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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from January 1, 1998 to September 30, 1998
COMMISSION FILE NUMBER 0-21999
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NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510)744-3333
(Issuer's telephone number)
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)
-----------------------------------------
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
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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 September 30, 1998, the issuer's revenues totaled
$9.4 million.
As of December 31, 1998, the aggregate market value of the voting common
equity of NHancement Technologies Inc. held by non-affiliates was approximately
$2,910,900 based upon the closing bid price for such common stock on such date
on The Nasdaq Stock Market SmallCap System, of $0.625 per share.
As of December 31, 1998, there were 5,808,700 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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<CAPTION> PAGE
PART I
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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
This report includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. Certain statements included in this Form
10-KSB, including, without limitation, statements related to anticipated cash
flow sources and uses under "Liquidity and Capital Resources", the mitigation
of the Year 2000 issue under "Impact of the Year 2000 Issue" and other
statements contained in the "Management's Discussion and Analysis of
Financial conditions and Results of Operations" regarding the Company's
financing alternatives, financial position, business strategy, plans and
objectives of management of the Company for future operations, and industry
conditions, are forward-looking statements. Although the Company believes
that the expectations reflected in any such forward-looking statements are
reasonable, it can give no assurances that such expectations will prove to
have been correct. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including but not
limited to, reliance on key customers and competition in its markets, market
demand, business strategy, product performance, technological developments,
maintenance of relationships with key suppliers, difficulties of hiring and
retaining key personnel and the effect of the Company's accounting policies,
all of which may be beyond the control of the Company.
In addition, the Company's Nasdaq Small Cap Market System listing is in some
jeopardy. See "Management's Discussion & Analysis - Risk Factors - Risks
Associated with Delisting of Common Stocks; Penny Stock Rules." The Company
incurred a net loss of approximately $2.5 million for the nine month
fiscal year ended September 30, 1998 and expects to continue to experience
losses for the first and second fiscal quarters of 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors." Any one or more of these factors could cause actual results
to differ materially from those expressed in any forward-looking statements.
All subsequent written and oral forward-looking statements attributable to
the Company or any person acting on its behalf are expressly qualified in
their entirety by the cautionary statements disclosed in this paragraph and
elsewhere in this report. This report contains certain trademarks of
Nhancement and its subsidiaries.
OVERVIEW
NHancement Technologies Inc.'s primary objective is to become a leading
systems integrator of communication products and services. NHancement
believes that increased competition, shorter time to market trends and the
reduced importance of geographical borders make it imperative that
corporations achieve and maintain communications operations worldwide. The
Company, through its two current operating subsidiaries, Voice
Plus-Registered Trademark-, Inc., a California corporation renamed NHancement
Technologies North America, Inc. on October 10, 1998 ("VPI", "Voice Plus" or
"NHAN NA"), and Infotel Technologies Pte Ltd, a Singapore corporation
("Infotel"), provide multinational corporations and other businesses with
communications products and technological innovations designed to enhance
efficiency.
0n January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly
created vacancy on the Broad of Directors of NHancement. Subsequently at the
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board. On January
6, 1999, Mr. Goei resigned his positions as President and CEO pursuant to the
terms of a Separation Agreement approved by the Board of Directors, which
modifies the terms of his Employment Agreement. Mr. Zorn subsequently became
Interim President and CEO.
The Company was incorporated in October 1996 to pursue a business
combination opportunity with Voice Plus-Registered Trademark-, 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-Registered Trademark-system, a proprietary computerized impairment
testing system. NHancement acquired these two companies 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.
Voice Plus, now named NHancement Technologies North America, Inc. 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-Registered Trademark- system, which was used for detecting worker
impairment. The Company later determined that such effort was no longer
justified, given the resources required to
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develop such a market and the need to dedicate its financial resources to its
other core businesses. It is attempting to sell the Factor 1000 technology.
On December 15, 1997, NHancement purchased one hundred percent (100%) of
the shares of Advantis Network & System Sdn Bhd ("Advantis"), a communications
systems company in Malaysia. Subsequent weakening of the Malaysian currency
combined with Advantis' poor operating performance and weak local management led
NHancement to divest itself of Advantis in September 1998. NHancement
transferred its ownership interest in Advantis to certain of the original
Advantis shareholders and waived certain potential claims NHancement may have
had for damages under the original Advantis purchase agreement in exchange for
such shareholders agreement to guarantee repayment of a loan made by NHancement
to Advantis in the principal amount of US$300,000.
On June 22, 1998, NHancement purchased one hundred percent (100%) of the
shares of Infotel Technologies (Pte) Ltd ("Infotel"). As a result of the
acquisition, Infotel became a wholly owned subsidiary of NHancement. Infotel is
an integrator of infrastructure communications equipment products, providing
radar system integration, turnkey project management services and test
instrumentation, as well as a portfolio of communication equipment in Asia. The
operations of the entity are being conducted under the name of "Infotel
Technologies (Pte) Ltd," which is headquartered in Singapore.
