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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21999
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NHANCEMENT TECHNOLOGIES INC.
(Name of Small Business Issuer in its Charter)
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DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
For the fiscal year ended December 31, 1997, the issuer's revenues totaled
$9.0 million.
As of March 31, 1998, the aggregate market value of the voting common
equity of NHancement Technologies Inc. held by non-affiliates was approximately
$8,026,000, based upon the closing bid price for such common stock on such date
on The Nasdaq Stock Market SmallCap System, of $2.4375 per share.
As of March 31, 1998, there were 4,437,000 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
Documents Incorporated by Reference -- None
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NHANCEMENT TECHNOLOGIES INC.
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Description of Property..................................... 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to Vote of Security Holders........... 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 12
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7. Financial Statements........................................ 19
Item 8. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure.................................. 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 20
Item 10. Executive Compensation...................................... 22
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 25
Item 12. Certain Relationships and Related Transactions.............. 26
Item 13. Exhibits and Reports on Form 8-K............................ 29
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PART I
ITEM 1. BUSINESS
The following contains forward-looking statements regarding future events
or the future financial performance of NHancement Technologies Inc. and its
subsidiaries ("NHancement" or 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 in this Item 1 under "Strategy," "Principal
Suppliers," "Marketing" and "Competition," as well as in Item 6 hereof
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this report. This report includes certain
trademarks of NHancement and its subsidiaries.
OVERVIEW
NHancement Technologies Inc. is a growing company whose objective is to
become a leading global systems integrator of communications-centric products.
NHancement believes that increased global competition, shorter time to market
trends and the reduced importance of geographical borders make it imperative
that corporations achieve and maintain high productivity and security in
communications operations worldwide. The Company through its two current
operating subsidiaries, Voice Plus, Inc., a California corporation ("VPI" or
"Voice Plus"), and Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"), serves this need by providing multinational corporations and other
businesses with communications products and technological innovations designed
to enhance efficiency.
NHancement's mission is to become the single vendor of choice for the
design and implementation of enterprise-wide communications-centric services for
small and medium-sized organizations with global operations. Services currently
provided by the Company include voice messaging, e-mail, paging and multimedia
systems, network servers, LANs, WANs, routers, transmission systems and network
security systems. In NHancement's view, traditional telecommunications service
providers have not kept pace with the requirements of global business operations
or adequately addressed the global multimedia communications needs of
corporations, thereby affording the Company an opportunity to exploit this
growing market.
The Company was incorporated in October 1996 to pursue a business
combination opportunity with Voice Plus, a company then engaged in the business
of integrating voice processing systems with telecommunications equipment, and
BioFactors, Inc. ("BFI" or "BioFactors"), a development stage company
incorporated in Delaware that offered the FACTOR 1000(R) system, a proprietary
computerized impairment testing system. These two companies were acquired by
NHancement on February 3, 1997 pursuant to two separate merger transactions
whereby each company became a wholly-owned subsidiary of NHancement. Immediately
following these acquisitions, the Company completed the initial public offering
("IPO") of shares of its Common Stock.
Subsequent to the completion of the IPO, management decided to combine the
operations of Voice Plus and BioFactors into a single entity. Effective as of
November 12, 1997, BioFactors was merged with and into Voice Plus 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 include the businesses conducted separately by
VPI and BFI prior to the merger and are currently being conducted under the name
of "Voice Plus(R)." Voice Plus, which is headquartered at the Company's
facilities in Fremont, California, remains a wholly-owned subsidiary of
NHancement and continues to provide organizations with voice processing systems
and other communications equipment. Prior to the merger, BioFactors had
concentrated on developing a market for its FACTOR 1000(R) system, which is used
for detecting worker impairment. The Company has determined that such effort is
no longer justified, given the resources required to develop such a market and
the need to dedicate its financial resources to its other core businesses. As a
result, the Company is attempting to sell FACTOR 1000(R) to a third party and
anticipates exiting that business in 1998.
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On December 15, 1997, NHancement purchased one hundred percent (100%) of
the 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 communications systems integrator formed to address the growing
communications infrastructure needs of 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.
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. The terms of the agreement require a cash payment of about $2.3
million in cash, performance payments based on 1998 and 1999 profitability of
about $2 million and 431,000 shares of NHancement Common stock. Consummation of
the transaction is contingent upon the Company obtaining an extension of the
closing date of April 13, 1998, which has been verbally agreed to by Infotel
shareholders. The Company has recently signed a financing agreement for $3
million the proceeds of which in large part will be used to effect the Infotel
acquisition. Should the Infotel acquisition be consummated, in addition to the
Company's existing portfolio of infrastructure communications equipment
products, it will provide radar system integration, turn key project management
services and test instrumentation, as well as a wider portfolio of
communications equipment.
The Company's principal corporate office is located at 39420 Liberty
Street, Suite 250, Fremont, California 94538, and its telephone number is
510-744-3333.
STRATEGY
The Company intends to leverage its position as a provider of voice
processing systems in the United States and its data and infrastructure
capabilities in Asia to become a diversified provider of a full range of
productivity and security enhancement products and services on a global basis.
The specific elements of the Company's strategy to achieve this objective are as
follows:
Capitalize and expand on its existing sales and support infrastructure and
systems integration capabilities to market its existing products and new
complementary products.
The Company believes that, by utilizing its sales force and installed base
of over 1,000 client organizations, the Company can position itself to increase
revenues by introducing new complementary products to its existing customers.
The Company has national sales and marketing presence in major markets geared to
sell communications products and services across the United States and Malaysia.
In addition to its offices in the San Francisco Bay Area, Atlanta, Salt Lake,
New York, Phoenix, Dallas, and Kuala Lumpur (Malaysia), the Company intends to
expand into additional major United States, Asia Pacific, and European markets.
Exploit a growing trend towards unified networks by providing various
solution-based stand-alone and network systems and applications.
The Company believes that when implementing any new system or technology,
businesses seek to maximize the use of current resources and facilities. As a
result, previously disparate electronic systems are being integrated to operate
on a unified network. For example, networked electronic security systems that
provide access control and monitoring within a premise or over a wide geographic
area were developed following the demand by corporations that the installation
of new security systems utilize existing communications networks. Further, the
continuing trend towards outsourcing of services in an environment of increased
technological complexities requires vendors to be highly skilled in integrating
telephony technology with LAN and WAN systems. The Company's goal is to provide
integrated productivity and security systems that achieve these goals.
Management believes that VPI's voice processing integration capabilities,
together with the security products and services the Company anticipates
providing, will offer solutions to meet the productivity and security needs of
corporations.
Exploit the need for worldwide system integration capabilities to meet the
growing demands from business globalization.
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The Company is devoting resources to address the need for integrated global
security systems and communications systems integration capabilities. With
multiple sites across continents, companies with global operations increasingly
are operating in real time, and security and communications must be conducted in
real time. The Company intends to provide communications and security products
and services on a global basis by exploiting, among other things, management
contacts in Asia Pacific. In this regard, the Company recently completed the
acquisition of Advantis, a Malaysian corporation engaged in the business of
telecommunications systems integration and structured cabling of
telecommunications switches and transmissions systems.
Continue to acquire complementary businesses and products.
The Company seeks to acquire additional businesses that will expand its
geographic coverage or provide complementary products and services. In
particular, the Company intends to expand its product portfolio while maximizing
its organizational strength and expertise in marketing and systems integration.
Acquisitions may involve a number of special risks, including adverse
short-term, and in some instances longer term, effects on the Company's
operating results, diversion of management's attention from the operations of
the Company and its existing subsidiaries, dependence on retention, hiring and
training of key personnel, risks associated with unanticipated problems or legal
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's operations and financial
performance. Successful integration of the operations of additional companies
into those of the Company will require the cooperative efforts of the managers
and employees of the respective business entities, including the integration of
the owners or managers of smaller companies into roles that require them to
report to supervisors. Significant costs and management time may be required to
integrate management control systems. Furthermore, to manage its growth
effectively, the Company must continue to improve its operational, financial and
management controls and information systems, to accurately forecast sales
demand, to control its overhead and to manage its marketing programs. There can
be no assurance of accomplishing these results without encountering substantial
costs, delays or other problems. If management fails to establish necessary
controls and to manage growth effectively, the Company's operating results and
financial condition will be adversely affected.
The Company's global business strategy subjects it to foreign market and
currency risks. In particular, the devaluation of the Malaysian currency
(Ringgit) in relation to the United States Dollar has affected the short and
medium term revenues of its Advantis subsidiary in Malaysia. Although the
Company believes that the long term effects of the currency problems in Malaysia
and the Asian region will be manageable, the short term uncertainty related to
fluctuations in the Ringgit has caused Advantis' customers to postpone the
deployment of communications equipment. The Company believes that such customers
cannot indefinitely delay the purchase of strategic equipment such as
communications equipment and that such purchases will be resumed within the next
few quarters. In the meantime, Advantis has instituted cost constraint measures
while continuing to expand its partnering efforts with its United States
equipment suppliers and local larger contractors. In addition to the short-term
effects of the Ringgit devaluation described above, any prolonged devaluation of
the Ringgit can be expected to materially and adversely affect the operations
and financial condition of Advantis, and may result in a material adverse effect
on the business and financial condition of the Company.
The Company does not intend to submit any proposed acquisition or other
business transaction for the review or approval of its stockholders, except as
required by Delaware law. Even if submitted to a vote of stockholders, the
Company's management owns a substantial portion of the Company's outstanding
voting securities and may be able to control the outcome of any such proposal.
The Company's growth strategy is highly dependent on the Company's ability to
make future acquisitions and to obtain the financing necessary to complete such
acquisitions.
THE COMPANY'S PRODUCTS AND SERVICES
The Company's current systems integration businesses include voice
processing, multimedia messaging and infrastructure communications equipment.
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Voice Processing and Multimedia Messaging
NHancement, through its United States subsidiary Voice Plus, offers a broad
range of products that supports a number of enterprise applications such as
voice messaging, text messaging, LAN messaging and interactive voice response or
self-inquiry systems. The Company's product portfolio includes manufacturers
among others, such as NEC, Centigram Communications Corporation, Digital Speech
Systems, Inc., Active Voice Corporation, Voice Technologies Group, and
Interactive Intelligence. VPI is a systems integrator and national distributor
of voice processing equipment from several manufacturers, which equipment
enables users to access and interact with a broad range of information in a
variety of formats (including voice, text, data and facsimile) from a variety of
terminals (including touch-tone telephones and personal computers). VPI offers a
broad range of products that support a number of enterprise applications:
Telephone Answering, Automated Attendant, Voice Messaging, Paging, Facsimile
Messaging, Interactive Voice Response, LAN Integration and Networking, and
Technical Support.
Infrastructure Communications Equipment
The Company, through its Malaysian subsidiary Advantis, has the ability to
offer a wide range of infrastructure communications equipment products that
satisfy demanding communications needs. With over four years of experience in
Malaysia, Advantis has satisfied many customers on a variety of projects ranging
from structured cabling to networking projects. Products supported include
manufacturers such as Nortel, Case Technology, Network Associates, 3Com, and
Hypercom. Advantis focuses on large projects in the government and institutional
sectors as well as in the commercial sector.
MARKETING
The Company has an established marketing and distribution infrastructure
for its voice processing and multimedia messaging products, which is expected to
include other new products, such as call centers. The Company has marketing
personnel, technical assistance centers (including customer service
representatives, system engineers and senior level field technicians) and a
network of service/support dealers to provide its customers with personalized
attention, flexibility, responsiveness and accountability within the United
States and Malaysia.
The Company markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific emerging growth
markets (including the paging and cellular operator markets), participation in
trade shows, acquisition of data bases and inclusion of its products and
services on bidders' lists. The Company focuses on pre-sale analysis of its
customers' needs and the rate-of-return potential of specific sales
opportunities to determine whether they justify the investment of time and
effort of the Company's sales and marketing organization. Typically, the Company
focuses on sales opportunities where the value added from its products and
services provides significant benefits for the customer. The Company also
participates in competitive bidding for government agency work. In evaluating a
prospective sales situation, the Company also considers the lead time to
revenue, the complexities of the customer's requirements and its ability to
satisfy the customer and provide it with the necessary support.
PRINCIPAL SUPPLIERS
VPI's business is based upon the integration of hardware and software
telecommunications and data processing equipment manufactured by others into
integrated systems designed to meet the needs of its customers. Although VPI has
distributor agreements with a number of equipment manufacturers, substantially
all of its revenue is based upon products manufactured by Centigram
Communications Corporation ("Centigram"). The Company depends upon Centigram to
offer products that 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 adversely affect the Company's voice processing business for
an indeterminate period of time until new supplier relationships could be
established.
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Pursuant to the Authorized United States Distributor Agreement, which has
been renewed several times over the last nine years, VPI is an independent
distributor of Centigram products in the United States, Puerto Rico and Canada
and may expand this territory into international locations with written
authorization from Centigram. Under the Distributor Agreement, VPI must purchase
a certain number of products each quarter from Centigram. During each of the
nine years that this distributor relationship has existed, VPI has exceeded its
quotas by significant amounts; VPI is expected to satisfy these quotas in 1998.
The Distributor Agreement which last expired on December 31, 1997, is renewable
automatically for successive two-year terms until canceled by either party upon
90 days' notice; effective as of December 31, 1997, the Agreement was
automatically renewed for an additional two years, subject to the termination
provisions described on the Distributor Agreement. The Distributor Agreement may
also be terminated for cause in the event (i) VPI defaults in the payment of any
amount due Centigram, and such default continues un-remedied for a period of 60
days after written notice of default; (ii) VPI breaches certain provisions of
the Distributor Agreement concerning the proprietary rights of Centigram; (iii)
VPI is acquired by a business entity that provides products or services in
direct competition with Centigram's products, and in Centigram's judgment, such
acquisition represents a conflict of interest; (iv) VPI fails to perform any
obligation under the Distributor Agreement and such failure continues for a
period of 20 days after written notice; (v) VPI fails to purchase any Centigram
assigned quota for a period of two consecutive quarters; or (vi) VPI sells a
Centigram product outside VPI's designated territory. In addition, the
Distributor Agreement terminates automatically if VPI becomes insolvent, makes
an assignment for the benefit of its creditors or if bankruptcy proceedings are
commenced by, for or against VPI. Any controversy or claim related to the
Distributor Agreement must be submitted to final and binding arbitration to be
held in San Jose, California, according to the rules of the American Arbitration
Association.
Centigram has publicly announced that it has hired a third party firm to
identify potential buyers for its Customer Premise Equipment ("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.
VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of such distributor
agreements, a manufacturer may discontinue the distributor relationship because
of factors related to a particular distributor or because of a manufacturer's
decision to change its method of distributing its products to all or parts of
its markets. In making such a change, a manufacturer of key products sold by a
distributor may effectively become a direct competitor of its former
distributor. Moreover, a manufacturer may reduce its dealer discounts, eliminate
exclusive distribution rights, reduce the manufacturer's support of a
distributor or otherwise adversely affect the competitive environment in which
the distributor sells the manufacturer's products. Any material change in VPI's
distributor relationships with its key suppliers, or any interruption of the
delivery of equipment to VPI by any of its key suppliers, would have a material
adverse effect upon the Company.
CUSTOMERS
The Company currently services approximately 1000 clients. Revenues from
sales and services to two of such customers accounted for approximately 19% and
7% of total net revenues during the year ended December 31, 1997.
YEAR 2000 POTENTIAL IMPACT
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
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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 operation.
The Company acquired Advantis Network & Systems Sdn Bhd, a Malaysian
company, on December 15, 1997 (See: Item 1, Overview). 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 (See: Item 1, Overview). 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 those 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 resolve any such
problems. 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.
INTELLECTUAL PROPERTY
The Company currently has pending federal trademark and service mark
applications covering various classes of Voice Plus' goods and services;
currently has two federally registered trademarks related to Voice Plus(R) and
currently has two federally registered trademarks related to the FACTOR 1000(R)
system. In addition, VPI, as the successor in interest to BFI, holds an
exclusive worldwide license to market the FACTOR 1000(R) system until 2008. The
FACTOR 1000(R) system is an impairment testing system that measures human
sensory motor performance. It is based upon the Critical Tracking Task/Test
("CTT") technology, a product of research conducted by Systems Technology, Inc.
("STI") for the United States military in the late 1950's on pilot control of
unstable aircraft.
