by the Initial Investor (the "Purchase Price") for
all Preferred Stock purchased pursuant to the Securities Purchase Agreement
for the period from the date following the Required Filing Date or the
Required Effective Date, as the case may be, to the first relevant
Computation Date, and (B) three percent (3%) to each Computation Date
thereafter. By way of illustration and not in limitation of the foregoing,
if the Registration Statement is timely filed but is not declared effective
until one hundred thirty-five (135) days after the Closing Date, the
Periodic Amount will aggregate eight percent (8%) of the Purchase Price of
the Preferred Stock (2% for days 61-90, plus 3% for days 91-120 and 3% for
days 121-135).
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(iv) Each Periodic Amount will be payable by the Company in cash or
other immediately available funds to the Investor monthly, without
requiring demand therefor by the Investor.
(v) The parties acknowledge that the damages which may be incurred by
the Investor if the Registration Statement is not filed by the Required
Filing Date or if the Registration Statement has not been declared
effective by the Required Registration Date may be difficult to ascertain.
The parties agree that the Periodic Amount represent a reasonable estimate
on the part of the parties, as of the date of this Agreement, of the amount
of such damages.
(vi) Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this provision shall not be payable to the extent any delay in
the effectiveness of the Registration Statement occurs because of an act
of, or a failure to act or to act timely by the Initial Investor or its
counsel, or in the event all of the Registrable Securities may be sold
pursuant to Rule 144 or another available exemption under the Act.
(vii) "Computation Date" means (i) the date which is the earlier of
(A) thirty (30) days after the Required Filing Date and the Required
Effective Date, as the case may be, or (B) the date after the Required
Filing Date or the Required Registration Date on which the Registration
Statement is filed (with respect to payments due as contemplated by Section
2(b)(i) hereof) or declared effective (with respect to payments due as
contemplated by Section 2(b)(ii) hereof), as the case may be, and (ii) each
date which is the earlier of (A) thirty (30) days after the previous
Computation Date or (B) the date after the previous Computation Date on
which the Registration Statement is filed (with respect to payments due as
contemplated by Section 2(b)(i) hereof) or declared effective (with respect
to payments due as contemplated by Section 2(b)(ii) hereof), as the case
may be.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC by the Required Filing Date, a
Registration Statement with respect to not less than the number of Registrable
Securities provided in Section 2(a) above, and thereafter use its reasonable
best efforts to cause each Registration Statement relating to Registrable
Securities to become effective by the Required Effective Date and keep the
Registration Statement effective at all times during the period (the
"Registration Period") continuing until the earliest of (i) the date that is two
(2) years after the Initial Closing Date, (ii) the date when the Investors may
sell all Registrable Securities under Rule 144 without restriction or (iii) the
date the Investors no longer own any of the Registrable Securities, which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration effective at all times during the Registration Period, and,
during the Registration Period, comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities of the Company
covered by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in the Registration
Statement;
(c) The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects.
(d) Notify each Holder of Registrable Securities to be sold, their Counsel
and any managing underwriters immediately (and, in the case of (i)(A) below, not
less than five (5) days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) Business Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the
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Registration Statement is proposed to be filed; (B) whenever the SEC notifies
the Company whether there will be a "review" of such Registration Statement; (C)
whenever the Company receives (or a representative of the Company receives on
its behalf) any oral or written comments from the SEC respect of a Registration
Statement (copies or, in the case of oral comments, summaries of such comments
shall be promptly furnished by the Company to the Holders); and (D) with respect
to the Registration Statement or any post-effective amendment, when the same has
become effective; (ii) of any request by the SEC or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the SEC of any stop order suspending the effectiveness of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
or warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event that to the best knowledge of the Company makes any
statement made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus, as the case may be, it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. In addition, the
Company shall furnish the Holders with copies of all intended written responses
to the comments contemplated in clause (C) of this Section 3(d) not later than
one (1) Business Day in advance of the filing of such responses with the SEC so
that the Holders shall have the opportunity to comment thereon.