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's goal is to become a provider of diversified communications
products and services. However, the Company first intends to devote its
resources to improving the performance of its domestic operations. The three
principal elements of this strategy are:
(1) 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 a national sales and
marketing presence in major markets geared to sell communications
products and services across the United States and Singapore.
(2) 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. 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 communications systems
that achieve these goals. Management believes that VPI's voice
processing and computer telephony integration capabilities will offer
solutions to meet the communications needs of corporations.
(3) Expand Product Portfolio
The Company intends to expand its product portfolio while maximizing
its organizational strength and expertise in marketing and systems
integration. In particular, the Company seeks to develop relationships
with organizations that will expand its geographic coverage or provide
complementary products and services. As an example, the Company
signed a reseller agreement with Interactive Intelligence, Inc. ("I3")
to sell its call center product named, Enterprise Information Center.
I3 has developed advanced computer telephony equipment incorporating
Internet capabilities and the Windows NT operating system and
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CT/telephony applications developed using the universal JAVA
programming language. I3 has merged two diverse technologies of
computer and telephony, and is seamlessly merging various diverse
functions such as advanced PBX, ACD, IVR, Voice Messaging, FAX
Messaging, E-Mail and Call Center functions, on a single Windows NT
server.
THE COMPANY'S PRODUCTS AND SERVICES
The Company's current systems integration businesses include voice
processing, multimedia messaging and infrastructure communications equipment.
Although the Company believes that its relations are good with all its vendors,
recent cash flow issues in North America have put a strain on these
relationships. If cash flow issues continue, relationships could degrade in the
future and in extreme instances cause a disruption to our product supply that
would have a material adverse effect on operations.
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
NHancement, through Infotel in Singapore, offers a wide range of
infrastructure communications equipment products that satisfy the most demanding
communications project.With over a decade of experience its technical team can
handle any communications project with confidence. NHancement has satisfied
many customers on simple projects of several hundreds of thousands of dollars
for modems and complex multi-million dollar, multi-node turnkey projects both in
complex radio and networking systems. Products supported include manufacturers
such as Motorola, Ericsson, Raytheon, Newbridge and Shiva Corp., Rohde & Schwarz
Gmbh, and Siemens. NHancement's Infotel subsidiary focuses principally on large
projects in the government and institutional sectors as well as in the
commercial sector, and targets opportunities for regionalization and
Internetworking.
Turnkey Systems Projects.
Customers that award turnkey projects do so only to vendors or systems
integrators that have full capabilities in design, installation, commissioning,
project management and documentation. In such projects the Company's emphasis
and competitive edge lies in the practice of sourcing the best product that
meets the customer's requirements. Emphasis is placed on design and project
management in which the Company maintains strong technical competency. Other
communications activities include the supply and installation of various voice
and data communications equipment on a tender basis.
Test Measuring Systems.
NHancement's Infotel subsidiary also has an established business providing
test measuring instrumentation and testing environments. The business grew out
of a communications relationship with a German conglomerate, Rohde & Schwarz
Gmbh, which evolved into a dependency on Infotel to service other Rohde &
Schwarz products such as test instruments. Infotel is now the regional
distributor and test and repair center for Rohde & Schwarz test instruments,
which provides a steady stream of revenues. Infotel has since expanded its
repair capability to include Alcatel mobile telephones.
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MARKETING
The Company has a marketing and distribution infrastructure for its voice
processing and multimedia messaging products, which now includes 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 Singapore.
The Company markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific markets,
participation in trade shows, acquisition of databases 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. If current
cash-flow issues persist, they will have an adverse effect on our abilities to
provide the level of support required by our customers.
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.
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 1999. 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 in 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 unremedied 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.
On May 8, 1998 Centigram sold its Customer Premise Equipment ("CPE")
business to Mitel Corporation which now markets Centigram's products through a
newly formed subsidiary, Baypoint Innovations. Baypoint has elected
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to honor the Distributor Agreement under the same terms as applied to the
distribution arrangement with Centigram. Any change in the relationship with
Baypoint would have a material adverse effect on the Company.
On July 8, 1998, the Company signed a reseller agreement with Interactive
Intelligence, Inc. ("I3") to sell its call center product. I3 has developed
advanced computer telephony equipment incorporating Internet capabilities and
the Windows NT operating system and CT/telephony applications developed using
the universal JAVA programming language. I3 has merged two diverse technologies
of computer and telephony, and is also seamlessly merging various diverse
functions such as advanced PBX, ACD, IVR, Voice Messaging, FAX Messaging, E-Mail
and Call Center functions, on a single Windows NT server.
Pursuant to the terms of the Reseller Agreement, VPI is a Premier Partner
of I3 with rights to market, license, install, support and/or deliver services
based on I3 products throughout North America. The Reseller Agreement is for an
initial term of 2 years and will be automatically extended for additional
one-year terms unless terminated in writing by either party six (6) months prior
to the anniversary date. I3 may assign VPI a revised annual sales quota for each
succeeding one-year term. If VPI does not meet its sales quota, the Agreement
can be terminated however; VPI will not be considered to be in breach or default
under these circumstances. Either party can also terminate the Agreement if the
other party commits a material breach that is not cured within 30 days. The
Agreement will terminate immediately without notice if VPI reverse engineers,
disassembles or decompiles any I3 product to a source code version or if VPI
transfers or assigns it rights under the Agreement or rights to the I3 products
without I3's permission.