The Company has decided to exit from the business related to the FACTOR
1000(R) product and plans to sell all technology and related assets of this
business. Under the terms of the CTT technology license agreement with STI,
Voice Plus (as the successor in interest to BFI) is required to make quarterly
royalty payments to STI of 8.5% of revenues directly related to CTT-based
impairment testing of employees. In addition to end-user licensing, the CTT
license permits BFI to sublicense the CTT technology; provided that the
sublicense agreement requires an initial payment to BFI of at least $250,000 and
an on-going royalty payment of 8.5% of revenues. VPI must make payments to STI
on such sublicensing arrangements as follows:
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(i) a royalty payment of 8.5% on $250,000 of the initial sublicense fee plus 50%
of any initial fee in excess of $250,000; and (ii) a royalty payment of 50% of
the sublicense royalties received, which amount must be at least 4.25% of the
gross contract revenue. The agreement also includes a minimum aggregate payment
to STI of $150,000 over each three-year period (which amount may include fees
paid to STI for consulting services), beginning with the three-year period
commencing on January 1, 1997. The Company has granted an exclusive license of
sports-related and sports entertainment applications of the FACTOR 1000(R)
system (and sublicense of the CTT technology) to SportsTrac for the term of the
CTT license. The Company collected a $1,000,000 initial fee from SportsTrac and
in 1996 paid to STI a royalty of $42,500 on the $500,000 portion of the initial
fee subject to the STI royalty. To date, SportsTrac has sold only one system. As
a result, the Company has collected only $850 (in the first quarter of 1997) in
on-going royalties from SportsTrac, and the Company has not projected
significant revenue from any such on-going royalties in the future.
GOVERNMENTAL REGULATION
The Telecommunications Act of 1996 eliminated government mandated barriers
between local and long distance calling, cable television, broadcasting and
wireless service. Consequently, local telephone companies, the traditional long
distance carriers and cable television companies may now enter any of these
markets to provide both local telephone and long distance service, as well as
television programming. Such increased competition likely will change the
infrastructure for implementing communications applications, such as voice and
electronic messaging.
The acquisition of Advantis required the approval of the Foreign Investment
Committee of the Malaysian government which approval was obtained subject to the
Company agreeing to apply for certification as a Multimedia Super Corridor
("MSC") company in Malaysia, although no time limit was specified for obtaining
such certification. The MSC is an economic development zone established by the
Malaysian government to stimulate the indigenous development of information
technology. To encourage the participation of businesses in the zone, MSC status
provides certain corporate benefits including access to government grants,
preferred vendor status within the MSC, and tax-free status for ten years. MSC
status is dependent on an applicant's contribution to the betterment of the
Malaysian people through the application of certain technology of which
communications technology is a prime determinant. The Company has undertaken
certain efforts to obtain MSC certification including the hiring of a consultant
knowledgeable in such processes. The Company believes that it has the necessary
merits for certification.
INSURANCE
The Company currently maintains director and officer liability insurance of
$5,000,000 per occurrence, $5,000,000 in the aggregate; general liability
insurance, including products liability insurance, of $2,000,000 per occurrence,
$2,000,000 in the aggregate; a general liability umbrella policy with limits of
$5,000,000 per occurrence, $5,000,000 in the aggregate; and products liability
insurance of $2,000,000 per occurrence, $2,000,000 in the aggregate. While there
can be no assurance that the Company will be able to maintain such coverage, or
secure increased coverage if needed, the Company believes that it will be able
to do so. There can be no assurance that any insurance policy will provide
adequate protection against successful claims. A successful claim brought
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company.
The Company maintains key man insurance policies on several of its senior
executive officers, including $1 million on the life of Esmond T. Goei, the
Company's Chairman, President and Chief Executive Officer. All policies name the
Company as the sole beneficiary. The loss of the services of any of the
Company's key employees would have a material adverse effect on the Company.
EMPLOYEES
As of March 15, 1998, the Company employed a total of 69 employees, of whom
31 were employed by the Company's Malaysian subsidiary, Advantis. The Company
has never had a work stoppage and no
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employee is covered by a collective bargaining agreement. The Company believes
that its relations with its employees are good.
COMPETITION
Voice Processing
The voice processing market, one of the fastest growing segments of the
telecommunications industry, is highly competitive. The Company believes that
competition within this industry will intensify with the introduction of new
product enhancements and new competitors. VPI competes with a number of larger
integrated companies that provide competitive voice processing products and
services as subsets of larger product offerings, including all the former
regional Bell companies and major PBX equipment manufacturers, such as Fujitsu
Limited and Lucent Technologies Inc. ("Lucent"), formerly a division of AT&T.
These integrated public company competitors are substantially larger than the
Company and have substantially larger revenues than the Company. Additionally,
in the customer premise equipment markets, VPI competes with two types of
equipment companies: (i) interconnects (PBX providers), including Lucent,
Northern Telecom Limited, Fujitsu Limited and NEC Corporation, and (ii)
independent voice processing manufacturers, such as Octel Communications
Corporation, Digital Sound Corporation, Active Voice Corporation, Applied Voice
Technology, Inc., Glenayre Technologies, Inc. and Comverse Technology, Inc.
Glenayre Technologies, Inc. and Comverse Technology, Inc., among others, also
compete with the Company in the service provider market. A substantial majority
of competitors in the voice processing field have better name recognition in the
market, a larger installed base of customers and greater financial, marketing
and technical resources than the Company.
VPI believes that its attention to customer service, as well as to the
customer's technical requirements, has resulted in success in competing and
winning sales bids against its much larger competitors. VPI provides detailed
information and support to its customers beginning at the point of sale and
continuing through the implementation period as well as ongoing service.
Depending on the terms of the maintenance contract purchased, the Company
provides assistance for its customers up to 24 hours per day, 365 days a year.
The Company provides extensive training for its employees in products,
installation, system design and support in order to assist customers in
selecting the right equipment and to provide the quality of service that is
demanded. VPI's technical capabilities and expertise are enhanced by its
experienced technical personnel. VPI's junior field technicians generally have
at least two years of field experience with the particular equipment being
installed, and senior technicians have about eight years of field experience.
This level of experience can often be a deciding factor in a customer's purchase
decision. VPI believes it has a very loyal customer base founded on satisfaction
with its service capabilities and active account management.
Customer Premise Equipment (CPE)
In the customer premise equipment markets, VPI competes with two types of
equipment companies: (i) interconnects (PBX providers), including Lucent,
Northern Telecom Limited, Fujitsu Limited and NEC Corporation, and (ii) voice
processing manufacturers, such as Octel Communications Corporation, Glenayre
Technologies, Inc., Digital Sound Corporation, Active Voice Corporation, Applied
Voice Technology, Inc. and Comverse Technology, Inc.
PBX providers sell voice processing equipment as an integrated solution
with their own PBXs. These providers may have a competitive advantage with
customers purchasing a voice processing system at the same time they are
purchasing a new PBX, and, in many situations, the Company is competing with an
organization offering the same product platform. The Company believes its
competitive strengths are its development and delivery of customer applications,
its implementation process and its service and support performance. The Company
also believes its ability to deliver enhanced applications, such as integration
with computer networks, facsimile and voice response systems applications,
differentiates its products and services.
VPI is the only national distributor that focuses solely on voice
processing systems integration. Other distributors that focus solely on voice
processing do not have a national organization. While manufacturers of voice
processing equipment could be viewed as national competitors, such manufacturers
are concerned
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<PAGE> 11
primarily with the sale of their own equipment and generally do not promote
other manufacturers' equipment that may better satisfy the needs of their
customers.
The Company expects that new or enhanced products will be offered by its
principal existing competitors and new competitors. In addition, the Company
believes that computer software vendors, such as Novell, Inc., Lotus Development
Corporation and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications.
Service Providers
The Company provides products to various service providers, including
cellular communications operators and long-distance re-sellers. Competitors
include several voice processing manufacturers such as Boston Technology Inc.,
Octel Communications Corporation, Centigram, Comverse Technology, Inc., Digital
Sound Corp. and Glenayre Technologies, Inc. The further deregulation of the
telecommunications industry resulting from the Telecommunications Act of 1996
has provided opportunities for increased competition in the local telephone
market. The Company believes that this market will require extensive integration
of equipment supplied by various vendors and, as such, can benefit from the
Company's independence and integration skills.
Infrastructure Communications Equipment
The infrastructure communications market in Malaysia is largely driven by
the growth of the country's manufacturing and industrial sectors as well as the
growth in government services as necessitated by population growth and
urbanization. Consequently much of the market opportunity is controlled by
either the government or the general construction contractors. Both market
sectors are addressed by Advantis, the Company's Malaysian subsidiary as well as
several larger local companies. However, given the infancy of Malaysia's
telecommunications industry, almost all equipment sold in the country is
imported. As a result, competitive advantage is often derived simply by a
vendor's ability to offer an exclusive portfolio of products, and to provide the
necessary technical support for such products. Advantis therefore competes by
aligning itself with several popular manufacturers of telecommunications
equipment such as Nortel, Inc., 3COM Corporation, Case Technology, Network
Associates, Inc., Intel Corporation, Hypercom Limited, and BICC BrandRex.
Advantis also aligns itself as a sub-contractor with various large local general
contractors to provide telecommunications equipment and services. Frequently,
Advantis also partners with local systems integrators that do not carry the line
of products that Advantis provides. One such systems integrator is Infocom (M)
Sdn Bhd which has a common shareholder with the Company, although such
shareholder holds less than 5% of the Company's Common Stock. Infocom is not
currently a competitor as it focuses largely on the banking sector, whereas
Advantis focuses on the manufacturing and government sectors. As to other large
systems integrators in the market, Advantis currently does not compete directly
with them but acts as a sub-contractor to another larger systems integrators
with whom it has aligned itself. However, the Company expects that Advantis will
face such competitors directly in the future when it has better established its
installed base. Further, continued growth of Malaysia's manufacturing and
industrial sectors will likely fuel competition in the country's infrastructure
communications market.
ITEM 2. DESCRIPTION OF PROPERTY
The Company consolidated its offices and moved its principal corporate
office to Fremont, California from Golden, Colorado in August 1997. The
Company's corporate offices occupy approximately 7,600 square feet of office
space in premises shared with, and leased by, VPI. This facility is leased
pursuant to a lease agreement expiring August 31, 2000. The lease provides for
an approximately 3% escalation in rents during each year of the lease. Rental
payments average $11,911 per month over the term of the lease. The Company was
able to cancel its Golden, Colorado lease with little or no cost to the Company.
The Company leases office space at several other locations in the United
States under leases which expire in the year 2000. Aggregate space leased at
these facilities totals approximately 5,700 square feet, and total monthly
office rental expense is approximately $9,750. In addition, the Company's
Malaysian subsidiary, Advantis, leases approximately 7,000 square feet of office
space at a monthly office rental expense of
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<PAGE> 12
approximately US $2,500 per month under a lease which can be extended to
November 1999. The Company believes that leased office space at market rates is
readily available at all such locations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management presently believes
that liability, if any, resulting from such ordinary course of business
litigation, individually or in the aggregate, will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF
COMMON STOCK
The Company's Common Stock has traded on the over-the-counter market and
has been quoted on The Nasdaq Stock Market SmallCap System under the symbol
"NHAN" since the Company's February 4, 1997 initial public offering. As of March
31, 1998, there were approximately 827 shareholders of record. The following
table sets forth for the periods indicated the high and low closing prices for
the Company's Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
- ---------------- ------- ------
<S> <C> <C>
First quarter (February 4, 1997 to March 31, 1997).......... $4.3125 $3.750
Second quarter.............................................. $4.0625 $3.375
Third quarter............................................... $4.0625 $3.250
Fourth quarter.............................................. $3.4375 $2.125
</TABLE>
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock since its inception,
nor did its predecessor, BFI. VPI, prior to its acquisition by the Company, made
distributions to its sole stockholder. The Company currently intends to retain
earnings for use in the business. Accordingly, the Company does not anticipate
paying any dividends to its stockholders in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
AGGREGATE
DATE OF NUMBER PURCHASE FORM OF
CLASS OF PURCHASERS(1) SALE TITLE OF NHANCEMENT SECURITIES OF SHARES PRICE CONSIDERATION
- ---------------------- -------- ------------------------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Ninety-one Holders of Capital
Stock of BioFactors(2) 02-03-97 Shares of Common Stock 612,800 2 2
James S. Gillespie(3) 02-03-97 Shares of Common Stock 1,312,500 3 3
Stock Options granted to three Stock options to purchase shares
optionees(4) 02-03-97 of Common Stock 100,000 4 4
Ten Holders of options to acquire Stock options to purchase shares
BioFactors Common Stock(5) 02-04-97 of Common Stock 534,375 5 5
Fifty-three Holders of Warrants
to acquire BioFactors Common Warrants to purchase shares of
Stock(6) 02-04-97 Common Stock 110,000 6 6
Sixteen Holders of Promissory
Notes payable by BioFactors(7) 02-04-97 Shares of Common Stock 258,200 7 7
Sixteen Officers, Directors and Warrants to purchase shares of
Third Party Lenders(8) 02-04-97 Common Stock 500,000 8 8
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
AGGREGATE
DATE OF NUMBER PURCHASE FORM OF
CLASS OF PURCHASERS(1) SALE TITLE OF NHANCEMENT SECURITIES OF SHARES PRICE CONSIDERATION
- ---------------------- -------- ------------------------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Stock Options granted to two Stock options to purchase shares
optionees(9) 02-04-97 of Common Stock 33,750 9 9
Nine Holders of Warrants to
acquire NHancement Common Warrants to purchase shares of
Stock(10) 02-04-97 Common Stock 230,000 10 10
Stock options granted to four Stock options to purchase shares
optionees(11) 03-18-97 of Common Stock 223,125 11 11
Stock options granted to five Stock options to purchase shares
optionees(12) 03-26-97 of Common Stock 130,000 12 12
Stock options granted to three Stock options to purchase shares
optionees(13) 07-07-97 of Common Stock 26,250 13 13
Stock options granted to one Stock options to purchase shares
optionee(14) 08-19-97 of Common Stock 20,000 14 14
Stock options granted to thirty Stock options to purchase shares
optionees(15) 12-08-97 of Common Stock 276,250 15 15
Six Holders of Capital Stock of
Advantis(16) 12-15-97 Shares of Common Stock 208,546 16 16
</TABLE>
- ---------------
(1) The sales of securities to, and the exchanges of securities with, the
individuals identified in the table above were made in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and/or
Regulation D promulgated thereunder.
(2) On February 3, 1997, prior to the February 4, 1997 consummation of the
initial public offering ("IPO") of NHancement, BioFactors merged with a
subsidiary of NHancement and became a wholly-owned subsidiary of
NHancement. In connection with this merger transaction, the issued and
outstanding shares of the capital stock of BioFactors were exchanged for
restricted shares of the Common Stock of NHancement.
(3) On February 3, 1997, prior to the February 4, 1997 consummation of the IPO,
Voice Plus was acquired by NHancement pursuant to a merger with a
subsidiary of NHancement, whereupon Voice Plus became a wholly-owned
subsidiary of NHancement. In connection with this acquisition transaction,
1,312,500 shares of the Common Stock of NHancement were issued to Mr.
Gillespie (the sole stockholder of Voice Plus), 600,000 of which were
registered and sold in the IPO and the balance of which (712,500 shares)
are restricted shares.
(4) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options generally expire ten (10) years from the
date of grant and become exercisable for 50% of the shares on August 4,
1998, with the balance vesting on February 4, 1999. The exercise price on
the date of grant was equal to or greater than 100% of the fair market
value as determined by the Board of Directors of NHancement on the date of
grant.
(5) On February 4, 1997, the outstanding options to acquire shares of the
Common Stock of BioFactors were assumed by NHancement and re-granted by
NHancement, subject to and in accordance with NHancement's Equity Incentive
Plan. Pursuant to the option assumption, the terms and vesting schedules of
the options remained the same (with full vesting of options generally
occurring by November 2, 1998 at an exercise price of $3.20 per share.
(6) On February 4, 1997, the outstanding warrants to acquire shares of the
common stock of BioFactors were assumed by NHancement, subject to and in
accordance with the terms governing the exercise of such warrants. The
exercise price for each warrant was set at $4.80 per share, with the term
for exercise expiring on February 4, 2001; provided, however, that no
warrants were exercisable until February 4, 1998.
(7) Upon the February 4, 1997 consummation of the IPO, all accrued interest
payable by BioFactors, under the terms of the then-existing promissory
notes, was converted into restricted shares of the Common Stock of
NHancement, based on a per share price of $4.00.
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<PAGE> 14
(8) Upon the February 4, 1997 consummation of the IPO, NHancement issued
warrants to purchase shares of the Common Stock of NHancement. The warrants
are presently exercisable at a price per share of $4.80 and will expire on
February 4, 2001.
(9) The options were granted to members of the Board of Directors of NHancement
under the Company's Equity Incentive Plan. The options generally expire ten
(10) years from the date of grant and become exercisable for 50% of the
shares on February 4, 1998, with the balance vesting on February 4, 1999.