(e) Furnish to each Investor whose Registrable Securities are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(f) As promptly as practicable after becoming aware of such event, notify
each Investor of the happening of any event of which the Company has knowledge,
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and use its best efforts promptly to prepare a supplement or
amendment to the Registration Statement or other appropriate filing with the SEC
to correct such untrue statement or omission, and deliver a number of copies of
such supplement or amendment to each Investor as such Investor may reasonably
request;
(g) As promptly as practicable after becoming aware of such event, notify
each Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance by the SEC
of a Notice of Effectiveness or any notice of effectiveness or any stop order or
other suspension of the effectiveness of the Registration Statement at the
earliest possible time;
(h) Notwithstanding the foregoing, if at any time or from time to time
after the date of effectiveness of the Registration Statement, the Company
notifies the Investors in writing of the existence of a Potential Material
Event, the Investors shall not offer or sell any Registrable Securities, or
engage in any other transaction involving or relating to the Registrable
Securities, from the time of the giving of notice with respect to a Potential
Material Event until such Investor receives written notice from the Company that
such Potential Material Event either has been disclosed to the public or no
longer constitutes a Potential Material Event; provided, however, that the
Company may not so suspend the right to such holders of Registrable Securities
for more than two twenty (20) day periods in the aggregate during any 12-month
period
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("Suspension Period") with at least a ten (10) business day interval between
such periods, during the periods the Registration Statement is required to be in
effect;
(i) Use its reasonable efforts to secure designation of all the Registrable
Securities covered by the Registration Statement on the "Small Capitalization
Market" of the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
quotation of the Registrable Securities on The NASDAQ SmallCap Market; or if,
despite the Company's reasonable efforts to satisfy the preceding clause, the
Company is unsuccessful in doing so, to secure NASDAQ/OTC Bulletin Board
authorization and quotation for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities;
(j) Provide a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
(k) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts as the case may be, as the Investors may reasonably
request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(l) Take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of the Registrable Securities pursuant to the
Registration Statement.
4. Obligations of the Investors. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of the Registrable Securities
held by it, as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to have any
of such Investor's Registrable Securities included in the Registration
Statement. If at least two (2) business days prior to the filing date the
Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(e) or 3(f),
above, such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
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5. Expenses of Registration.
(a) All reasonable expenses (other than underwriting discounts and
commissions of the Investor) incurred in connection with registrations, filings
or qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printers and accounting fees,
the fees and disbursements of counsel for the Company and a fee for a single
counsel for the Investor not exceeding $3,500, shall be borne by the Company.
(b) Except as and to the extent specifically set forth in Exhibit 1
attached hereto, neither the Company nor any of its subsidiaries has, as of the
date hereof, nor shall the Company nor any of its subsidiaries, on or after the
date of this Agreement, enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as and to the extent
specifically set forth in Exhibit 1 attached hereto, neither the Company nor any
of its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person. Without
limiting the generality of the foregoing, without the written consent of the
Holders of a majority of the then outstanding Registrable Securities, the
Company shall not grant to any person the right to request the Company to
register any securities of the Company under the Securities Act unless the
rights so granted are subject in all respects to the prior rights in full of the
Holders set forth herein, and are not otherwise in conflict or inconsistent with
the provisions of this Agreement.
6. Indemnification. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any post-effective amendment thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to clause (b) of this Section 6, the Company shall
reimburse the Investors, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a) shall not (I) apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) be available to the extent such Claim is based on a failure of
the Investor to deliver or cause to be delivered the prospectus made available
by the Company; or (III) apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Each Investor will indemnify
the Company and its officers, directors and agents against any claims arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company, by or on behalf of such
Investor, expressly for use in connection with the
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preparation of the Registration Statement, subject to such limitations and
conditions as are applicable to the Indemnification provided by the Company to
this Section 6. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In case any
such action is brought against any Indemnified Person or Indemnified Party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such Indemnified Person or Indemnified Party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such Indemnified Person or Indemnified Party under this Section 6 for
any legal or other reasonable out-of-pocket expenses subsequently incurred by
such Indemnified Person or Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation, unless the indemnifying
party shall not pursue the action of its final conclusion. The Indemnified
Person or Indemnified Party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof, but the fees and
reasonable out-of-pocket expenses of such counsel shall not be at the expense of
the indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the Indemnified Person or
Indemnified Party. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as
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may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any Preferred Stock of the Company which is
convertible into such securities) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay, or the payments set forth in
Section 2(c) hereof. Any preceding provision of this Section 9 to the contrary
notwithstanding, no assignment to a transferee contemplated by this Section 9
shall be for an amount less than the lower of (x) ten percent (10%) of the
Initial Investor's rights hereunder or (y) one hundred percent (100%) of the
rights hereunder then held by the Investor.