VPI has distributor agreements with a number of equipment manufacturers.
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. Current cash flow problems have negatively impacted the Company's
relations with several key vendors and continued or worsened cash problems could
result in a material adverse effect on the Company.
CUSTOMERS
The Company currently services approximately 1000 clients. Revenues from
our two largest customers accounted for approximately 26% and 12% of total net
revenues during the nine-month period ended September 30, 1998. This
concentration of revenues between two customers results in additional risk to
the Company and any disruption of orders from either of these customers would
have an adverse effect on the Company. The Company's order backlog as of
September 30, 1998 totaled approximately $ 1.9 million.
YEAR 2000 POTENTIAL IMPACT
The Company has developed an implementation plan to correct any internal
computer systems that could be affected by "Year 2000" issue. 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 middle of calendar year 1999. 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.
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The Company distributes products from third party voice product equipment
manufacturers in North America, 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.
As for our Asian operations, the Company has only begun its review of
third-party products distributed by 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 system of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.
The Company's internal computer systems for North American operations were
purchased this year from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant and the implementation in North America
is scheduled to be completed during fiscal year 1999. As for Asian operations,
the Company acquired Infotel, a company organized under the laws of Singapore on
June 22, 1998. The Company has since completed its review of the internal
computer systems of Infotel and is aware that Infotel's systems are not Year
2000 compliant; thus, a plan has been established to convert Infotel to the
Company's internal business system during fiscal 1999 about three months behind
the North America implementation. Estimated cost of the new business systems
for all locations combined is $400,000 and was needed not only because of Year
2000 compliance but also in order to maintain proper controls by which to manage
the Company.
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-Registered Trademark- and currently has two federally registered trademarks
related to the FACTOR 1000-Registered Trademark- system. In addition, VPI, as
the successor in interest to BFI, holds an exclusive worldwide license to market
the FACTOR 1000-Registered Trademark- system until 2008. The FACTOR
1000-Registered Trademark- 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 decided during fiscal 1998 to exit from the business related to
the FACTOR 1000-Registered Trademark- product and ultimately 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: (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 must make about $100,000 in
additional minimum payments under the terms of its license by December 31, 1999
or its license will become non-exclusive. The Company has granted an exclusive
license of sports-related and sports entertainment applications of the FACTOR
1000-Registered Trademark- system
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(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 two systems. As
a result, the Company had collected only $1100 (in the first quarter of 1997 and
the fourth quarter of fiscal 1998) in on-going royalties from SportsTrac. The
Company has not projected significant revenue from any such on-going royalties
in the future and will continue its efforts to sell the FACTOR 1000 technology
in fiscal 1999.
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.
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 $1,000,000 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. 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 December 31, 1998, the Company employed a total of 98 employees, of
whom 55 were employed by Infotel, the Company's Singapore subsidiary. At
September 30, 1998 the employee headcount was substantially the same. The
Company has never had a work stoppage and no 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-
9
<PAGE>
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. 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
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 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.
VPI is a national distributor that focuses solely on voice processing
systems integration. While manufacturers of voice processing equipment could be
viewed as national competitors, such manufacturers are concerned 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 its principal existing competitors and new
competitors will offer new or enhanced products. 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.
Infrastructure Communications Equipment
Generally Infotel does not compete for business with small companies.
Infotel's competitors are mainly large system integrators and distribution
companies having the competitive advantage of a lower cost structure. Rather,
Infotel leverages its lower cost structure and flexibility to compete with the
bigger competitors and to achieve higher margins on its sales.
In the data-communication market key competitors are Datacraft Asia Ltd,
Teledata Ltd, National Computer Systems Pte Ltd and ST Computer Systems Ltd.
Most of these companies are either government-linked or listed companies and
they represent some of the best lines of products like Cisco, Ascend, Fore
Systems, etc.
In the radio communications market, which serves largely the government,
there are fewer competitors and most are government-linked companies such as
CET Technologies Pte Ltd and Keppel Communications Pte Ltd. There
10
<PAGE>
are occasions where Infotel will work with these competitors for government
projects in which its products can find a good fit with the products and
capabilities offered by these large system houses.
In the test instrumentation market, Infotel has only one major competitor
which is Hewlett Packard Singapore (Pte) Ltd, the largest electronic test
equipment manufacturer in the world.
ITEM 2. DESCRIPTION OF PROPERTY
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 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 $9,700. In addition, the Company's
Singapore subsidiary, Infotel, leases approximately 8700 square feet of office
space at a monthly office rental expense of approximately US $13,000 per month
under a lease which expires in October of 1999 with an option to be extended for
two additional years. The Company believes that leased office space at market
rates is readily available at all such locations.