One of the optionees, a former director of the Company, resigned his
position in August 19, 1997; all options granted to such director were
canceled. The exercise price on the date of grant was equal to or greater
than 100% of the fair market value as determined by the Board of Directors
of NHancement on the date of grant.
(10) Upon the February 4, 1997 consummation of the IPO, NHancement issued
warrants to the underwriter to purchase shares of the Common Stock of
Nhancement which were subsequently assigned to nine (9) of the underwriter
employees. The warrants are presently exercisable at a price per share of
$4.80 and will expire on February 4, 2001.
(11) The options were granted to employees and members of the Board of Directors
of NHancement under the Company's Equity Incentive Plan. The options
generally expire ten (10) years from the date of grant and, in the case of
options granted to employees, become exercisable for 1/36 per month from
the date of grant; an option granted to a former director of the Company
became exercisable for 50% of the shares on the date of grant of the
option, with the balance vesting on March 18, 1997. Such director resigned
his position on April 9, 1997; all options granted to such director were
canceled. The exercise price on the date of grant was equal to or greater
than 100% of the fair market value as determined by the Board of Directors
of NHancement on the date of grant.
(12) The options were granted to employees of, and consultants to, NHancement
under the Company's Equity Incentive Plan. The options generally expire ten
(10) years from the date of grant and, in the case of options granted to
employees, become exercisable for 25% of the shares on the first year
anniversary of the date of grant, with the balance vesting 1/36 per month
thereafter; an option granted to a consultant vests 1/3 on April 1, 1998,
1/3 on April 1, 1999 and 1/3 on April 1, 2000. The exercise price on the
date of grant was equal to or greater than 100% of the fair market value as
determined by the Board of Directors of NHancement on the date of grant.
(13) The options were granted to members of the Board of Directors of NHancement
under the Company's Equity Incentive Plan. The options generally expire ten
(10) years from the date of grant and, in the case of one director, become
exercisable for 25% of the shares on the first year anniversary of the date
of grant and 25% annually thereafter; in the case of the other directors,
the options become exercisable for 50% of the shares on February 4, 1998,
with the balance vesting on February 4, 1999. One such director resigned
his position on August 19, 1997; all options granted to such director were
canceled. The exercise price on the date of grant was equal to or greater
than 100% of the fair market value as determined by the Board of Directors
of NHancement on the date of grant.
(14) The options were granted to a member of the Board of Directors of
NHancement under the Company's Equity Incentive Plan. The options generally
expire ten (10) years from the date of grant and become exercisable for 25%
of the shares on the first year anniversary of the date of grant and 25%
annually thereafter. The exercise price on the date of grant was equal to
or greater than 100% of the fair market value as determined by the Board of
Directors of NHancement on the date of grant.
(15) The options were granted to employees of, and consultants to, NHancement
under the Company's Equity Incentive Plan. The options generally expire ten
(10) years from the date of grant and become exercisable for 25% of the
shares on the first year anniversary of the date of grant, with the balance
vesting 1/36 per month thereafter. The exercise price on the date of grant
was equal to or greater than 100% of the fair market value as determined by
the Board of Directors of NHancement on the date of grant.
(16) On December 15, 1997, in connection with the acquisition by NHancement of
all of the issued and outstanding shares of the capital stock of Advantis,
NHancement issued 300,000 shares of its Common Stock in exchange for all of
the issued and outstanding shares of the capital stock of Advantis. Of
these
14
<PAGE> 15
shares, 208,546 have been transferred to the former stockholders of
Advantis, and the remaining 91,454 are being held in escrow, and may or may
not be transferred to the former stockholders of Advantis upon termination
of the escrow depending on whether certain accounts receivable goals are
attained, in which case the shares would be retired. Further, depending
upon Advantis meeting certain profit targets over the following two years,
the company could be obligated to issue up to an additional 230,000 shares
of its Common Stock to former Advantis stockholders.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 1997, the Company and Chatfield Dean & Company, its
underwriter, completed an initial public offering of 2,300,000 shares of $0.01
par value Common Stock, of which 1,700,000 shares were sold by the Company and
600,000 shares, representing a portion of the consideration for the outstanding
shares of VPI, were sold by a stockholder of the Company (Commission file number
333-15563). On February 11, 1997, the underwriters exercised an option to
purchase from the Company an additional 345,000 shares of Common Stock to cover
over-allotments. The use of proceeds by the Company through December 31, 1997
was as follows (amounts are actual unless indicated as estimates):
<TABLE>
<S> <C>
Gross Proceeds to the Company............................... $8,180,000
Underwriters Discounts and Commissions...................... 572,600
Underwriters Non-accountable Expenses....................... 245,400
Other Expenses.............................................. 831,700
----------
Total Expenses.............................................. 1,649,700
----------
Net Offering Proceeds to the Company........................ $6,530,300
==========
Use of Net Offering Proceeds:
Purchase and installation of equipment...................... $ 199,000
Repayment of Indebtedness................................... 2,485,400
Repayment of Indebtedness to Affiliates..................... 391,100
Bonuses to Officers......................................... 250,000
Secured Loans ($60,000 to Officer).......................... 360,000
Working Capital (estimated)................................. 1,490,000
Cash in Banks............................................... 1,354,800
----------
$6,530,300
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 in this Item 6, as well as in Item 1 hereof and
elsewhere in this report.
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.
15
<PAGE> 16
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.
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 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(R)
technology and products, as no significant FACTOR 1000(R) 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
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<PAGE> 17
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 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 quarter 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(R) sublicensing revenues which were
extremely high as a result of the receipt of a $700,000 sublicense payment with
minimal related expense. No significant revenues from the commercial release of
the FACTOR 1000(R) 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 protect its gross margins. The
Company, to date, has little experience with currency hedging transactions and
this inexperience may result in an adverse effect 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(R) 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(R) 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.
17
<PAGE> 18
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 currently 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 large 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 were 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 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 U.S. 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 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.
18
<PAGE> 19
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 implementations 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 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.
19
<PAGE> 20
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 operation.
The Company acquired Advantis Network & Systems Sdn Bhd, a Malaysian
company, on December 14, 1997 (See: Item 1, Overview). 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 (See: Item 1, Overview). 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 those 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1 of this
report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to each of
the directors, executive officers and significant employees of the Company and
its subsidiaries as of March 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Esmond T. Goei................. 47 Chairman, Chief Executive Officer, President and
Director
Douglas S. Zorn................ 49 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Stephan Jan Meyers............. 50 Vice President, General Counsel and Assistant
Secretary
James S. Gillespie............. 45 Vice President Sales and Director; President of Voice
Plus, Inc.
Gary L. Nemetz................. 45 Director
James H. Boyle................. 43 Director
Santanu Das.................... 43 Director
Kim Siang Goh.................. 32 General Manager, Advantis Network & Systems Sdn Bhd
Diane E. Nowak................. 36 Vice President of Sales, Western Region, of Voice
Plus, Inc.
</TABLE>
Esmond T. Goei. Mr. Goei has served as Chairman of the Board, President and
Chief Executive Officer of the Company since its incorporation in October 1996.
Mr. Goei served as Chairman of the Board, President and Chief Executive Officer
of BFI from December 1993 until the merger of BFI into VPI in November 1997.
From October 1992 to March 1997, Mr. Goei was a general partner of Transition
Ventures I, L.P., a venture capital fund which he co-founded. Mr. Goei also was
the co-founder of Transtech Venture Management Pte. Ltd., an international
venture capital management firm established in 1986, and co-founder of Transpac
Capital Management Pte. Ltd., a venture capital management firm established in
1989, of which he was Chief Executive Officer for North American operations
until 1992. Mr. Goei currently serves as a director of YES! Entertainment
Corporation, an electronics toy company of which he was a co-founding investor
in 1992 and which is listed on The Nasdaq National Market System ("Nasdaq NMS").
From 1988 to 1995, Mr. Goei was a director of CliniCom, Inc., a patient care
information systems company listed on Nasdaq NMS, which was sold in 1995 to HBO
& Company. From 1987 to March 1995, Mr. Goei was a director of Centigram
Communications Corporation, a voice messaging equipment company listed on Nasdaq
NMS and VPI's largest supplier of voice processing equipment, and from 1988 to
1994, he served as Chairman of the Board. From 1988 to 1994, Mr. Goei also was a
director of TranSwitch Corporation, a telecommunications semiconductor systems
company listed on the Nasdaq NMS.
Douglas S. Zorn. Mr. Zorn has served as Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a director of the Company since its
incorporation in October 1996. Mr. Zorn also held the title of Chief Operating
Officer of the Company since its incorporation, but resigned from this position
in October 1997. Mr. Zorn served as Executive Vice President, Secretary and
Treasurer and Chief Financial and Operating Officer of BFI from December 1993
until the merger of BFI into VPI in November 1997. From 1991 until he joined
BFI, Mr. Zorn was Chief Financial Officer of Monterey Telecommunications
Corporation, an OEM wireless switch manufacturer for Motorola, Inc. From 1983 to
1991, he was employed by Centigram Communications Corporation where he last
served as Vice President of Finance and Administration. Prior to joining
Centigram, Mr. Zorn held various positions with Gould, Inc., a manufacturer of
sophisticated logic test instruments, including Operation Controller of the
Biomation Division. Mr. Zorn is a licensed certified public accountant.
Stephan Jan Meyers. Mr. Meyers has served as Vice President, General
Counsel and Assistant Secretary of the Company since February 3, 1998. He joined
the Company on December 1, 1997, and plans to resign from his positions with the
Company on or about April 30, 1998. From 1989 until he joined the Company, Mr.
Meyers was in private practice as a sole practitioner in Northern California.
Prior to establishing a private
21
<PAGE> 22
practice, he held various positions in publicly traded and privately held
companies, as well as with a San Francisco law firm.
James S. Gillespie. Mr. Gillespie has been Vice President of Sales and a
director of the Company since its incorporation in 1996 and also serves as
President of VPI. Mr. Gillespie was the founder of VPI and has served as
President since VPI's incorporation in 1987. Mr. Gillespie was with Centigram
Communications Corporation from 1983 to 1986, during which time he held a number
of positions, with his final position being Director of National Sales. Mr.
Gillespie has indicated his desire to relinquish his Board of Directors and
Officers responsibilities and to transition into a part-time or consulting role
with the Company when his replacement starts.
Gary L. Nemetz. Mr. Nemetz became a director of the Company in February
1996, upon the consummation of the Company's IPO. Mr. Nemetz served in March
1995, and from April 1996 to February 1997, as a director of BFI. Mr. Nemetz
served as a consultant to BFI from April 1995 to April 1996. Since 1984, Mr.
Nemetz has served as President of Admiral Capital Corporation, a private
investment management firm. He is also a general partner of Transition Capital
Management Company, a venture capital fund. Since 1984, Mr. Nemetz also has
conducted a management consulting business and law practice through G.L. Nemetz,
a Professional Corporation. Mr. Nemetz is a certified public accountant
(inactive status). From 1995 to 1997, Mr. Nemetz served as a director of YES!
Entertainment Corporation, which is listed on Nasdaq NMS.
James H. Boyle. Mr. Boyle was elected to the Company's Board of Directors
July 7, 1997, to fill a vacancy created by a resignation and confirmed at its
annual meeting of stockholders on August 19, 1997. Mr. Boyle is President of
Boyle Enterprises, Inc., a management and investment consulting firm, and since
May 1994 has been engaged in the development of the investment strategy and
formation of an international telecommunications partnership. From July 1988 to
July 1991, Mr. Boyle was a Vice President of BCE Ventures Corporation, and a
director of numerous venture capital-backed companies including two
international cellular telephone operating companies. From January 1985 to June
1988, he was employed by Northern Telecom Limited, a leading global provider of
digital network solutions, as Manager-Venture Capital, and from April 1982 to
December 1984, as Senior Treasury Analyst. Since September 1988, Mr. Boyle has
served as a director on the board of Centigram Communications Corporation, a
voice messaging equipment manufacturer listed on Nasdaq NMS and VPI's largest
supplier of voice processing equipment. Mr. Boyle holds a Bachelor of Science
(Honors) in Chemistry from Lakehead University and an M.B.A. in Finance and
Accounting from McMaster University, both in Canada.
Santanu Das. Dr. Das became a director of the Company at its annual meeting
of stockholders on August 19, 1997. Dr. Das has served as President, Chief
Executive Officer and a director of TranSwitch Corporation, a telecommunications
semiconductor systems manufacturer, which is listed on Nasdaq NMS, since its
inception in 1988. Prior to joining TranSwitch Corporation, Dr. Das held various
positions, including President with Spectrum Digital Corporation where he worked
from 1986 through August of 1988. Prior to joining Spectrum Digital Corporation,
he held various positions including Director, Applied Technology Division of ITT
Corporation's Advanced Technology Center. Dr. Das holds a Ph.D. from Washington
University, St. Louis, and an undergraduate degree from Jadavpur University,
Calcutta, India.
Goh Kim Siang. Mr. Goh has served as General Manager of Advantis Network &
System Sdn Bhd since its incorporation in May 1993. From 1992 until he joined
Advantis Network & System Sdn Bhd, Mr. Goh was Account Manager for Uniteers
Communications Sdn Bhd; a wholly-owned subsidiary of United Engineers (M)
Berhad, responsible for the setting up of the networking division. Prior
thereto, he held various sales positions in networking companies well known in
Malaysia.
Diane E. Nowak. Ms. Nowak has served as Vice President of Sales, Western
Region, for VPI since July 1993. Ms. Nowak joined VPI in 1989 and previously
served as Senior Sales Executive (May 1990 to July 1991) and as Director of
Major Accounts (July 1991 to July 1993). Ms. Nowak served as a director of VPI
from November 1995 to September 1996.
22
<PAGE> 23
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except for the
filings listed below.
Late Filings
All of the officers and directors of the Company at the time of the
consummation of the Company's initial public offering ("IPO") on February 4,
1997 correctly and timely filed his or her initial Statement of Beneficial
Ownership of Securities on Form 3 ("Form 3"). However, certain of those officers
and directors possessed convertible notes which were automatically converted
upon the consummation of the Company's initial public offering ("IPO") on
February 4, 1997. The conversion of those convertible notes should have been,
but was not, reported on a Statement of Changes of Beneficial Ownership of
Securities on Form 4 ("Form 4") for the month of February 1997. Those same
officers and directors were also issued Common Stock warrants at the
commencement of the IPO. Those warrants should have been, but were not, reported
on a Form 4 for the month February 1997. The following officers and directors
timely filed a Form 5 for the fiscal year ended December 1997 to include the
conversion of the convertible notes and the issuance of the Common Stock
warrants: William Brehm; Esmond T. Goei; Gary L. Nemetz; Richard H. Williams;
and Douglas S. Zorn.
Gary L. Nemetz, a director of the Company, purchased 15,000 shares of
Common Stock of the Company during the month of August 1997, and purchased 6,700
shares of Common Stock of the company during the month of November 1997. These
purchases should have been, but were not, reported on a Form 4 for the months of
August and November 1997. An amended Form 5 for the fiscal year ended December
1997 was filed on behalf of Mr. Nemetz in April 1998.
Incorrect Filing
James S. Gillespie, and officer, director and more than ten percent
stockholder of the Company, timely filed a Form 4 to reflect an open market
purchase of the Company's Common Stock during the month of April 1997. However
the total number of securities owned by him at the end of that month was listed
incorrectly. An amended Form 4 for April 1997 was filed in February 1998.
Santanu Das timely filed his Form 3 upon becoming a director of the
Company. However, the total number of securities owned by him as reflected on
the Form 3 failed to include five hundred shares purchased in the open market
prior to his becoming a director of the Company, but following the consummation
of the Company's IPO. An amended Form 3 was filed for Mr. Das in April 1998 to
include those shares.