10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an eighty (80%) percent
interest of the Registrable Securities. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be in writing
and shall be deemed to be sufficiently given when personally delivered (by hand,
by courier, by telephone line facsimile transmission, receipt confirmed, or
other means) or sent by certified mail, return receipt requested, properly
addressed and with proper postage pre-paid (i) if to the Company, NHANCEMENT
TECHNOLOGIES, INC., 39420 Liberty Street, Suite 250, Fremont, CA 94538, ATTN:
Chief Financial Officer, Telecopier No.: (510) 744-4003; with a copy to
Tomlinson Zisko Morosoli & Maser, 200 Page Mill Road, 2nd Floor, Palo Alto, CA
94306, ATTN: Cindy Loe, Esq., Telecopier No.: (650) 324-1808; (ii) if to the
Initial Investor, at the address set forth under its name in the Securities
Purchase Agreement, with a copy to Samuel Krieger, Esq., Krieger & Prager, 319
Fifth Avenue, Third Floor, New York, NY 10016, Telecopier No.: (212) 213-2077;
and (iii) if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b), and shall be
effective, when personally delivered, upon receipt and, when so sent by
registered or certified mail, four (4) calendar days after deposit with the
United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware for contracts to be wholly performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of New York or the state courts
of the State of New York sitting in
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the City of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non coveniens, to the bringing of any
such proceeding in such jurisdictions.
(e) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company to perform its
obligations under Section 3(a) hereof, or any delay in such performance could
result in loss to the Investors, and the Company agrees that, in addition to any
other liability the Company may have by reason of such failure or delay, the
Company shall be liable for all direct damages caused by any such failure or
delay, unless the same is the result of force majeure. Neither party shall be
liable for consequential damages.
(k) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
C-9
<PAGE> 85
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
COMPANY:
NHANCEMENT TECHNOLOGIES, INC.
By: /s/ DOUGLAS S. ZORN
------------------------------------
Name: Douglas S. Zorn
Title: Chief Financial Officer
INITIAL INVESTOR:
The Endeavour Capital Fund S. A.
By: /s/ SHMULI MARGULIES
------------------------------------
Name: Shmuli Margulies
Title: Director
INITIAL INVESTOR:
AMRO INTERNATIONAL S. A.
By: /s/ H. U. BACHOFEN
------------------------------------
Name: H. U. Bachofen
Title: President and Director
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<PAGE> 86
NHANCEMENT TECHNOLOGIES INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, JULY 6, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Esmond T. Goei and Douglas S. Zorn, and
each or any of them (with power of substitution), proxies for the undersigned to
represent and to vote, as designated on the reverse side hereof, all shares of
Common Stock and Preferred Stock of NHancement Technologies Inc., which the
undersigned would be entitled to vote if personally present at the Special
Meeting of its stockholders to be held on July 6, 1998, and at any reconvened
session thereof, subject to any directions indicated on the reverse side of this
card. If no directions are given, this proxy will be voted FOR the Proposal.
This proxy is continued on the reversed side. Please sign and return
promptly in the envelope provided. No postage is required if mailed in the
United States. If you attend the Special Meeting and vote in person, the proxy
will not be used.
Continued and to be signed and dated on reverse side.
<PAGE> 87
The directors recommend a vote FOR the Proposal
1. Approval of the Issuance of 30,000 Shares of Series A Convertible
Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as name or names appear on this proxy. If stock is held
jointly, each holder should sign. If signing as attorney, trustee, executor,
administrator, custodian, guardian or corporate officer, please give full title.
DATE , 1998
SIGNED
Please sign, date and return
this card promptly in the
enclosed envelope Please mark
votes as in this example: [X]