ITEM 3. LEGAL PROCEEDINGS
In Re C.C. and Associates et al vs. NHancement Technologies, Inc., et al,
on July 30, 1988 a default judgment against the Company was entered by the Santa
Clara County Superior Court; on or about December 10, 1998, plaintiff requested
Entry of Default and Clerk's Judgment against the Company in the amount of
$54,722.00. The dispute related to payment of legal expenses pursuant to a
non-binding letter of intent.
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 fiscal 1998, which ended September 30, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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
December 31, 1998 there were approximately 111 shareholders of record. The
Company's Series A Preferred Stock is not publicly traded and the underlying
Common Stock is subject to receipt of Stockholder approval which has not yet
been obtained. The underlying Common Stock was registered pursuant to a
Registration Statement on Form S-3 declared effective by the SEC on June 2,
1998. 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 1998 (Nine Months Ended September 30, 1998) HIGH LOW
---------------------------------------------------------------- ------- --------
<S> <C> <C>
First quarter (January 1, 1998 to March 31, 1997). . . . . . . . $ 3.9375 $ 2.4375
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.4375 $ 1.6875
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.1250 $ 0.6250
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CALENDAR YEAR 1997 HIGH LOW
-------------------- -------- -------
<S> <C> <C>
First quarter (February 4, 1997 to December 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>
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, in November 1998 the Company informed Nasdaq that it no
longer met the requirements for continued listing on the Nasdaq SmallCap Market
System. Nasdaq is currently reviewing the propriety of continuing the Company's
listing on the Nasdaq SmallCap Market System. There can be no assurance that the
Company will in fact meet these requirements in this or any future period.
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>
TITLE OF NUMBER AGGREGATE FORM OF
CLASS OF DATE OF NHANCEMENT OF PURCHASE CONSIDER-
PURCHASERS(1) SALE SECURITIES SHARES PRICE ATION
------------- ------ ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Options granted to thirteen Shares of
optionees(2) 07-02-98 Common Stock 258,000 2 2
</TABLE>
- --------------------
(1) The grant of options to 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) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options generally expire ten years from the date of
grant and become exercisable for twenty-five percent 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 on the date of grant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. Certain statements included in this Form
10-KSB, including, without limitation, statements related to anticipated cash
flow sources and uses under "Liquidity and Capital Resources", the mitigation
of the Year 2000 issue under "Impact of the Year 2000 Issue" and other
statements contained in the "Management's Discussion and Analysis of
Financial conditions and Results of Operations" regarding the Company's
financing alternatives, financial position, business strategy, plans and
objectives of management of the Company for future operations, and industry
conditions, are forward-looking statements. Although the Company believes
that the expectations reflected in any such forward-looking statements are
reasonable; it can give no assurances that such expectations will prove to
have been correct. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including but not
limited to, reliance on key customers and competition in its markets, market
demand, business strategy, product perfomance, technological developments,
maintenance of relationships with key suppliers, difficulties of hiring and
retaining key personnel and the effect of the Company's accounting policies,
all of which may be beyond the control of the Company. In addition, the
Company's Nasdaq Small Cap Market System listing is in jeopardy. The Company
incurred a net loss of approximately $2.5 million for the nine months
fiscal year ended September 30, 1998 and expects to continue to experience
losses for the first and second fiscal quarters of 1999.
Any one or more of these factors could cause actual results to differ
materially from those expressed in any forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and elsewhere
in this report. 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.
12
<PAGE>
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., now named NHancement Technologies North
America Inc. ("VPI", "Voice Plus" or "NHAN NA"), a California corporation, and a
systems integrator and national distributor of voice processing equipment,
pursuant to a transaction by which VPI merged with a subsidiary of NHancement,
whereupon VPI, as the surviving corporation, became a wholly owned subsidiary of
NHancement. The VPI acquisition was accounted for as a purchase, and,
accordingly, the results of VPI's operations were included in the Company's
financial statements commencing February 3, 1997.
For financial accounting purposes, BFI was deemed to be the acquirer 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-Registered Trademark- 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-Registered Trademark-," 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 acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997. On September 30, 1998,
NHancement disposed of Advantis. The Company and three of the former
shareholders of Advantis entered into a guarantee agreement pursuant to which
each such shareholder agreed to guarantee repayment of the outstanding loan made
by the Company to Advantis (together with all the interest accrued through
August 31, 1998) pursuant to that certain loan agreement and related promissory
notes dated July 7, 1997. In exchange, the Company delivered all of the Advantis
shares and transferred its ownership interest in Advantis to three of the
original Advantis stockholders. As of September 30, 1998, NHancement ceased
conducting business under its former subsidiary, Advantis Network & System Sdn
Bhd. and does not have any liabilities for Advantis' obligations. The financial
effect of this disposal on the balance sheet of NHancement was to increase our
tangible net worth, due to the disposal of the Advantis balance sheet, which
contained more liabilities than tangible assets. The results of operations are
expected to improve with the disposition of Advantis' recent losses. The
results of Advantis' operations and the related loss on its disposal have been
classified as discontinued operations in the December 31, 1997 and September 30,
1998 financial statements and are excluded from the loss from continued
operations.
On June 22, 1998, the Company acquired all outstanding shares of common
stock of Infotel Technologies (Pte) Ltd, a Singapore corporation ("Infotel").