23
<PAGE> 24
ITEM 10. EXECUTIVE COMPENSATION
The following table, and the accompanying explanatory footnotes, include
annual and long-term compensation information for services rendered in all
capacities during the fiscal years ended December 31, 1995, 1996 and 1997, by
(i) the Company's Chief Executive Officer and (ii) the other highly compensated
executive officers of the Company (or its subsidiaries) at December 31, 1997,
who received compensation of at least $100,000 during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------------
----------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#)
- ----------------- ---- --------- -------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei................... 1997 $163,750 $ -- $ 38,000(4) $ -- 100,000
Chairman of the Board, 1996(1) 135,000 125,000 --(2) -- --
President and Chief 1995(1) 108,000 -- --(2) 58,608(1) 168,750(8)
Executive Officer
Douglas S. Zorn.................. 1997 $150,000 $ -- $ 60,000(5) $ -- 100,000
Executive Vice President, 1996(1) 135,000 125,000 --(2) -- --
Chief Financial Officer and 1995(1) 90,000 -- --(2) 58,608(1) 140,625(8)
Secretary
James S. Gillespie(6)............ 1997 $150,000 $ -- $ 230,000(2) $ -- --
Vice President of Sales and 1996 300,000 -- $1,003,130(7) -- --
President of VPI 1995 300,000 550,000 --(2) -- --
</TABLE>
- ---------------
(1) Data reflects compensation paid by BFI for fiscal years 1995 and 1996. In
1995, the Company and Messrs, Goei and Zorn orally agreed that future cash
salary payments would be suspended until BFI had obtained sufficient funding
to pursue a public offering of its securities. During the period of
suspension, from April through December 1995, Messrs, Goei and Zorn
continued to pursue their respective duties in the interest of BFI. BFI
compensated Mr. Goei and Mr. Zorn for their respective past salaries by
issuing to each of them 87,475 shares of restricted stock of BFI.
(2) Prerequisites do not exceed the lesser of $50,000 or 10% of the Named
Executive Officer's total annual salary and bonus.
(3) Represents sales commissions paid to Mr. Gillespie.
(4) Mr. Goei was reimbursed by the Company in fiscal 1997 $25,000 for previous
years vacation accrued but not taken and automobile expenses.
(5) Mr. Zorn was reimbursed by the Company in fiscal 1997 for $55,000 in moving
expenses and $25,000 for previous year vacation accrued but not taken and
automobile expenses.
(6) Data reflects compensation paid by VPI for 1995, 1996 and January 1997.
Thereafter, compensation was paid by the Company.
(7) Mr. Gillespie, formerly the sole stockholder of VPI, received a $1.0 million
dividend from VPI in 1996, approximately $450,000 of which was to reimburse
Mr. Gillespie for income taxes paid by him during that year.
(8) BFI options for 1995 were re-granted upon the Company's February 4, 1997 IPO
at the exercise price and vesting schedules as established by BioFactors.
24
<PAGE> 25
OPTION GRANTS IN CALENDAR 1997
The following option grants were made to the Named Executive Officers
during the fiscal year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR(6) ($/SHR)(3) DATE
---- --------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
Esmond T. Goei, 100,000(2)(3) 9.5% $3.875/share 3/18/2007
CEO, President and Chairman 168,750(1)(4) 16.0 3.20/share(5) 11/2/2005
Douglas S. Zorn, 100,000(2)(3) 9.5 $3.875/share 3/18/2007
EVP and CFO 140,625(1)(4) 13.4 3.20/share(5) 11/2/2005
James S. Gillespie, -- -- n/a n/a
VP Sales and President of VPI
</TABLE>
- ---------------
(1) These options were granted by BioFactors Inc. to ten individuals in November
1995 or February 1996. Pursuant to the terms of the Agreement and Plan of
Merger among BioFactors, Inc. BioFactors Acquisition Corporation and the
Company, dated October 30, 1996 (the "Merger Agreement"), these stock
options were deemed re-granted to all such individuals upon the Company's
February 4,1997, IPO, in the amounts, at the exercise price (as set forth in
the Merger Agreement), and with the terms and vesting schedules as
established by BioFactors. The total number of such options was 520,313. In
addition, in connection with the acquisition of Voice Plus, which occurred
immediately prior to the IPO, an additional 100,000 options previously
approved by the Company on September 12, 1996, for grant to Voice Plus
employees, were deemed re-granted at a price deemed to be the fair market
value of the underlying common stock of the Company on the original grant
date. None of the Named Executive Officers were included in this second
group, but all of these shares are included as part of the total options
granted to employees in fiscal year 1997.
(2) These options were granted on March 18, 1997 under the Company's Equity
Incentive Plan ("Plan"). The options become exercisable ratably on a monthly
basis over 36 months.
(3) The exercise price was deemed to be equal to 100% of the fair market value
on the date immediately preceding the date of the grant, as determined by
the closing price as reported on the Nasdaq SmallCap listing.
(4) The exercise price was deemed to be equal to 100% of the fair market value
on the date of the grant as determined by the Board of Directors.
(5) The options vest fifty percent (50%) on August 4, 1998, with the remaining
50% vesting on February 4, 1999.
(6) Excludes 290,626 options granted during 1997 to five non-employee directors
and two consultants. The total number of options deemed granted during 1997
was 1,053,125.
25
<PAGE> 26
The following table sets forth certain information regarding option
exercises during fiscal year 1997 and the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1997 for each of
the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei................... -- -- 193,750 75,000 -- --
Douglas S. Zorn.................. -- -- 165,625 75,000 -- --
James S. Gillespie............... -- -- -- -- -- --
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company or its subsidiaries are not
separately compensated for serving on the Board of Directors. Non-employee
directors are entitled to receive a fee of $1,000 per board meeting requiring
personal attendance and a fee of $250 per telephonic Board meeting and committee
meeting not part of, immediately preceding or following, a scheduled Board
meeting and also are reimbursed for reasonable travel-related expenses for
attendance at meetings. The non-employee director who chairs the Board's
compensation committee and the non-employee director who chairs the Board's
audit committee are each entitled to be paid $12,000 per year in addition to
compensation for Board of Director meetings.
In connection with his election to the BFI Board in December 1995, Mr.
Williams (who resigned from the Board April 9, 1997) received a non-statutory
option ("NSO") to purchase shares of BFI Common Stock, which was exchanged for
an NSO to purchase 16,875 shares of the Company's Common Stock, exercisable at a
price per share of $3.20. The option vested 50% on the first anniversary of the
date of grant and the remaining 50% on the second anniversary. The option was
not exercised as of March 31, 1998. On February 4, 1997, in connection with
their respective elections to the Board of Directors, the Company granted to
each of Messrs. Nemetz and Brehm non-qualified stock options ("NSOs") to
purchase 16,875 shares of Common Stock at a price per share of $4.00, 50%
percent of which vest on the first anniversary of the date of grant, and the
remaining 50% percent on the second anniversary. On July 7, 1997, the Company
granted to each of Messrs. Nemetz and Brehm an additional NSO to purchase 3,125
shares of Common Stock at a price per share of $3.50, 50% of which vest on
February 4, 1998, and the remaining 50% vest on February 4, 1999. The purpose of
these grants was to bring the number of options granted to each director up to
20,000. On July 7, 1997, the Company granted to James Boyle, in connection with
his election to the Board of Directors, a NSO to purchase 20,000 shares of
Common Stock at a price per share of $3.50, one quarter of which vests on each
of the four succeeding anniversary dates of the grant. On August 19, 1997, the
Company granted to Santanu Das, in connection with his election to the Board of
Directors, a NSO to purchase 20,000 shares of Common Stock at a price per share
of $3.5625, one quarter of which vests on each of the four succeeding
anniversary dates of the grant. Mr. Brehm resigned from the Board of Directors
of the Company in August 1997; no shares had vested under his NSO as of his date
of resignation. As of March 31, 1998, neither of Messrs. Nemetz or Das had
exercised any of their options. As of March 31, 1998, none of Mr. Boyle's
options had vested. Under the Company's Equity Incentive Plan, each outside
director who has served for a full fiscal year will be granted annually a NSO to
purchase 2,400 shares of Common Stock, which will vest one-third on each of the
first, second and third anniversaries of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has three-year employment agreements with each of Esmond T.
Goei, as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, and Douglas S. Zorn, as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company. Each officer's base
salary may be adjusted from time to time by mutual agreement between each such
officer and the Board of Directors. In 1997, the base salary of Mr. Goei was
increased to $210,000 and the base salary of Mr. Zorn was $150,000. The
agreements provide for an annual bonus to be paid to each officer pursuant to a
written bonus
26
<PAGE> 27
plan to be approved by the Board of Directors. The agreements provide that each
officer is entitled to reasonable expense reimbursements, four weeks paid
vacation per year and participation in any of the Company's benefit and deferred
compensation plans. Mr. Goei received a $500 monthly automobile allowance
through July 7, 1997, at which time his allowance was increased to $1,100 per
month. Mr. Zorn's automobile allowance was $500 per month throughout 1997 and
was increased to $1,100 in 1998. On the annual anniversary date of each
agreement, the period of employment is extended automatically for one year
unless the officer is notified in writing. The agreements also provide for
payments in the event of termination prior to the end of the term, as follows:
if the officer is terminated without cause, then base salary will be paid for
the greater of two years or the balance of the term plus a bonus for each such
year equal to the average bonus for the two preceding years; if the officer is
terminated upon a change of control, then compensation equal to two times the
sum of the base salary plus average bonus will be paid for one year. In the
event of termination (except termination without cause), the officer is subject
to a two-year non-competition agreement.
The Company has a three-year employment agreement with James S. Gillespie,
Vice President of Sales of the Company and President of VPI. Mr. Gillespie's
agreement provides for a base salary of $150,000, annual sales commissions
targeted to be approximately $200,000 and an annual bonus pursuant to a written
bonus plan to be approved by the Board of Directors. The agreement provides that
Mr. Gillespie is entitled to reasonable expense reimbursements, participation in
any of the Company's benefit and deferred compensation plans, use of a Company
car or a monthly car allowance and annual paid vacation, consistent with the
arrangements provided to the Company's senior management. Additionally, the
agreement contains provisions for assignment of inventions and confidentiality
and, in the event of termination, covenants not to compete, to solicit customers
or to hire employees for two years. The agreement also provides that in the
event of termination without cause or a material breach by the Company, Mr.
Gillespie will receive his base salary and 50% of sales commissions for the
duration of the term of the agreement and, in the event of a material breach by
the Company, a promissory note with a remaining principal amount of $250,000
issued by the Company in consideration for the VPI acquisition will be
accelerated and immediately become due and payable.
VPI has two-year employment agreements with each of Diane E. Nowak, Vice
President of Sales, Western Region, of VPI, and Bradley J. Eickman, Director of
Operations for VPI. Each of these employment agreements provides for a base
salary of $65,000, sales commissions payable pursuant to an annual sales manager
compensation plan and performance-based bonus payments. Both agreements also
provide for reasonable expense reimbursements, participation in any of VPI's
benefit plans, use of a car leased by VPI and annual paid vacation.
Additionally, the agreements contain provisions for assignment of inventions and
confidentiality and, in the event of termination, covenants not to compete, to
solicit customers or to hire employees for two years. The Company granted to Ms.
Nowak and Mr. Eickman incentive stock options ("ISOs") to purchase 50,000 and
40,000 shares of Common Stock, respectively, at a price per share equal to the
fair market value on the date of grant, 50% of which will vest 18 months from
the date of grant and the remaining 50% of which will vest on the second
anniversary of the date of grant. In addition, Ms. Nowak and Mr. Eickman
received signing bonuses that are not tied to continued employment in the
amounts of $100,000 and $50,000, respectively, 50% of which was paid on February
3, 1997 and the balance of which was paid on August 1, 1997.
27
<PAGE> 28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998, by (a) each person
known to the Company to own beneficially more than 5% of the Company's Common
Stock, (b) each of the Company's directors and Named Executive Officers, and (c)
all executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAMES AND ADDRESSES OWNED(1) OWNERSHIP%(1)
------------------- ------------------- -------------
<S> <C> <C>
James S. Gillespie.................................... 815,000(2) 15.5%
198 Country Club Drive
Incline Village, Nevada 89451
Esmond T. Goei........................................ 402,068(3) 8.3
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Douglas S. Zorn....................................... 380,324(4) 7.9
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Gary L. Nemetz........................................ 132,725(5) 2.9
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025
Santanu Das........................................... 31,718(6) *
14 Hunter Ridge Road
Monroe, Connecticut 06468
James H. Boyle........................................ *
4564 Daffodil Trail
Plano, TX 75093
Directors and executive officers as a group (9
persons)............................................ 1,810,210(7) 40.8%
</TABLE>
- ---------------
* Less than 1%
(1) In performing all calculations in connection with this Item 11, the number
of issued and outstanding share excludes 91,454 shares held in escrow in
connection with the Advantis acquisition.
(2) Includes warrants to purchase 27,500 shares of Common Stock.
(3) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 207,638 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 179,514 shares of Common Stock, and
warrants to purchase 61,375 shares of Common Stock.
(5) Includes 67,725 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 10,000 shares and warrants to purchase 55,000 shares.
(6) Includes a warrant to purchase 25,000 shares of Common Stock.
(7) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 405,904 shares of Common Stock and
warrants to purchase 220,393 shares of Common Stock.
28
<PAGE> 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, BFI entered into an agreement with Burton Kanter (a
director of BFI until February 3, 1997), that was subsequently amended on July
16, 1996. Mr. Kanter agreed on behalf of Walnut Capital Corp., of which Mr.
Kanter is Chairman: (i) to extend the maturity date of certain unsecured notes
issued to Walnut Capital Corp. in the aggregate principal amount of $54,850,
represented by five notes issued between January 29, 1992 and November 1, 1992
(the "1992 Notes"), and payment of accrued interest thereon until the earlier of
December 31, 1996 or receipt by the Company of the proceeds of an initial public
offering; and (ii) to waive the default on the 1992 Notes (in return for
re-compilation of interest on the 1992 Notes on an annually compounded basis
from the date each of the 1992 Notes was issued). In return for such agreements
and his past and then continuing participation on BFI's Board of Directors, BFI:
(i) executed and delivered to Mr. Kanter a stock option to purchase 75,000
shares of BFI Common Stock, which subsequently was assigned to Windy City, Inc.
and was exchanged for an option to purchase 42,188 shares of NHancement Common
Stock, with an exercise price per share equal to 80% of the initial public
offering price of the Company's Common Stock ($4.00 being the initial public
offering price and $3.20 being equal to 80% of the initial public offering
price); (ii) transferred to Mr. Kanter and a former director all of BFI's rights
to invest in SportsTrac; (iii) transferred to Mr. Kanter and a former director
of BFI all of BFI's 7.5% warrants in SportsTrac; and (iv) agreed to pay Mr.
Kanter a fee of $2,000 per month, plus reasonable expenses, in connection with
his duties as a director. In July 1996, Mr. Kanter agreed to terminate his
$2,000 per month director fees and, from that time forward, to be compensated on
the same basis as other outside directors. The 1992 Notes and all accrued
interest thereon were paid in February 1997.
In May and June 1996, BFI issued 87,475 shares of BFI common stock to each
of Messrs. Goei and Zorn in lieu of cash compensation. The aggregate value of
these shares at the time of issuance totaled $117,200, of which $110,000 was for
payment of deferred compensation accrued in 1995. In June 1996, BFI issued
18,750 shares of common stock to Mr. Kanter as consideration for his special
services as a director during 1995, paid out of compensation otherwise owing to
Messrs. Goei and Zorn, in accordance with an agreement dated July 16, 1996 by
and among BFI and Messrs. Goei, Zorn, Kanter and a former director of BFI.
In November 1996, BFI entered into a Unit Subscription Agreement with each
of VPI, Admiral Capital Corporation (of which Mr. Nemetz has sole voting and
investment power) and Messrs. Goei and Zorn for the purchase and sale of BFI's
units consisting of: (i) unsecured promissory notes in the principal amounts of
$50,000, $50,000, $35,000 and $100,000, respectively, and (ii) warrants to
purchase 50,000, 50,000, 35,000 and 100,000 shares, respectively: at an exercise
price of 120% of the initial public offering price of the Company's common
stock. In January 1997, Mr. Zorn transferred to Richard H. Williams (a director
of BFI until February 3, 1997, and a director of the Company from February 4,
1997 until April 9, 1997) and Mr. Goei notes in the principal amounts of $25,000
and $15,000, respectively, and warrants to purchase 25,000 shares and 15,000
shares, respectively, in exchange for Mr. Williams payment to BFI of $25,000,
Mr. Goei's payment to BFI of $15,000, and Mr. Zorn's receipt of an unsecured
promissory note from BFI in the principal amount of $40,000. Upon the February
4, 1997 closing of NHancement's initial public offering ("IPO"), outstanding
principal and all accrued interest in the amounts of $51,361.11 (VPI),
$51,361.11 (Admiral Capital Corporation), $51,027.78 (Mr. Goei), $102,722.22
(Mr. Zorn) and $25,270.83 (Mr. Williams), respectively, were paid.