As a result of the acquisition, Infotel became a wholly owned subsidiary of
NHancement. Infotel is a system integrator of infrastructure communications
equipment products, providing radar system integration, turnkey project
management services and test instrumentation, as well as a portfolio of
communication equipment in Asia. The acquisition was accounted for as a
purchase, and, accordingly, the results of Infotel's operations were included in
the Company's financial statements commencing June 22, 1998.
The ongoing business of NHancement will be conducted by its operating
company subsidiaries, Voice Plus, Inc. and of Infotel Technologies (Pte) Ltd.
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
13
<PAGE>
IPO and the acquisition of Advantis. For the nine month period ended
September 30, 1998, the historical financial statement information for
continuing operations includes BFI, VPI, and the results of Infotel for June
22, 1998 through September 30, 1998. The historical financial statement
information presented for 1997 includes twelve months of BFI operations and
approximately eleven months of VPI operations. As noted above, the results of
Advantis's operations were classified as discontinued operations. During
1998, the Company changed its fiscal year-end from December 31st to September
30th. As a consequence, management's discussion addresses audited financial
data for the nine-month period ended September 30, 1998 compared to unaudited
financial data for the same period a year earlier. Also discussed is the
audited financial results for the calendar years ended December 31, 1996 and
1997.
On November 20, 1998, the Company informed Nasdaq,
that due to continued losses, that it no longer met the requirements for
continued listing on the Nasdaq SmallCap Market System. Specifically, the
Company failed to meet the requirements of Nasdaq Marketplace Rule 4310(c)(2)
which requires that an issuer maintain (i) net tangible assets of Two Million
Dollars ($2,000,000); (ii) market capitalization of Thirty-Five Million
Dollars ($35,000,000); or (iii) net income of Five Hundred Thousand Dollars
($500,000) in the most recently completed fiscal year or in two of the last
three most recently completed fiscal years. There can be no assurance that
the Company will in fact meet these requirements in any future period. The
Company's cash position increased by about $314,000 during the nine months
ended September 30, 1998 due to the net effect of the following; (i)
continued losses resulted in a use of funds from operations for the
nine-months ended September 30, 1998 of approximately $500,000 and (ii) net
proceeds from the Company's Series A Preferred Stock financing was about
$1,000,000. Continued losses from operations would have a materially adverse
effect on the financial condition of the Company. However, the Company
believes that the management changes implemented in January 1999 and the
corresponding cost reduction measures expected to be implemented primarily
thru a 10% headcount reduction and certain operating expense cutbacks in
travel, outside services, discretionary sales cost, corporate overhead, and
administrative costs will return the Company to profitability during fiscal
1999 despite sales that are expected to be well below recent historical run
rates in the first fiscal quarter of 1999 and a one time restructuring charge
related to severance benefits to be incurred in the second fiscal quarter. As
a mitigating factor, sales in the second fiscal quarter of 1999 are expected
to equal or exceed historical run rates. Therefore, management also believes
that this anticipated return to profitability coupled with an increased
credit facility and planned financing activities will provide adequate cash
flow for future operations, although no assurances can be given that current
efforts will be successful. See "Risk Factors".
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Nine Months
Year Ended Year Ended Ended Ended
December 31, December 31, September 30, September 30,
1996 1997 1997 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . 16.2% 56.8% 52.3% 62.1%
Gross margin. . . . . . . . . . . . 83.8% 43.2% 47.7% 37.9%
Research, selling and
administration expenses . . . . . 240.0% 96.4% 37.3% 53.1%
Operating income (loss) . . . . . . (156.2)% (53.2)% 10.4% (15.2)%
Other income (expense). . . . . . . (73.3)% 0.6% (5.6)% (0.2)%
Income (loss) before
income taxes. . . . . . . . . . . (229.5)% (52.6)% 4.8% (15.4)%
Income taxes. . . . . . . . . . . . 0.0% 0.0% 1.4% 0.7%
Net Income (loss) from
continuing operations . . . . . . (229.5)% (52.6)% 3.4% (16.1)%
Discontinued operations . . . . . . 0.0% 0.0% 0.0% 10.1%
Net income (loss) . . . . . . . . . (229.5)% (52.6)% 3.4% (26.2)%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
14
<PAGE>
FACTOR 1000-Registered Trademark- revenues in the nine-month periods ended
September 30, 1998 and 1997 were negligible. The Company has decided to pursue
a buyer for its FACTOR 1000 technology and products, as no significant FACTOR
1000 revenue is anticipated for any periods in the future. The carrying value
of the assets and liabilities associated with the FACTOR 1000 technology are
insignificant at September 30, 1998 and December 31, 1997.
The Company's primary focus in the nine-month periods ended September 30,
1998 and 1997 was as an integrator and distributor of voice processing and
telecommunications systems for businesses, which operations were conducted
through the Company's VPI subsidiary. VPI's revenues for the nine-month period
ended September 30, 1998 totaled $6.4 million as compared to nine month proforma
revenue of $7.6 million (revenue from the date of acquisition in February to
September 30, 1997 was $6.7 million) during the same period a year earlier,
which represents a decrease of 15.8%. The decrease in VPI net revenues between
1998 and 1997 was due primarily to a slow down in voice processing systems and
parts sales. The VPI order backlog at September 30, 1998 was about $1.0 million
or unchanged from the prior year. VPI revenues in the September quarter of 1998
were slightly below the same period in 1997, and management expects sales levels
to continue to be well below recent historical run rates in the first
fiscal quarters of 1999. Projected revenue for the first fiscal quarter of 1999
is estimated at less than $1.5 million. 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 and Mitel Corporation or its subsidiary, Baypoint Innovations, the
successor in interest to the Centigram CPE business, would have a material
adverse impact upon the Company's voice processing business.
Based on the estimated future undiscounted operating cash flows of its related
business, the Company periodically evaluates the carrying value of goodwill.
Due to issues not known by management at the time of the VPI acquisition, the
estimated future undiscounted operating cash flows of VPI were calculated to be
less than those estimated at the time of its acquisition and less than the
carrying amount of the excess of cost over net assets acquired. On December 31,
1997 and September 30, 1998, the Company recorded impairment losses of
$4,084,300 and $525,000, representing the difference between the carrying
amounts of goodwill over its estimated fair value. The remaining balance of the
VPI goodwill at September 30, 1998 was $750,000 and the useful life was reduced
from five years to three years. The second write-off of $525,000 in 1998 was
due to lower than projected revenues in the nine-month period ended September
30, 1998, continued losses in the VPI subsidiary and changes in the voice
processing industry. Management believes that the Company will experience
future revenue growth in 1999 due to our Year 2000 program which was implemented
to identify potential customers with voice processing systems which are not year
2000 compliant. Management believes that after 1999, revenues for legacy
systems will decline and that VPI revenues will come increasingly from new
technologies and products that are just now being introduced to the marketplace.
The Company is in the process of repositioning the VPI subsidiary to take
advantage of the new trends in the voice processing industry, specifically the
migration from legacy systems to the new NT computer-based systems of the
future. This transition required the addition of several new management members
and new technological capabilities within the VPI subsidiary resulting in
significant expense to the Company. In April of 1998, the Company announced
that James B. Linkous accepted the position of General Manager of VPI and that
James Gillespie, who previously held that position, had become a part-time
consultant to the Company. Mr. Linkous has been tasked with strengthening the
sales infrastructure and expanding VPI's product offering.
The Company's former subsidiary, Advantis, had net revenues decrease
sharply, due mainly to the economic decline in Malaysia and poor local
management. Poor performance, the economic decline and the weakening of the
Malaysian currency combined with weak local management led to the Company's
disposal of Advantis in September 1998. The Company recorded a loss from
discontinued Advantis' operations of $581,400 and a one-time charge of $368,600
on the disposal of Advantis.
The Company's Infotel subsidiary was acquired June 22, 1998 and added a
little over three months, or about $3.0 million of revenues during the fiscal
period ended September 30, 1998. On a stand-alone pro forma basis, Infotel
revenues have increased $2.7 million or 40.3% from $6.7 million for the
nine-month period ended September 30, 1997 compared $9.4 million for the same
period in 1998. The increase was due primarily to the sale of several large
radio systems ($850,000), increased test instrumentation sales ($150,000) and
several large management contracts ($1.7 million) during the first nine months
of 1998. Due to the economic slow-down in Asia, revenues are projected to be
flat during fiscal 1999 as compared to fiscal 1998. The Infotel order backlog
at September 30, 1998 was approximately $900,000.
15
<PAGE>
Gross margins in the nine-month period ended September 30, 1998 decreased
from 47.7% to 37.9% in 1998. The gross margin in 1997 was associated almost
exclusively with the Company's VPI subsidiary. No significant 1997 revenues or
gross margin were recorded from FACTOR 1000-Registered Trademark- systems or the
Company's former Advantis subsidiary. The gross margin in 1998 was associated
with the Company's VPI subsidiary and approximately three months of Infotel
sales in Singapore. VPI's gross margin, as a stand-alone business, decreased to
39.2% in 1998 compared to 46.6% in the same period of 1997 due primarily to
higher product cost as a percentage of revenues and increased overhead spending
within the operations function. Infotel as a stand-alone business enjoyed an
increase in gross margins for the first nine months of 1998 to 30.4% as compared
to the same period the year before of 23.5%. The increase in Infotel gross
margins was due primarily to Infotel's decision in 1997 to terminate its retail
modem business and sell all existing stock at or below cost, as well as to the
introduction of a new high margin network product in 1998.