Upon consummation of the VPI merger on February 3, 1997, the Company
acquired all of the capital stock of VPI from Mr. Gillespie for total
consideration valued at approximately $6,180,000, consisting of: (i) $1,500,000
in two long-term notes in the principal amounts of $1,000,000 and $500,000,
respectively, bearing interest at the medium-term United States-Treasury Bill
rate declared at the close of business on the maturity date or earlier payment
date and maturing on the three-year anniversary of the date of issuance but
payable earlier, dependent upon the future earnings of VPI, with fifty percent
(50%) of VPI's pre-tax profits to be applied to pay principal and accrued
interest on the $1,000,000 note quarterly, and $62,500 of principal and accrued
interest to be paid on the $500,000 note in any quarter in which VPI is
profitable, beginning 45 days after the close of the first fiscal quarter in
1997; (ii) $2,400,000 in shares of Common Stock sold in the Company's IPO (being
600,000 shares based on the price to the public in the IPO of $4.00 per share);
and (iii) $2,280,000 in restricted shares of Common Stock (being 712,500 shares
based on the estimated fair value
29
<PAGE> 30
of $3.20 per share). In the event of a material breach by the Company of the
employment agreement with Mr. Gillespie, the two promissory notes will be
accelerated and immediately become due and payable. During 1997, an aggregate of
$1,250,000 was paid to Mr. Gillespie in connection with the $1,500,000 of notes
payable issued to him by the Company. At December 31, 1997, Mr. Gillespie was
owed a total of $250,000 on these notes. See Item 10, "Employment Agreements."
Except for 150,000 shares, restricted shares are subject to a lock-up agreement
in favor of Chatfield Dean & Co., the representative of the underwriters of the
IPO, for 18 months following the consummation of the IPO with respect to 50% of
the shares, and for 24 months following the consummation of the IPO with respect
to the remaining 50% of the shares. Additionally, the Company has agreed to
register 150,000 shares of Common Stock issued as consideration for VPI one year
after the consummation of the IPO.
On April 15, 1997, the Board of Directors approved a short-term loan to
Esmond T. Goei to assist him with the costs of relocation due to the Company's
headquarters move from Colorado to California. The principal amount of the loan
is $60,000, with interest accruing at seven percent (7%) per annum. Principal
and interest are due in April 1998. As of December 31, 1997, principal and
unpaid interest totaled approximately $63,000.
On December 15, 1997, the Company consummated a stock purchase acquisition
with Advantis Network & System Sdn Bhd, a Malaysian corporation ("Advantis").
The Company purchased all of the shares of stock of Advantis from the six (6)
stockholders who owned all of the issued and outstanding shares of Advantis
("Advantis Stockholders"). The purchase price consisted of newly-issued shares
of the Common Stock of the Company. As a result of the transaction, Advantis
became a wholly-owned subsidiary of the Company, and the Advantis Stockholders
became stockholders of the Company. As of December 31, 1997, the Advantis
Stockholders had received a total of 208,500 shares of the Company's stock, with
no Advantis Stockholder receiving more than 2.3% of the total issued and
outstanding shares of the Company. At the time of the Advantis acquisition, an
Advantis Stockholder had an outstanding loan payable to Advantis. This loan
arose in April 1997, at which time proceeds from a term loan to the Company from
a third party were advanced to such Advantis Stockholder in return for a
promissory note payable to Advantis. Under the terms of the note, repayments,
including interest, will match Advantis' payments due under the term loan. Those
payments provide for monthly principal and interest payments of $2,600 through
April 2012, with interest payable at the Base Lending Rate in Malaysia plus
2.23%. At December 31, 1997, this rate was 12.65%, and the amount owing on the
note was approximately $204,000.
At various times in 1996 and 1997, Advantis purchased inventory from
certain companies whose directors and/or stockholders were also stockholders of
Advantis. At December 31, 1997, the Company's Advantis subsidiary owed $426,700
in relation to these transactions.
At December 31, 1997, the Company's Advantis subsidiary owed $58,200 to
certain of the Advantis Stockholders for expenses paid by those Stockholders on
behalf of Advantis.
The Company's Advantis subsidiary leases its corporate facilities from an
entity that is partially owned by a former minority Advantis Stockholder. The
lease commenced in November 1996, and its terms provide for annual payments of
$42,500 through October 1999.
Reference is made to Items 9 and 10 of this report on Form 10-KSB regarding
options granted to the directors and Named Executive Officers of the Company.
30
<PAGE> 31
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Annual Report on Form
10-KSB
1. Financial Statements
See Index to Financial Statements on page F-1 of this Form 10-KSB
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation, as
filed with the Delaware Secretary of State on January 27,
1997, as amended by Certificate of Designations, as filed
with the Delaware Secretary of State on April 9, 1998, as
further amended by Amended Certificate of Designations,
as filed with the Delaware Secretary of State on April
13, 1998.
3.2 -- Amended and Restated Bylaws(1)
4.1 -- Form of Common Stock Certificate(2)
4.2 -- Form of underwriter Warrant(3)
4.3 -- Registration Rights Agreement, dated September 1, 1996,
between BFI and (i) a majority of the holders of
securities pursuant to the Secured Note and Warrant
Purchase Agreement dated December 1, 1994, as amended;
(ii) a majority of the holders of securities issued
pursuant to the Secured Note and Stock Purchase
Agreement, dated December 1, 1995, as amended; (iii) a
majority of the holders of securities issued pursuant to
the Unsecured Note and Stock Purchase Agreement, dated
February 1, 1996, as amended; (iv) a majority of the
holders of securities issued pursuant to the Unit
Subscription Agreement, dated May 17, 1996, as amended;
(v) the purchasers of securities issued pursuant to the
Unit Subscription Agreement dated October 3, 1996; and
(vi) the former holders of BFI's Series A Preferred
Stock(3)
4.4 -- Registration Rights Agreement, dated October 25, 1996,
between the Company and James S. Gillespie(2)
4.5 -- Form of Series A Preferred Stock Certificate
4.6 -- Registration Rights Agreement, dated as of April 13,
1998, among the Company, The Endeavour Capital Fund S.A.
and AMRO INTERNATIONAL S.A.
10.1 -- Formation Agreement, dated as of October 15, 1996,
between BFI and VPI(2)
10.2 -- Agreement and Plan of Merger, dated as of October 30,
1996, between the Company, BFI Acquisition Corporation
and BFI(3)
10.3 -- Agreement and Plan of Merger, dated as of October 25,
1996, between the Company, VPI Acquisition Corporation,
VPI and James S. Gillespie, together with Forms of
Promissory Notes(4)
10.4 -- Agreement of Merger between Voice Plus, Inc. and
BioFactors, Inc., dated as of October 10, 1997
10.5 -- License Agreement, dated November 24, 1988, by and
between BFI and Systems Technology, Inc., as amended by
Addendum to License Agreement, dated May 19, 1994, as
amended by Second Addendum to License Agreement, dated
November 18, 1996(3)
10.6 -- Sublicense Agreement, dated August 30, 1995, between BFI
and SportsTrac, Inc., as amended by Addendum to
Sublicense Agreement, dated July 31, 1996(2)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.7 -- Secured Note and Warrant Purchase Agreement, dated
December 1, 1994, between BFI and the purchasers listed
therein, as amended by the First Amendment to Secured
Note and Warrant Purchase Agreement, Dated July 1995, as
amended by Amendment to Secured Note and Warrant Purchase
Agreement, dated December 1, 1995, as amended by Third
Amendment to Secured Note and Warrant Purchase Agreement,
dated March 1, 1996, and as amended by Fourth Amendment
to Secured Note and Warrant Purchase Agreement, dated
October 1, 1996, together with Amended and restated
Security Agreement and Form of Secured Promissory Note(3)
10.8 -- Secured Note and Stock Purchase Agreement, dated December
1, 1995, between BFI and the purchasers listed therein,
as amended by the First Amendment to Secured Note and
Stock Purchase Agreement, dated March 1, 1996, as amended
by Second Amendment to Secured Note and Stock Purchase
Agreement, dated July 1, 1996, and as amended by Third
Amendment to Secured Note and Stock Purchase Agreement,
dated October 1, 1996, together with Form of Secured
Promissory Note(3)
10.9 -- Unsecured Note and Stock Purchase Agreement, dated
February 1, 1996, between BFI and the purchasers listed
therein, as amended by the First Amendment to Unsecured
Note and Stock Purchase Agreement, dated March 1, 1996,
as amended by Second Amendment to Unsecured Note and
Stock Purchase Agreement, dated July 1, 1996, and as
amended by Third Amendment to Unsecured Note and Stock
Purchase Agreement, dated October 1, 1996, together with
Form of Unsecured Promissory Note(3)
10.10 -- Unit Subscription Agreement, dated May 17, 1996, between
BFI and the purchasers listed therein, as amended by
First Amendment to Unit Subscription Agreement, dated
October 1, 1996, together with Form of Promissory Note(3)
10.11 -- Unit Subscription Agreement, dated October 1, 1996,
between BFI and the purchasers listed therein, together
with Form of Promissory Note and Form of Warrant(1)
10.12 -- Equity Incentive Plan(1)
10.13 -- Employment Agreement, dated as of October 30, 1996,
between Douglas S. Zorn and the Company(1)
10.14 -- Employment Agreement, dated as of October 25, 1996,
between James S. Gillespie and the Company(2)
10.15 -- Employment Agreement, dated as of October 30, 1996,
between Esmond T. Goei and the Company(2)
10.16 -- Form of FACTOR 1000(R) Service Contract(2)
10.17 -- Office Building Lease, dated April 8, 1996, between BFI
and Denver West Office Building No. 21 Venture(3)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16,
1996, between Centigram Communications Corporation and
VPI(2)
10.19 -- Office Lease, dated October 16, 1995, between AJ Partners
Limited Partnership and VPI(3)
10.20 -- Agreement, dated October 16, 1995, between BFI, Burton
Kanter and Elliot Steinberg, as amended by Amendment
dated July 16, 1996, between BFI, Esmond Goei, Douglas
Zorn, Burton Kanter and Elliot Steinberg(3)
10.21 -- Stockholder Agreement, dated October 25, 1996, between
the Company and James D. Gillespie(3)
10.22 -- 1997 Management and Company Performance Bonus Plan(3)
10.23 -- Employment Agreement, dated as of November 1, 1996,
between Diane E. Nowak and VPI(1)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.24 -- Employment Agreement, dated as of November 1, 1996,
between Bradley Eickman and VPI(1)
10.25 -- Promissory Note Payable to the Company by Esmond T. Goei
10.26 -- Agreement for the Sale of Shares in Advantis Network &
System Sdn. Bhd. Dated June 20, 1997, Between the Company
and the shareholders of Advantis, as amended by the
Supplemental Agreement to the Agreement dated November
26, 1997; and the Second Supplemental Agreement Dated
November 26, 1997(5)
10.27 -- Building Lease dated June 9, 1997 by and between the
company, as Tenant and El Dorado Holding Company, Inc.,
as Landlord(7)
10.28 -- Form of Lock Up Agreement between the Company the former
Shareholders of Advantis(6)
10.29 -- Securities Purchase Agreement, dated as of April 13,
1998, by and among the Company, the Endeavour Capital
Fund S.A. and AMRO INTERNATIONAL S.A.
10.30 -- Form of Escrow Instructions related to Securities
Purchase Agreement, dated as of April 13, 1998.
21 -- Subsidiaries
27.1 -- Financial Data Schedule for the year ended December 31,
1996 and 1997
27.2 -- Restated Financial Data Schedule for the year ended March
31, 1997
27.3 -- Restated Financial Data Schedule for the year ended June
30, 1997
27.4 -- Restated Financial Data Schedule for the year ended
September 31, 1997
</TABLE>
- ---------------
(1) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 2 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on January 13, 1997.
(2) Incorporated by reference to the document bearing the same exhibit number as
contained in Registrant's Registration Statement on Form SB-2, File Number
333-15563, as filed with the Securities and Exchange Commission on November
5, 1996.
(3) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 1 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on December 20, 1996.
(4) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 3 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on January 28, 1997.
(5) Incorporated by reference to Exhibit 2.01 on registrant's Form 8-K, SEC File
No. 0-21999, as filed with the Securities and Exchange Commission on
December 30, 1997.
(6) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, SEC File
Number 0-21999, as filed with the Securities and Exchange Commission on
December 30, 1997.
(7) Incorporated by reference to the document bearing the same exhibit number as
contained in registrant's Quarterly Report on Form 10-QSB, SEC File Number
0-21999, as filed with the Securities and Exchange Commission on November
14, 1996.
(b) Reports on Form 8-K
Registrant filed Reports on Form 8-K on April 7, 1997, and December 30,
1997. A Report on Form 8-K/A was filed by the Registrant on February 11, 1998.
33
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NHANCEMENT TECHNOLOGIES INC.
By /s/ ESMOND T. GOEI
-----------------------------------
Esmond T. Goei
Chairman of the Board, Chief
Executive
Officer, President and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Esmond T. Goei and Douglas S. Zorn and each of
them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ESMOND T. GOEI Chairman of the Board, Chief April 15, 1998
- ----------------------------------------------------- Executive Officer, President and
Esmond T. Goei Director (Principal Executive
Officer)
/s/ DOUGLAS S. ZORN Executive Vice President-Finance, April 15, 1998
- ----------------------------------------------------- Secretary, Treasurer, Chief
Douglas S. Zorn Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ JAMES S. GILLESPIE Vice President Sales, President of April 15, 1998
- ----------------------------------------------------- Voice Plus, Inc. and Director
James S. Gillespie
/s/ GARY L. NEMETZ Director April 15, 1998
- -----------------------------------------------------
Gary L. Nemetz
/s/ SANTANU DAS Director April 15, 1998
- -----------------------------------------------------
Santanu Das
/s/ JAMES H. BOYLE Director April 15, 1998
- -----------------------------------------------------
James H. Boyle
</TABLE>
34
<PAGE> 35
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
Consolidated Financial Statements
Years Ended December 31, 1996 and 1997
<PAGE> 36
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<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
</TABLE>
F-1
<PAGE> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- A $192,900 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 with 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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation, as
filed with the Delaware Secretary of State on January 27,
1997, as amended by Certificate of Designations, as filed
with the Delaware Secretary of State on April 9, 1998, as
further amended by Amended Certificate of Designations,
as filed with the Delaware Secretary of State on April
13, 1998.
3.2 -- Amended and Restated Bylaws(1)
4.1 -- Form of Common Stock Certificate(2)
4.2 -- Form of underwriter Warrant(3)
4.3 -- Registration Rights Agreement, dated September 1, 1996,
between BFI and (i) a majority of the holders of
securities pursuant to the Secured Note and Warrant
Purchase Agreement dated December 1, 1994, as amended;
(ii) a majority of the holders of securities issued
pursuant to the Secured Note and Stock Purchase
Agreement, dated December 1, 1995, as amended; (iii) a
majority of the holders of securities issued pursuant to
the Unsecured Note and Stock Purchase Agreement, dated
February 1, 1996, as amended; (iv) a majority of the
holders of securities issued pursuant to the Unit
Subscription Agreement, dated May 17, 1996, as amended;
(v) the purchasers of securities issued pursuant to the
Unit Subscription Agreement dated October 3, 1996; and
(vi) the former holders of BFI's Series A Preferred
Stock(3)
4.4 -- Registration Rights Agreement, dated October 25, 1996,
between the Company and James S. Gillespie(2)
4.5 -- Form of Series A Preferred Stock Certificate
4.6 -- Registration Rights Agreement, dated as of April 13,
1998, among the Company, The Endeavour Capital Fund S.A.
and AMRO INTERNATIONAL S.A.