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net revenues were abnormally high during the first nine months
of 1998 at 53.1% as compared to 37.3% in the same period of 1997. The SG&A
expenses in 1998 included the VPI subsidiary's and NHancement's corporate
office expenses for the nine months and about three months of Infotel's SG&A
expenses. The majority of SG&A expenses in 1997 were associated with the
Company's VPI subsidiary and the corporate office. For VPI, as a stand-alone
business, SG&A in 1998 increased as a percent of revenues to 58.2% compared
to 30.1% in 1997 due to (i) a 1998 impairment loss and amortization of the
excess of cost over net assets acquired of $750,000 which reduced the
carrying value of the excess of cost over net assets acquired relating to the
VPI acquisition compared to $400,000 in 1997, (ii) corporate allocated
expenses, as a percent of revenue, increased from 6.0% in 1997 to 9.8% in
1998 which is related to the expense of implementing a new Year 2000
compliance management information system ("MIS") which included software and
hardware, (iii) a 6.3% increase in expenses associated with the hiring of
additional sales and marketing personnel during 1997, and (iv) general and
administrative expenses increased 4.5% due to increased expenses related to
rent and MIS support costs. Infotel added about $900,000 in SG&A expenses
during the three months since the acquisition of Infotel. On a stand-alone
basis Infotel's SG&A as a percent of revenues remained constant at
approximately 23% for the nine-month period ended September 30, 1998 and
1997. For an analysis of the differences between the Company's effective tax
rate and the statutory rate see Note 9, Income Taxes in the Consolidated
Financial Statements. At September 30, 1998, the Company fully provided
against its deferred tax assets. The Company believes sufficient uncertainty
exists regarding the realizability of the deferred tax assets, such that a
full valuation allowance is required. At September 30, 1998 the Company had
approximately $9 million of federal net operating loss carryforwards expiring
between 2008 and 2013. The federal net operating loss carryforwards are
subject to an annual limit of approximately $250,000.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
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-Registered Trademark- technology and products, as no significant FACTOR
1000-Registered Trademark- revenue is anticipated for 1998.
The Company's primary focus in 1997 was as an integrator and distributor of
voice processing and telecommunications systems for businesses, which operations
were conducted through the Company's VPI subsidiary. Only eleven months of
VPI's revenues were recorded in the Company's financial statements during 1997,
for a total of $8.8 million, which were almost exclusively derived from the sale
of Centigram products. 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.
Gross margins in 1997 decreased to 43.2% from 83.8% in 1996. Gross margins
in 1996 related only to
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FACTOR 1000-Registered Trademark- 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-Registered Trademark- 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.
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-Registered Trademark- 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-Registered Trademark- 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.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complementary businesses and products is an
element of the Company's business strategy, the Company may need to obtain
additional debt or equity financing to engage in any acquisition activities.
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. In April of 1998, the Company negotiated an equity
financing for $3.0 million of which $1,250,000 was received, with substantially
all of the proceeds having been used for the acquisition of Infotel. The
Company amended the agreement in September of 1998 limiting the aggregate
financing amount to $1,250,000, (approximately $985,000 net of expenses) except
by mutual consent of the parties.
During the nine-month period ended September 30, 1998, net cash used in
operating activities was $0.5 million consisting primarily of cash used to
fund the operating losses in the U.S. operations. Net cash provided by
financing activities totaled $1.9 million. Net proceeds from the preferred
stock financing of almost $1.0 million were used for the acquisition of
Infotel in June of 1998. The amount of cash remaining on Infotel's books was
nearly equal to the cash paid for the acquisition of Infotel. At September
30, 1998, the Company's working capital was $0.36 million and cash and cash
equivalents totaled $1.7 million. The current ratio decreased slightly from
1.3 to 1 at December 31, 1997 to 1.1 to 1 at September 30, 1998. The reduced
level of revenues projected for VPI and the corresponding projected losses in
the first quarters of fiscal 1999 will result in a net use of cash from
operations and a further reduction of the current ratio. Management believes
that available cash reserves coupled with additional available credit and the
implementation of cost reductions management believes that this will provide
adequate funds for future operations, although no assurance can be given that
current efforts will be successful.
As of September 30, 1998, the Company had outstanding debt, exclusive of
accounts payable, accrued liabilities and deferred revenue totaling about $4
million, of approximately $2.5 million consisting of about $231,000 in
revolving credit, $670,000 in shareholder loans, $187,500 due to the former
shareholder of VPI and $1.4 million in additional purchase consideration due
to the former Infotel shareholders. During fiscal 1998, the Company
completed a $1.0 million accounts receivable credit line with a U.S. finance
company with an advance rate of 80% of eligible receivables at an interest
rate of 2.0% every 15 days. In October 1998, the terms of the revolving
credit line were re-negotiated to a maximum of $1.0 million at an interest
rate of 2.75% per month. In January of 1999 the Company received a letter
from its lender committing to increase the credit line from $1,000,000
to $2 million under similar terms and conditions. The Company, through
its Infotel subsidiary is attempting to complete a credit line with a major
Singapore bank for S$3.5 million with interest at 1.25% above bank prime to
be used for overdraft protection, letters of credit, letters of guarantee,
foreign exchange and revolving credit. The Company hopes to complete this
facility early in calendar 1999.
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The Company's management estimates that it will incur about $200,000 in
capital expenditures during the next 12 months, representing mostly company-wide
business systems hardware and communication systems. 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 cost reduction plans, management believes that
operating cash flow, available cash and available credit resources 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, if any
are pursued in this fiscal year, 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.