10.1 -- Formation Agreement, dated as of October 15, 1996,
between BFI and VPI(2)
10.2 -- Agreement and Plan of Merger, dated as of October 30,
1996, between the Company, BFI Acquisition Corporation
and BFI(3)
10.3 -- Agreement and Plan of Merger, dated as of October 25,
1996, between the Company, VPI Acquisition Corporation,
VPI and James S. Gillespie, together with Forms of
Promissory Notes(4)
10.4 -- Agreement of Merger between Voice Plus, Inc. and
BioFactors, Inc., dated as of October 10, 1997
10.5 -- License Agreement, dated November 24, 1988, by and
between BFI and Systems Technology, Inc., as amended by
Addendum to License Agreement, dated May 19, 1994, as
amended by Second Addendum to License Agreement, dated
November 18, 1996(3)
10.6 -- Sublicense Agreement, dated August 30, 1995, between BFI
and SportsTrac, Inc., as amended by Addendum to
Sublicense Agreement, dated July 31, 1996(2)
10.7 -- Secured Note and Warrant Purchase Agreement, dated
December 1, 1994, between BFI and the purchasers listed
therein, as amended by the First Amendment to Secured
Note and Warrant Purchase Agreement, Dated July 1995, as
amended by Amendment to Secured Note and Warrant Purchase
Agreement, dated December 1, 1995, as amended by Third
Amendment to Secured Note and Warrant Purchase Agreement,
dated March 1, 1996, and as amended by Fourth Amendment
to Secured Note and Warrant Purchase Agreement, dated
October 1, 1996, together with Amended and restated
Security Agreement and Form of Secured Promissory Note(3)
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.8 -- Secured Note and Stock Purchase Agreement, dated December
1, 1995, between BFI and the purchasers listed therein,
as amended by the First Amendment to Secured Note and
Stock Purchase Agreement, dated March 1, 1996, as amended
by Second Amendment to Secured Note and Stock Purchase
Agreement, dated July 1, 1996, and as amended by Third
Amendment to Secured Note and Stock Purchase Agreement,
dated October 1, 1996, together with Form of Secured
Promissory Note(3)
10.9 -- Unsecured Note and Stock Purchase Agreement, dated
February 1, 1996, between BFI and the purchasers listed
therein, as amended by the First Amendment to Unsecured
Note and Stock Purchase Agreement, dated March 1, 1996,
as amended by Second Amendment to Unsecured Note and
Stock Purchase Agreement, dated July 1, 1996, and as
amended by Third Amendment to Unsecured Note and Stock
Purchase Agreement, dated October 1, 1996, together with
Form of Unsecured Promissory Note(3)
10.10 -- Unit Subscription Agreement, dated May 17, 1996, between
BFI and the purchasers listed therein, as amended by
First Amendment to Unit Subscription Agreement, dated
October 1, 1996, together with Form of Promissory Note(3)
10.11 -- Unit Subscription Agreement, dated October 1, 1996,
between BFI and the purchasers listed therein, together
with Form of Promissory Note and Form of Warrant(1)
10.12 -- Equity Incentive Plan(1)
10.13 -- Employment Agreement, dated as of October 30, 1996,
between Douglas S. Zorn and the Company(1)
10.14 -- Employment Agreement, dated as of October 25, 1996,
between James S. Gillespie and the Company(2)
10.15 -- Employment Agreement, dated as of October 30, 1996,
between Esmond T. Goei and the Company(2)
10.16 -- Form of FACTOR 1000 Service Contract(2)
10.17 -- Office Building Lease, dated April 8, 1996, between BFI
and Denver West Office Building No. 21 Venture(3)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16,
1996, between Centigram Communications Corporation and
VPI(2)
10.19 -- Office Lease, dated October 16, 1995, between AJ Partners
Limited Partnership and VPI(3)
10.20 -- Agreement, dated October 16, 1995, between BFI, Burton
Kanter and Elliot Steinberg, as amended by Amendment
dated July 16, 1996, between BFI, Esmond Goei, Douglas
Zorn, Burton Kanter and Elliot Steinberg(3)
10.21 -- Stockholder Agreement, dated October 25, 1996, between
the Company and James D. Gillespie(3)
10.22 -- 1997 Management and Company Performance Bonus Plan(3)
10.23 -- Employment Agreement, dated as of November 1, 1996,
between Diane E. Nowak and VPI(1)
10.24 -- Employment Agreement, dated as of November 1, 1996,
between Bradley Eickman and VPI(1)
10.25 -- Promissory Note Payable to the Company by Esmond T. Goei
10.26 -- Agreement for the Sale of Shares in Advantis Network &
System Sdn. Bhd. Dated June 20, 1997, Between the Company
and the shareholders of Advantis, as amended by the
Supplemental Agreement to the Agreement dated November
26, 1997; and the Second Supplemental Agreement Dated
November 26, 1997(5)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.27 -- Building Lease dated June 9, 1997 by and between the
company, as Tenant and El Dorado Holding Company, Inc.,
as Landlord(7)
10.28 -- Form of Lock Up Agreement between the Company the former
Shareholders of Advantis(6)
10.29 -- Securities Purchase Agreement, dated as of April 13,
1998, by and among the Company, the Endeavour Capital
Fund S.A. and AMRO INTERNATIONAL S.A.
10.30 -- Form of Escrow Instructions related to Securities
Purchase Agreement, dated as of April 13, 1998.
21 -- Subsidiaries
27.1 -- Financial Data Schedules for the years ended December 31,
1996 and 1997
27.2 -- Restated Financial Data Schedule for the three months
ended March 31, 1997
27.3 -- Restated Financial Data Schedule for the six months ended
June 30, 1997
27.4 -- Restated Financial Data Schedule for the nine months
ended September 31, 1997
</TABLE>
- ---------------
(1) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 2 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on January 13, 1997.
(2) Incorporated by reference to the document bearing the same exhibit number as
contained in Registrant's Registration Statement on Form SB-2, File Number
333-15563, as filed with the Securities and Exchange Commission on November
5, 1996.
(3) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 1 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on December 20, 1996.
(4) Incorporated by reference to the document bearing the same exhibit number as
contained in Amendment No. 3 to Registrant's Registration Statement on Form
SB-2, File Number 333-15563, as filed with the Securities and Exchange
Commission on January 28, 1997.
(5) Incorporated by reference to Exhibit 2.01 on registrant's Form 8-K, SEC File
No. 0-21999, as filed with the Securities and Exchange Commission on
December 30, 1997.
(6) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, SEC File
Number 0-21999, as filed with the Securities and Exchange Commission on
December 30, 1997.
(7) Incorporated by reference to the document bearing the same exhibit number as
contained in registrant's Quarterly Report on Form 10-QSB, SEC File Number
0-21999, as filed with the Securities and Exchange Commission on November
14, 1996.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION OF
NHANCEMENT TECHNOLOGIES INC.
A DELAWARE CORPORATION
ARTICLE 1
The name of the Corporation is Nhancement Technologies Inc.
(hereinafter referred to as the "Corporation").
ARTICLE 2
The address of the Corporation's registered office in the State of
Delaware is The Prentice-Hall Corporation System, Inc., 1013 Centre Road,
Wilmington, Delaware 19805, County of New Castle. The name of its registered
agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE 3
The nature of the business of the Corporation and the purposes for
which it is organized are to engage in any business and in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware (the "GCL") and to possess and employ all powers and privileges
now or hereafter granted or available under the laws of the State of Delaware to
such corporations.
ARTICLE 4
4.1 Authorized Shares. The total number of shares which the Corporation
is authorized to issue is one thousand and ten (1,010) shares of which one
thousand (1,000) shares shall be common stock, par value $.01 per share, and ten
(10) shares shall be preferred stock, par value $.01 per share.
4.2 Common Stock. Each holder of common stock shall be entitled to one
vote for each share of common stock held on all matters as to which holders of
common stock shall be entitled to vote. Except for and subject to those
preferences, rights, and privileges expressly granted to the holders of all
classes of stock at the time outstanding having prior rights, and series of
preferred stock which may from time to time come into existence, and except as
may be provided by the laws of the State of Delaware, the holders of common
stock shall have exclusively all other rights of stockholders of the
Corporation, including, but not by way of limitation, (i) the right to receive
dividends when, as and if declared by the board of
<PAGE> 2
directors out of assets lawfully available therefor, and (ii) in the event of
any distribution of assets upon the dissolution and liquidation of the
Corporation, the right to receive ratably and equally all of the assets of the
Corporation remaining after the payment to the holders of preferred stock of the
specific amounts, if any, which they are entitled to receive as may be provided
herein or pursuant hereto.
4.3 Preferred Stock. The preferred stock authorized by this Certificate
of Incorporation may be issued from time to time in one or more series. The
board of directors of the Corporation is authorized, subject to limitations
prescribed by law, to provide by resolution or resolutions for the issuance of
the shares of preferred stock as a class or in series, and, by filing a
certificate of designation, pursuant to the GCL, setting forth a copy of such
resolution or resolutions, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of the class or of each such series, and
the qualifications, limitations, and restrictions thereof. The authority of the
board of directors with respect to the class or each series shall include, but
not be limited to, determination of the following:
(a) The number of shares constituting any series and the
distinctive designation of that series;
(b) The dividend rate on the shares of the class or of any series,
whether dividends shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares of
the class or of that series;
(c) Whether the class or any series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(d) Whether the class or any series shall have conversion
privileges, and, if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as the board of
directors shall determine;
(e) Whether or not the shares of the class or of any series shall
be redeemable, and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(f) Whether the class or any series shall have a sinking fund for
the redemption or purchase of shares of the class or of that series, and, if so,
the terms and amount of such sinking fund;
(g) The rights of the shares of the class or of any series in the
event of voluntary or involuntary dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of the class
or of that series;
-2-
<PAGE> 3
(h) Any other powers, preferences, rights, qualifications,
limitations, and restrictions of the class or of any series.
ARTICLE 5
5.1 Number and Election of Directors. The number of directors of the
Corporation shall be fixed from time to time in the manner provided in the
bylaws and may be increased or decreased from time to time in the manner
provided in the bylaws. Election of directors need not be by written ballot
except and to the extent provided in the bylaws of the Corporation. A director
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and qualified, subject,
however, to such director's prior death, resignation, retirement,
disqualification or removal from office.
5.2 Quorum. A quorum of the board of directors for the transaction of
business shall not consist of less than a majority of the total number of
directors, except as may be provided in this Certificate of Incorporation or in
the bylaws with respect to filling vacancies.
5.3 Newly Created Directorships and Vacancies. Except as otherwise
fixed relative to the rights of the holders of any class or series of stock
having a preference over the common stock as to dividends or upon liquidation to
elect directors under specified circumstances, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
board of directors resulting from death, resignation, disqualification, removal
or other cause shall be filled solely by the affirmative vote of a majority of
the remaining directors then in office, or by a sole remaining director, even
though less than a quorum of the board of directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the new directorship which was created or in which the vacancy
occurred and until such director's successor shall have been elected and
qualified. No decrease in the number of directors constituting the board of
directors shall shorten the term of any incumbent director.
ARTICLE 6
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the board
of directors is expressly authorized to adopt, repeal, alter, amend and rescind
any or all of the bylaws of the Corporation, but such authorization shall not
divest the stockholders of the power, nor limit their power to adopt, amend or
repeal bylaws.
ARTICLE 7
7.1 Stockholder Actions. Any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of such stockholders and may not be effected by any consent
in writing by such stockholders.
-3-
<PAGE> 4
7.2 Meetings. Meetings of stockholders may be held within or without
the State of Delaware, as the bylaws may provide. Except as otherwise required
by law and subject to the rights of the holders of any class or series of stock
having a preference over the common stock, special meetings of the stockholders
may be called only by the chairman of the board, the chief executive officer,
the president, the board of directors pursuant to a resolution approved by a
majority of the entire board of directors, or as may be designated in the bylaws
of the Corporation.
7.3 Corporate Books. The books of the Corporation may be kept (subject
to any provision contained in the statutes) outside the State of Delaware at
such place or places as may be designated from time to time by the board of
directors or in the bylaws of the Corporation.
ARTICLE 8
The board of directors of the Corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
the Corporation, (b) merge or consolidate the Corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation, shall in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to (i) all relevant
factors including, without limitation, the social, legal, environmental and
economic effects on the employees, customers, suppliers and other affected
persons, firms and corporations and on the communities and geographical areas in
which the Corporation and its subsidiaries operate or are located and on any of
the businesses and properties of the Corporation or any of its subsidiaries, as
well as such other factors as the directors deem relevant, and (ii) not only the
consideration being offered, in relation to the then current market price for
the Corporation's outstanding shares of capital stock, but also in relation to
the then current value of the Corporation in a freely negotiated transaction and
in relation to the board of directors' estimate of the future value of the
Corporation (including the unrealized value of its properties and assets) as an
independent going concern.
ARTICLE 9
Notwithstanding any other provisions of the Certificate of
Incorporation of the Corporation or of the bylaws of the Corporation (and
notwithstanding the fact that a lessor percentage may be specified by law, the
Certificate of Incorporation or the bylaws), the affirmative vote of the holders
of not less than eighty percent (80%) of the outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class), shall be required to amend or repeal
or adopt any provisions inconsistent with Articles 7, 8 and 9 of this
Certificate of Incorporation.
-4-
<PAGE> 5
ARTICLE 10
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for (i) any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) violations of Section 174 of the GCL, or (iv) any transaction from
which the director derived any improper personal benefit. If the GCL hereafter
is amended to eliminate or limit further the liability of a director in addition
to the elimination and limitation of liability provided by the preceding
sentence, the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the GCL as so amended. Any repeal or
modification of the foregoing provisions of this Article 10 by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation under this Article 10, as in effect immediately
prior to such repeal or modification, with respect to any liability that would
have accrued, but for this Article 10, prior to such repeal or modification.
ARTICLE 11
The Corporation shall indemnify, to the fullest extent permitted by
applicable law as in effect from time to time, any person against all liability
and expense (including attorneys' fees) incurred by reason of the fact that he
is or was a director or officer of the Corporation or any of its subsidiaries,
or while serving as a director or officer of the Corporation or any of its
subsidiaries, he is or was serving at the request of the Corporation or any of
its subsidiaries as a director, officer, partner or trustee of, or in any
similar managerial or fiduciary position of, or as an employee or agent of,
another corporation, partnership, joint venture, trust, association, or other
entity. Expenses (including attorneys' fees) incurred in defending an action,
suit, or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit, or proceeding to the fullest extent permitted
by Delaware law. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee, fiduciary, or agent
of the Corporation or any of its subsidiaries against any liability asserted
against and incurred by such person in any such capacity or arising out of such
person's position, whether or not the Corporation would have the power to
indemnify against such liability under the provisions of this Article 11. The
indemnification provided by this Article 11 shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under this Certificate
of Incorporation, any bylaw, agreement, vote of stockholders or disinterested
directors, statute, or otherwise, and shall inure to the benefit of their heirs,
executors, and administrators. The provisions of this Article 11 shall not be
deemed to preclude the Corporation from indemnifying other persons from similar
or other expenses and liabilities as the board of directors or the stockholders
may determine in a specific instance or by resolution of general application.
-5-
<PAGE> 6
ARTICLE 12
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE 13
The name and address of the incorporator is:
Lester R. Woodward
370 Seventeenth Street, Suite 4700
Denver, CO 80202
The names and mailing addresses of the persons who are to serve as
directors of the Corporation until the first annual meeting of stockholders or
until their successors are elected and qualified or until their earlier
resignations or removal are:
Name Address
Esmond T. Goei 1746 Cole Boulevard, Suite 265
Golden, Colorado 80401
Douglas S. Zorn 1746 Cole Boulevard, Suite 265
Golden, Colorado 80401
James S. Gillespie 39899 Balentine Drive
Newark, California 94560
-6-
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation on the 16th day of October, 1996.
/s/ Lester R. Woodward
--------------------------------
Lester R. Woodward, Incorporator
-7-
<PAGE> 8
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
NHANCEMENT TECHNOLOGIES INC.
A DELAWARE CORPORATION
ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF
SECTIONS 242 AND 245 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
NHancement Technologies Inc., (the "Corporation") a corporation duly
existing under and by virtue of a Certificate of Incorporation dated and filed
October 16, 1996 with the Delaware Secretary of State pursuant to the General
Corporation Law of the State of Delaware ("GCL"), DOES HEREBY CERTIFY:
FIRST: The Board of Directors and Stockholders of the Corporation, by
written consent pursuant to a special meeting of the Board of Directors and
Stockholders of the Corporation dated January 7, 1997, have proposed and
adopted the following Amended and Restated Certificate of Incorporation of the
Corporation:
ARTICLE 1
The name of the Corporation is NHancement Technologies Inc.
ARTICLE 2
The address of the Corporation's registered office in the State of
Delaware is The Prentice-Hall Corporation System, Inc., 1013 Centre Road,
Wilmington, Delaware 19805, County of New Castle. The name of its registered
agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE 3
The nature of the business of the Corporation and the purposes for
which it is organized are to engage in any business and in any lawful act or
activity for which corporations may be organized under the GCL and to possess
and employ all powers and privileges now or hereafter granted or available
under the laws of the State of Delaware to such corporations.
<PAGE> 9
ARTICLE 4
4.1 Authorized Shares. The total number of shares which the
Corporation is authorized to issue is twenty two million (22,000,000) shares of
which twenty million (20,000,000) shares shall be common stock, par value $.01
per share, and two million (2,000,000) shares shall be preferred stock, par
value $.01 per share.
4.2 Common Stock. Each holder of common stock shall be entitled
to one vote for each share of common stock held on all matters as to which
holders of common stock shall be entitled to vote. Except for and subject to
those preferences, rights, and privileges expressly granted to the holders of
all classes of stock at the time outstanding having prior rights, and series of
preferred stock which may from time to time come into existence, and except as
may be provided by the laws of the State of Delaware, the holders of common
stock shall have exclusively all other rights of stockholders of the
Corporation, including, but not by way of limitation, (i) the right to receive
dividends when, as and if declared by the board of directors out of assets
lawfully available therefor, and (ii) in the event of any distribution of
assets upon the dissolution and liquidation of the Corporation, the right to
receive ratably and equally all of the assets of the Corporation remaining
after the payment to the holders of preferred stock of the specific amounts, if
any, which they are entitled to receive as may be provided herein or pursuant
hereto.
4.3 Preferred Stock. The preferred stock authorized by this
Certificate of Incorporation may be issued from time to time in one or more
series. The board of directors of the Corporation is authorized, subject to
limitations prescribed by law, to provide by resolution or resolutions for the
issuance of the shares of preferred stock as a class or in series, and, by
filing a certificate of designation, pursuant to the GCL, setting forth a copy
of such resolution or resolutions, to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of the class or of each such series, and
the qualifications, limitations, and restrictions thereof. The authority of
the board of directors with respect to the class or each series shall include,
but not be limited to, determination of the following:
(a) The number of shares constituting any series and the
distinctive designation of that series;
(b) The dividend rate on the shares of the class or of
any series, whether dividends shall be cumulative, and, if so, from which date
or dates, and the relative rights of priority, if any, of payment of dividends
on shares of the class or of that series;
(c) Whether the class or any series shall have voting
rights, in addition to the voting rights provided by law, and, if so, the terms
of such voting rights;
(d) Whether the class or any series shall have conversion
privileges, and, if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as the board of
directors shall determine;
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<PAGE> 10
(e) Whether or not the shares of the class or of any
series shall be redeemable, and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates;
(f) Whether the class or any series shall have a sinking
fund for the redemption or purchase of shares of the class or of that series,
and, if so, the terms and amount of such sinking fund;
(g) The rights of the shares of the class or of any
series in the event of voluntary or involuntary dissolution or winding up of
the corporation, and the relative rights of priority, if any, of payment of
shares of the class or of that series;
(h) Any other powers, preferences, rights,
qualifications, limitations, and restrictions of the class or of any series.
ARTICLE 5
5.1 Number and Election of Directors. The number of directors of
the Corporation shall be fixed from time to time in the manner provided in the
bylaws and may be increased or decreased from time to time in the manner
provided in the bylaws. Election of directors need not be by written ballot
except and to the extent provided in the bylaws of the Corporation. A director
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and qualified, subject,
however, to such director's prior death, resignation, retirement,
disqualification or removal from office. Any director, or the entire Board of
Directors, may be removed with or without cause by a vote of the holders of a
majority of all classes of stock then entitled to vote.
5.2 Quorum. A quorum of the board of directors for the
transaction of business shall not consist of less than a majority of the total
number of directors, except as may be provided in this Certificate of
Incorporation or in the bylaws with respect to filling vacancies.
5.3 Newly Created Directorships and Vacancies. Except as
otherwise fixed relative to the rights of the holders of any class or series of
stock having a preference over the common stock as to dividends or upon
liquidation to elect directors under specified circumstances, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, or by
a sole remaining director, even though less than a quorum of the board of
directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the new directorship
which was created or in which the vacancy occurred and until such director's
successor shall have been elected and qualified. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director.
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<PAGE> 11
ARTICLE 6
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the board
of directors is expressly authorized to adopt, repeal, alter, amend and rescind
any or all of the bylaws of the Corporation, but such authorization shall not
divest the stockholders of the power, nor limit their power to adopt, amend or
repeal bylaws.
ARTICLE 7
7.1 Stockholder Actions. Any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a duly called
annual or special meeting of such stockholders and may not be effected by any
consent in writing by such stockholders.
7.2 Meetings. Meetings of stockholders may be held within or
without the State of Delaware, as the bylaws may provide. Except as otherwise
required by law and subject to the rights of the holders of any class or series
of stock having a preference over the common stock, special meetings of the
stockholders may be called only by the chairman of the board, the chief
executive officer, the president, the executive vice president, the holders of
at least ten percent (10%) of the outstanding shares of all classes of stock
then entitled to vote at such special meeting or the board of directors
pursuant to a resolution approved by a majority of the entire board of
directors, or as may be designated in the bylaws of the Corporation.
7.3 Corporate Books. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the bylaws of the Corporation.
ARTICLE 8
The board of directors of the Corporation, when evaluating any offer
of another party to (a) make a tender or exchange offer for any equity security
of the Corporation, (b) merge or consolidate the Corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation, shall in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to (i) all relevant
factors including, without limitation, the social, legal, environmental and
economic effects on the employees, customers, suppliers and other affected
persons, firms and corporations and on the communities and geographical areas
in which the Corporation and its subsidiaries operate or are located and on any
of the businesses and properties of the Corporation or any of its subsidiaries,
as well as such other factors as the directors deem relevant, and (ii) not only
the consideration being offered, in relation to the then current market price
for the Corporation's outstanding shares of capital stock, but also in relation
to the then current value of the Corporation in a freely negotiated
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<PAGE> 12
transaction and in relation to the board of directors' estimate of the future
value of the Corporation (including the unrealized value of its properties and
assets) as an independent going concern.
ARTICLE 9
Notwithstanding any other provisions of the Certificate of
Incorporation of the Corporation or of the bylaws of the Corporation (and
notwithstanding the fact that a lessor percentage may be specified by law, the
Certificate of Incorporation or the bylaws), the affirmative vote of the
holders of not less than sixty six and two-thirds percent (66-2/3%) of the
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class), shall be required to amend or repeal or adopt any provisions
inconsistent with Articles 7, 8 and 9 of this Certificate of Incorporation.
ARTICLE 10
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for (i) any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) violations of Section 174 of the GCL, or (iv) any
transaction from which the director derived any improper personal benefit. If
the GCL hereafter is amended to eliminate or limit further the liability of a
director in addition to the elimination and limitation of liability provided by
the preceding sentence, the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the GCL as so amended.
Any repeal or modification of the foregoing provisions of this Article 10 by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation under this Article 10, as in effect
immediately prior to such repeal or modification, with respect to any liability
that would have accrued, but for this Article 10, prior to such repeal or
modification.
ARTICLE 11
The Corporation shall indemnify, to the fullest extent permitted by
applicable law as in effect from time to time, any person against all liability
and expense (including attorneys' fees) incurred by reason of the fact that he
is or was a director or officer of the Corporation or any of its subsidiaries,
or while serving as a director or officer of the Corporation or any of its
subsidiaries, he is or was serving at the request of the Corporation or any of
its subsidiaries as a director, officer, partner or trustee of, or in any
similar managerial or fiduciary position of, or as an employee or agent of,
another corporation, partnership, joint venture, trust, association, or other
entity (an "Agent"). Expenses (including attorneys' fees) incurred in defending
an action, suit, or proceeding may be paid by the Corporation in advance of the
final disposition
-5-
<PAGE> 13
of such action, suit, or proceeding, to the fullest extent permitted by
Delaware law, upon receipt of an undertaking to repay the amount of expenses so
advanced if it shall be determined that the Agent is not entitled to be
indemnified. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, fiduciary, or agent of
the Corporation or any of its subsidiaries against any liability asserted
against and incurred by such person in any such capacity or arising out of such
person's position, whether or not the Corporation would have the power to
indemnify against such liability under the provisions of this Article 11. The
indemnification provided by this Article 11 shall not be deemed exclusive of
any other rights to which those indemnified may be entitled under this
Certificate of Incorporation, any bylaw, agreement, vote of stockholders or
disinterested directors, statute, or otherwise, and shall inure to the benefit
of their heirs, executors, and administrators. The provisions of this Article
11 shall not be deemed to preclude the Corporation from indemnifying other
persons from similar or other expenses and liabilities as the board of
directors or the stockholders may determine in a specific instance or by
resolution of general application.
ARTICLE 12
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE 13
The names and mailing addresses of the persons who are to serve as
directors of the Corporation until the first annual meeting of stockholders or
until their successors are elected and qualified or until their earlier
resignations or removal are:
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<PAGE> 14
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Esmond T. Goei 1746 Cole Boulevard, Suite 265
Golden, Colorado 80401
Douglas S. Zorn 1746 Cole Boulevard, Suite 265
Golden, Colorado 80401
James S. Gillespie 39899 Balentine Drive
Newark, California 94560
</TABLE>
SECOND: That the aforesaid Amended and Restated Certificate of
Incorporation was adopted in accordance with the applicable provisions of
Section 242 of the GCL.
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by Esmond T. Goei, President
of the Corporation this 7th day of January, 1997.
------------------------------------
By: Esmond T. Goei
Title: President
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<PAGE> 15
Exhibit 3.1.
Certificate of Designations Filed with Delaware Secretary of State on
April 9, 1998
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.
<PAGE> 16
NHancement Technologies Inc.
Certificate of Designations
Page 2
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 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 EVENT" shall have the meaning set
forth in Section 7.1.
1.13 "REDEMPTION NOTICE" shall have the meaning set
forth in Section 7.3.
1.14 "REDEMPTION PRICE" shall mean One Hundred Eighteen
Dollars ($118.00) plus all unpaid dividends.
1.15 "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
<PAGE> 17
NHancement Technologies Inc.
Certificate of Designations
Page 3
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.
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.
<PAGE> 18
NHancement Technologies Inc.
Certificate of Designations
Page 4
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.
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
<PAGE> 19
NHancement Technologies Inc.
Certificate of Designations
Page 5
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
<PAGE> 20
NHancement Technologies Inc.
Certificate of Designations
Page 6
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 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,
<PAGE> 21
NHancement Technologies Inc.
Certificate of Designations
Page 7
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 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).
<PAGE> 22
NHancement Technologies Inc.
Certificate of Designations
Page 8
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 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").
<PAGE> 23
NHancement Technologies Inc.
Certificate of Designations
Page 9
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 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)
<PAGE> 24
NHancement Technologies Inc.
Certificate of Designations
Page 10
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
<PAGE> 25
EXHIBIT 3.1
Amended Certificate of Designations, as filed with the Delaware Secretary of
State on April 13, 1998
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
<PAGE> 26
NHancement Technologies Inc.
Amended Certificate of Designations
Page 2
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 S. Zorn
--------------------------------
Douglas S. Zorn,
Secretary
<PAGE> 1
EXHIBIT 4.5
Form of Series A Preferred Stock Certificate
*SEE RESTRICTIONS ON REVERSE SIDE*
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
A- * *
- ------- ---------
NHANCEMENT TECHNOLOGIES, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
THIS CERTIFIES THAT __________________________________________________
is the record holder of _______________________________________________________
shares of the SERIES A CONVERTIBLE PREFERRED STOCK of
NHANCEMENT TECHNOLOGIES, INC.
transferable only on the share register of said corporation, in person or by
duly authorized Attorney, upon surrender of this certificate properly endorsed
or assigned.
This certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Certificate of Incorporation
and the Bylaws of said corporation and any amendments thereof, to all of which
the holder of this certificate, by acceptance hereof, assents.
A statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof, including but not limited to the voting, redemption and
conversion rights, and the qualifications, limitations or restrictions of such
preferences and/or rights may be obtained by any stockholder, upon written
request and without charge, at the principal office of the corporation.
WITNESS the signatures of the duly authorized officers of the
corporation as of the _______ day of ____________ ___, 19______.
- -------------------- ------------------------------
DOUGLAS S. ZORN, DOUGLAS S. ZORN,
SECRETARY EXECUTIVE VICE PRESIDENT
Par Value $0.01
<PAGE> 2
FOR VALUE RECEIVED, __________________________ HEREBY SELLS, ASSIGNS AND
TRANSFERS UNTO __________________________________ _____________ SHARES
REPRESENTED BY THE WITHIN CERTIFICATE AND DOES HEREBY IRREVOCABLY CONSTITUTE
AND APPOINT _________________________ ATTORNEYS TO TRANSFER THE SAID SHARES ON
THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF
SUBSTITUTION IN THE PREMISES.
DATED ___________ 19_____ _________________________
IN THE PRESENCE OF:_________________________________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, 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.
<PAGE> 1
EXHIBIT 4.6
Registration Rights Agreement dated as of April 13, 1998
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").
W I T N E S S E T H:
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:
<PAGE> 2
(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.
(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,
<PAGE> 3
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).
(ii) 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
<PAGE> 4
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).
(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;
<PAGE> 5
(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 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
<PAGE> 6
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 ("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
<PAGE> 7
("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;
<PAGE> 8
(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.
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:
<PAGE> 9
(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 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.
<PAGE> 10
(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.
<PAGE> 11
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 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.
<PAGE> 12
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 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
<PAGE> 13
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]
<PAGE> 14
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
<PAGE> 1
EXHIBIT 10.4
Agreement of Merger between Voice Plus, Inc. and BioFactors, Inc., dated as of
October 10, 1997
AGREEMENT OF MERGER
BETWEEN
VOICE PLUS, INC.
AND
BIOFACTORS, INC.
AGREEMENT OF MERGER dated this 10th day of October, 1997, by and
between Voice Plus, Inc., a California corporation ("VPI"), herein the
surviving corporation, and BioFactors, Inc., a Delaware corporation ("BFI"),
herein the merging corporation.
WITNESSETH that:
WHEREAS, VPI has an authorized capital stock of 1,000 common shares,
of which 100 shares are outstanding and owned by NHancement Technologies Inc.,
a Delaware corporation ("Parent"); and
WHEREAS, BFI has an authorized capital stock of 1,000 common shares,
of which 100 shares are outstanding and owned by Parent; and
WHEREAS, the parties to this Agreement, in consideration of the mutual
agreements of each corporation as set forth hereinafter, deem it advisable for
the sole stockholder of each of said corporations, and generally for the
welfare of said corporations, that BFI merge with and into VPI, and that VPI be
the surviving corporation in such merger, under and pursuant to the terms and
conditions hereinafter set forth; and
WHEREAS, the parties intend the statutory merger to qualify, for
federal income tax purposes, as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended.
<PAGE> 2
NOW, THEREFORE, BFI and VPI, in consideration of the mutual covenants,
agreements and provisions hereinafter contained do hereby agree upon and
prescribe the terms and conditions of said merger, the mode of carrying them
into effect and the manner and basis of converting the shares of BFI into the
shares of VPI, as follows:
FIRST: BFI shall be merged into VPI, which shall be the surviving
corporation. The name of the surviving corporation shall be "Voice Plus, Inc."
The merger shall become effective when this Agreement of Merger shall have been
filed with the California Secretary of State and a Certificate of Merger shall
have been filed with the Delaware Secretary of State, or as otherwise
prescribed by law.
SECOND: The terms and conditions of the merger are as follows:
The directors and officers of VPI on the effective date of this
merger, shall be the same as the directors and officers of VPI prior to the
effective date of the merger.
Upon the merger becoming effective, the separate existence of BFI
shall cease and all the property, rights, privileges, franchises, patents,
trade-marks, licenses, registrations and other assets of every kind and
description of BFI shall be transferred to, vested in and devolve upon VPI,
without further act or deed, and all property, rights, and every other interest
of VPI and BFI shall be as effectively the property of VPI as they were of VPI
and BFI, respectively. BFI hereby agrees, from time to time, as and when
requested by VPI or by its successors or assigns, to execute and deliver or
cause to be executed and delivered all such deeds and instruments and to take
or cause to be taken such further or other action as VPI may deem necessary or
desirable in order to vest in and confirm to VPI title to and possession of any
property of BFI acquired or to be acquired by reason of or as a result of the
merger herein provided for and otherwise to carry out the intent and purposes
hereof and the proper officers and directors of BFI and VPI, respectively, are
fully authorized in the name of and on behalf of BFI or otherwise to take any
and all such action.
<PAGE> 3
All rights of creditors and all liens upon the property of either of
BFI and VPI shall be preserved unimpaired, and all debts, liabilities and
duties of BFI shall thenceforth attach to VPI and may be enforced against VPI
to the same extent as if said debts, liabilities and duties had been incurred
or contracted by VPI.
THIRD: The articles of incorporation and bylaws of VPI, as existing as
of the effective date of the merger, shall continue as the articles of
incorporation and bylaws of VPI, as the surviving corporation, until amended
and changed in accordance with the laws of the State of California.
FOURTH: The manner of converting the shares of each of the constituent
corporations is as follows:
At the effective time, by virtue of the merger and without any action
on the part of BFI, VPI or any holder of shares of BFI common stock, each share
of BFI common stock outstanding immediately prior to the effective time of the
merger shall be converted into and deemed to be one (1) share of common stock
of VPI. Each certificate which immediately prior to the effective time of the
merger represents a number of outstanding shares of BFI common stock shall,
from and after the effective time of the merger, be deemed for all purposes to
represent one (1) share of VPI common stock for each share of BFI common stock
represented. The shares of VPI common stock outstanding immediately prior to
the merger shall remain outstanding and are not affected by the merger.
FIFTH: VPI hereby agrees that it may be served with process in the
State of Delaware in any proceeding for enforcement of any obligation of BFI,
as well as for enforcement of any obligation of VPI arising from the merger,
including any suit or other proceeding to enforce the right of any stockholders
as determined in appraisal proceedings pursuant to the provisions of Section
262 of the General Corporation Law of the State of Delaware, and further agrees
that the Secretary of State of the State of Delaware shall be irrevocably
appointed as VPI's agent to accept service of process in any such suit or other
proceedings.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of
Merger to be executed by their respective officers thereunto duly authorized as
of the date first above written.
VOICE PLUS, INC.,
A CALIFORNIA CORPORATION
By: /s/ James S. Gillespie
----------------------------------
James S. Gillespie, President
By: /s/ Esmond T. Goei
----------------------------------
Esmond T. Goei, Secretary
BIOFACTORS, INC.,
A DELAWARE CORPORATION
By: /s/ Douglas S. Zorn
----------------------------------
Douglas S. Zorn, President
By: Esmond T. Goei
----------------------------------
Esmond T. Goei, Secretary
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EXHIBIT 10.25
Promissory Note between the Company and Esmond T. Goei
PROMISSORY NOTE
$60,000.00 APRIL 17, 1997
FOR VALUE RECEIVED, the undersigned, ESMOND T. GOEI ("Maker") hereby
promises to pay to the order of NHANCEMENT TECHNOLOGIES INC., a Delaware
corporation ("Holder") at its offices located at 39899 Balentine Drive, Newark,
California 94560, or at such place as the Holder may from time to time designate
in writing, the principal sum of SIXTY THOUSAND DOLLARS ($60,000), and to pay
simple interest on the unpaid balance of said principal from the date hereof
through maturity at the rate of seven percent (7%) per annum.
1. Maturity.
(a) Principal and accrued interest under this Note shall be due
and payable at the close of business on April 17, 1998 (the "Maturity Date")
(b) Principal and interest payments hereunder shall be made in
money of the United States of America, lawful at such times for the satisfaction
of public and private debts.
2. Prepayment. Maker may prepay this note in whole at any time, or
in part form time to time, without penalty or premium. Each partial prepayment
shall first be applied to interest through the date of prepayment and then to
principal.
3. Default.
(a) The failure of Maker to pay all outstanding principal and
accrued interest under this Note on or before the Maturity Date shall constitute
a default hereunder.
(b) In the event of default, the Holder may by written notice to
Maker declare the Note to be immediately due and payable, and Holder shall then
have, in addition to all other rights and remedies, the rights and remedies of a
secured party under the U.C.C. in effect in California at that time. All such
remedies shall be exercised in such manner as not to result in a violation of
applicable federal and state securities laws.
4. Waiver of Demand, Protest, etc. Maker hereby waives diligence,
presentment, demand, protest and notice of any kind whatsoever. Maker promises
to pay costs of collection and reasonable attorneys' fees if default is made in
the payment of this Note. The right to plead any and all statutes of limitation
as a defense to this Note or to any agreement to pay the same, is hereby
expressly waived by the undersigned to the full extent permitted by law.
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5. Notice. Any notice required or permitted hereunder shall be given
by hand delivery, first class mail, or facsimile transmission with automatic
confirmation, to Mr. Goei at the address set forth below.
6. Governing Law. THE MAKER AND THE HOLDER AGREE THAT THIS NOTE AND
THE LEGAL RELATIONS BETWEEN THE MAKER AND THE HOLDER, AND ALL RIGHTS AND
OBLIGATIONS HEREUNDER, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY, AND
PERFORMANCE, SHALL BE GOVERNED BY AND INTERPRETED, CONSTRUED, APPLIED AND
ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA, WITHOUT
REFERENCE TO THE LAW OF ANOTHER JURISDICTION.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
as of the 17th day of April, 1997.
MAKER:
--------------------------
Esmond T. Goei
2003 Tripiano Court
Mountain View, CA 94040
Fax: 415-964-2409
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EXHIBIT 10.29
Securities Purchase Agreement, dated as of April 13, 1998
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").
W I T N E S S E T H:
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
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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 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
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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
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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 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.
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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 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
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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.
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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, 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.
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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.
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.
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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):
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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 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.
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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.
(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,
11
<PAGE> 12
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
12
<PAGE> 13
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
(y) require the Company to redeem such share of Unconverted
Preferred Stock for an amount (the "Redemption Amount"), payable in cash, equal
to:
V x M
-----------
CP
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
13
<PAGE> 14
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 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
14
<PAGE> 15
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>
15
<PAGE> 16
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 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
16
<PAGE> 17
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 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.
17
<PAGE> 18
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;
18
<PAGE> 19
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;
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
19
<PAGE> 20
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,
(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):
20
<PAGE> 21
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
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.]
21
<PAGE> 22
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.
NUMBER OF SHARES OF
INITIAL PREFERRED STOCK TO BE PURCHASED: 6,250
AGGREGATE PURCHASE PRICE OF
SUCH INITIAL PREFERRED STOCK: $625,000.00
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.
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
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
22
<PAGE> 23
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.
NUMBER OF SHARES OF
INITIAL PREFERRED STOCK TO BE PURCHASED: 6,250
AGGREGATE PURCHASE PRICE OF
SUCH INITIAL PREFERRED STOCK: $625,000.00
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.
AMRO INTERNATIONAL S.A.
- ---------------------------------- ----------------------------------
Address Pnted Name of Subscriber
SO ULTRA FINANCE
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
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
23
<PAGE> 24
ANNEX I AMENDMENT TO/EXCERPT FROM CERTIFICATE OF
INCORPORATION or CERTIFICATE OF DESIGNATIONS
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
<PAGE> 1
EXHIBIT 10.30
Form of Escrow Instructions dated April 13, 1998
FORM OF
JOINT ESCROW INSTRUCTIONS
Dated as of the date of the
Securities Purchase Agreement to
Which These Joint Escrow
Instructions Are Attached
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Attention: Samuel M. Krieger, Esq.
Dear Mr. Krieger:
As escrow agent for both Nhancement Technologies, Inc., a California
corporation (the "Company"), and the one or more Buyers (each, a "Buyer") of
Series A Convertible Preferred Stock (the "Preferred Stock") of the Company,
which is named in the Securities Purchase Agreement between the Company and the
Buyer to which a copy of these Joint Escrow Instructions is attached as ANNEX II
(the "Agreement"), you (hereafter, the "Escrow Agent") are hereby authorized and
directed to hold the documents and funds (together with any interest thereon,
the "Escrow Funds") delivered to the Escrow Agent pursuant to the terms of the
Agreement in accordance with the following instructions:
1. (a) The Escrow Agent shall, as promptly as feasible, notify the
Company of receipt of the Purchase Price for the relevant Preferred Stock for
the Initial Preferred Stock or any subsequent tranche of Additional Preferred
Stock, as the case may be, from or on behalf of the Buyer, and notify the Buyer
(or such agent as the Buyer may designate in writing) of receipt of the relevant
Certificate. As promptly as feasible upon receipt of notice (whether oral or in
written form) from the Company and the Buyer that the respective conditions
precedent to the purchase and sale have been satisfied (which notice shall not
be unreasonably withheld), the Escrow Agent shall, after reduction by the
amounts referred to in the next succeeding sentence of this paragraph, release
the relevant Escrow Funds to or upon the order of the Company, and shall release
the relevant Certificate to the Buyer. After receipt of such notice, an amount
equal to (i) twelve percent (12%) of the Purchase Price of the relevant
Preferred Stock for each tranche as the aggregate cash fees and non-accountable
expense allowance due to David Diamond
1
<PAGE> 2
(the "Placement Agent") shall be released to or upon the order of the Placement
Agent, (ii) one percent (1%) of the Purchase Price of the relevant Preferred
Stock for each tranche in legal and escrow fees to the Escrow Agent shall be
released to or upon the order of the Escrow Agent., and (iii) of the Purchase
Price for the Initial Preferred Stock only, Five Hundred Thousand Dollars
($500,000; the ?Retained Escrow Amount?) shall be retained in escrow hereunder
pending receipt by the Escrow Agent of the Filing Confirmation.
(b) If the relevant Certificate is are not deposited
with the Escrow Agent within ten (10) days after receipt by the Company of
notice of receipt by the Escrow Agent of the relevant Purchase Price funds from
the Buyer for the relevant Preferred Stock, the Escrow Agent shall notify the
Buyer and the Buyer shall be entitled to cancel the purchase and demand
repayment of the funds. If the relevant Purchase Price funds are not deposited
with the Escrow Agent within ten (10) days after receipt by the Buyer of notice
of receipt by the Escrow Agent of the relevant Certificate from the Company, the
Escrow Agent shall notify the Company and the Company shall be entitled to
cancel the purchase and demand return of such Certificate.
(c) If the Company or the Buyer notifies the Escrow Agent
that, on the relevant Closing Date, the conditions precedent to the obligations
of the Company or the Buyer, as the case may be, under the Agreement with
respect to the purchase and sale of Preferred Stock to be effected that date
were not satisfied or waived, then the Escrow Agent shall return the relevant
Escrow Funds to the Buyer and shall return the relevant Certificate to the
Company.
(d) Upon the Escrow Agent?s receipt of the Filing
Confirmation, the Escrow Agent shall release the Retained Escrow Amount to or
upon the order of the Company.
(e) Prior to return of any Escrow Funds to the Buyer, the
Buyer shall furnish such tax reporting or other information as shall be
appropriate for the Escrow Agent to comply with applicable United States laws.
(f) The Escrow Agent shall deposit all funds received
hereunder in the Escrow Agent's attorney escrow account at The Bank of New York.
2. The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by the Company, the Buyer and the
Escrow Agent.
3. The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed by
the Escrow Agent to be genuine and to have been signed or presented by the
proper party or parties. The Escrow Agent shall not be personally liable for any
act the Escrow Agent may do or omit to do hereunder as the Escrow Agent while
acting in good faith, and any act done or omitted by
2
<PAGE> 3
the Escrow Agent pursuant to the advice of the Escrow Agent's attorneys-at-law
shall be conclusive evidence of such good faith.
4. The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other person
or corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree, the Escrow Agent shall not be liable to any of the parties hereto or
to any other person, firm or corporation by reason of such decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.
5. The Escrow Agent shall not be liable in any respect on account
of the identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
6. The Escrow Agent shall be entitled to employ such legal
counsel and other experts as the Escrow Agent may deem necessary properly to
advise the Escrow Agent in connection with the Escrow Agent's duties hereunder,
may rely upon the advice of such counsel, and may pay such counsel reasonable
compensation therefor. The Escrow Agent has acted as legal counsel for any one
or more of the Buyers and may continue to act as legal counsel for such parties,
from time to time, notwithstanding its duties as the Escrow Agent hereunder. The
Company consents to the Escrow Agent acting in such capacity as legal counsel
for the Buyer and waives any claim that such representation represents a
conflict of interest on the part of the Escrow Agent. The Company understands
that the Buyer and the Escrow Agent are relying explicitly on the foregoing
provision in entering into these Joint Escrow Instructions.
7. The Escrow Agent's responsibilities as escrow agent hereunder
shall terminate if the Escrow Agent shall resign by written notice to the
Company and the Buyer. In the event of any such resignation, the Buyer and the
Company shall appoint a successor Escrow Agent.
8. If the Escrow Agent reasonably requires other or further
instruments in connection with these Joint Escrow Instructions or obligations in
respect hereto, the necessary parties hereto shall join in furnishing such
instruments.
9. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the documents
or the Escrow Funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed in the Escrow Agent's sole discretion (1) to retain in
the Escrow Agent's possession without liability to anyone all or any part of
said documents or the Escrow Funds until such disputes shall have been settled
either by mutual written agreement of the parties concerned or by a final order,
decree or judgment of a court of competent jurisdiction
3
<PAGE> 4
after the time for appeal has expired and no appeal has been perfected, but the
Escrow Agent shall be under no duty whatsoever to institute or defend any such
proceedings or (2) to deliver the Escrow Funds and any other property and
documents held by the Escrow Agent hereunder to a state or federal court having
competent subject matter jurisdiction and located in the State and City of New
York in accordance with the applicable procedure therefor.
10. The Company and the Buyer agree jointly and severally to
indemnify and hold harmless the Escrow Agent from any and all claims,
liabilities, costs or expenses in any way arising from or relating to the duties
or performance of the Escrow Agent hereunder other than any such claim,
liability, cost or expense to the extent the same shall (a) have been tax
obligations in connection with Escrow Agent's fee hereunder, or (b) have been
determined by final, unappealable judgment of a court of competent jurisdiction
to have resulted from the gross negligence or willful misconduct of the Escrow
Agent, or (c) be a liability, or arise from liability, to either the Company or
the Buyer.
11. Any notice required or permitted hereunder shall be given in
manner provided in the Section headed "NOTICES" in the Agreement, the terms of
which are incorporated herein by reference.
12. By signing these Joint Escrow Instructions, the Escrow Agent
becomes a party hereto only for the purpose of these Joint Escrow Instructions;
the Escrow Agent does not become a party to the Agreement. The Company and the
Buyer have become parties hereto by their execution and delivery of the
Agreement, as provided therein.
13. This instrument shall be binding upon and inure to the benefit
of the parties hereto, and their respective successors and permitted assigns and
shall be governed by the laws of the State of New York without giving effect to
principles governing the conflicts of laws. A facsimile transmission of these
instructions signed by the Escrow Agent shall be legal and binding on all
parties hereto.
14. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided in the Agreement.
15. The rights and obligations of any party hereto are not
assignable without the written consent of the other parties hereto. These Joint
Escrow Instructions constitute the entire agreement amongst the parties with
respect to the subject matter hereof.
ACCEPTED BY ESCROW AGENT:
KRIEGER & PRAGER
By:
---------------------------------------
Date:
--------------------------------------
4
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company as of March 31, 1998
1. Voice Plus, Inc., a California Corporation
2. Advantis Network & System Sdn. Bhd., a company organized under the
laws of Malaysia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 60 1,363
<SECURITIES> 0 0
<RECEIVABLES> 0 3,520
<ALLOWANCES> 0 515
<INVENTORY> 13 536
<CURRENT-ASSETS> 551 5,415
<PP&E> 137 1,311
<DEPRECIATION> 102 609
<TOTAL-ASSETS> 586 8,905
<CURRENT-LIABILITIES> 4,226 4,272
<BONDS> 0 0
0 0
0 0
<COMMON> 6 44
<OTHER-SE> 5,364 18,021
<TOTAL-LIABILITY-AND-EQUITY> 586 8,905
<SALES> 796 8,983
<TOTAL-REVENUES> 796 8,983
<CGS> 129 5,150
<TOTAL-COSTS> 129 5,150
<OTHER-EXPENSES> 2 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 582 98
<INCOME-PRETAX> (1,828) (4,591)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,828) (4,591)
<EPS-PRIMARY> (4.20) (1.18)
<EPS-DILUTED> (4.20) (1.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,058
<SECURITIES> 0
<RECEIVABLES> 1,611
<ALLOWANCES> 50
<INVENTORY> 960
<CURRENT-ASSETS> 6,797
<PP&E> 634
<DEPRECIATION> 124
<TOTAL-ASSETS> 13,395
<CURRENT-LIABILITIES> 3,194
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 17,626
<TOTAL-LIABILITY-AND-EQUITY> 13,395
<SALES> 1,432
<TOTAL-REVENUES> 1,432
<CGS> 637
<TOTAL-COSTS> 637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 53
<INCOME-TAX> 10
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,641
<SECURITIES> 0
<RECEIVABLES> 2,220
<ALLOWANCES> 50
<INVENTORY> 605
<CURRENT-ASSETS> 5,860
<PP&E> 649
<DEPRECIATION> 169
<TOTAL-ASSETS> 12,235
<CURRENT-LIABILITIES> 2,700
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 17,628
<TOTAL-LIABILITY-AND-EQUITY> 12,235
<SALES> 4,072
<TOTAL-REVENUES> 4,072
<CGS> 2,159
<TOTAL-COSTS> 2,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 145
<INCOME-TAX> 30
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY RESTATED FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,326
<SECURITIES> 0
<RECEIVABLES> 1,917
<ALLOWANCES> 50
<INVENTORY> 438
<CURRENT-ASSETS> 5,427
<PP&E> 780
<DEPRECIATION> 201
<TOTAL-ASSETS> 11,738
<CURRENT-LIABILITIES> 2,838
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 17,574
<TOTAL-LIABILITY-AND-EQUITY> 11,738
<SALES> 6,721
<TOTAL-REVENUES> 6,721
<CGS> 3,513
<TOTAL-COSTS> 3,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 322
<INCOME-TAX> 92
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