Although the acquisition of complementary businesses and products has been
an element of the Company's business strategy, none of the proceeds of the IPO,
which occurred in February 1997, were reserved specifically for the funding of
future acquisitions.
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.
As of December 31, 1997, the Company had outstanding interest-bearing debt
of approximately $0.5 million inclusive of associated accrued interest.
SUBSEQUENT EVENTS
On January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly
created vacancy on the Broad of Directors of NHancement. Subsequently at the
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board. On
January 6, 1999, a Mr. Goei resigned his positions as President and CEO
pursuant to the terms of a Separation Agreement approved by the Board of
Directors, which modifies the terms of his Employment Agreement. In exchange
for Mr. Goei's resignation, the Company has agreed to a severance package
with the following principal terms: (i) six and one-half months of regular
pay at his current rate, (ii) continued benefits under the Company's
medical and group insurance plan through May 15, 1999, (iii) use of the
Company paid leased automobile through the end of the lease term
in July 1999, (iv) the Company will reimburse Mr. Goei's for certain accrued
moving expenses totaling $70,000, (v) the Company will issue warrants to
purchase 50,000 shares of NHancement Common Stock at the fair market price
effective as of the date of his resignation at $1.00 per share, and (vi)
Mr. Goei and the Company agree to a mutual waiver of all claims related to
Mr. Goei's employment. Mr. Zorn subsequently became Interim President and
CEO.
ACCOUNTING STANDARDS
The Company was not affected by its adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which established a
different method of calculating earnings per share than was previously used in
accordance with Accounting Principal Board No. 15, "Earnings per Share," and
provides for the calculation of basic and diluted earnings per share. This
statement was effective for the Company's year ending December 31, 1997 and
required that all prior earnings be restated to reflect its retroactive
application.
During 1997, the Financial Accounting Standards Board released its
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130, which is effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in the entity's financial
statements. The objective of SFAS No. 130 is to report a measure of all
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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, its implementation does not have an impact on the financial condition
or results of operations of the Company.
In June 1997, the Financial Accounting Standards Board 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. The financial statements
include the disclosures required by this Statement. Results of operations and
financial position, however, are 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 are unaffected by
implementation of this standard.
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its recent acquisition of Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.
RISK FACTORS
The following risk factors, in addition to the risks described elsewhere
in the description of the Company's business in this report on Form 10-KSB,
including, without limitation, those under the captions "Strategy,"
"Principal Suppliers," "Marketing," and "Competition," as well as under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may cause actual results to differ materially from those in any
forward-looking statements contained in the business description,
management's discussion and analysis or elsewhere in this report or made in
the future by the Company or is representatives. Such forward-looking
statements involve known risks, uncertainties and other factors which may
cause the actual results, performance or achievements expressed or implied by
such forward-looking statements.
RISKS ASSOCIATED WITH DELISTING OF COMMON STOCK; PENNY STOCK RULES.
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on November 20, 1998, the Company informed Nasdaq that
it no longer met the requirements for continued listing on the Nasdaq SmallCap
Market System. Specifically, the Company failed to meet the requirements of
Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer maintain
(i) net tangible assets of Two Million Dollars ($2,000,000); (ii) market
capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net income
of Five Hundred Thousand Dollars ($500,000) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal years.
Nasdaq is currently reviewing the
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possibility of continuing the Company's listing on the Nasdaq Small Cap Market
System. There can be no assurance that the Company will in fact meet these
requirements in any future period. Nasdaq is currently reviewing the propriety
of continuing the Company's listing on the Nasdaq Small Cap Market System.
There can be no assurances that the Company will in fact meet these requirements
in this or any other future period.
If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny stock" rules, and as a result, an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock.
The "penny stock" rules under the Exchange Act impose additional sales
practice and market-making requirements on broker-dealers who sell and/or make a
market in such securities. For transactions covered by the penny stock rules, a
broker-dealer must make special suitability determinations for purchasers and
must have received the purchaser's written consent to the transaction prior to
sale. In addition, for any transaction involving a penny stock, unless exempt,
the rules require delivery prior to any transaction in a penny stock of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market and penny stocks. As a result, the Company's
delisting from the Nasdaq SmallCap Market System and its becoming subject to the
rules on penny stocks would negatively affect the ability or willingness of
broker-dealers to sell or make a market in the Company's securities and,
therefore, would severely and adversely affect the market liquidity for the
Company's Common Stock.
PRIOR LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.
For the nine months ended September 30, 1998, the Company incurred a net
loss in the amount of $2.4 million on net revenues of $9.4 million. The loss
resulted primarily from (i) a loss from continuing operations of $1.5 million
which includes a combined charge of a $750,000 impairment write-off and
amortization of goodwill associated with the Company's acquisition of Voice
Plus in February 1997, and a repayment premium of $135,000 associated with
the repayment of $750,000 of promissory notes from Preferred Stock investors.
(ii) losses associated with the discontinued operations of Advantis of
$581,400, and (iii) a one-time charge of $368,600 associated with the disposal
of Advantis. Furthermore, future issuances of the Series A Convertible
Preferred Stock that is convertible into shares of Common Stock at a 25%
discount will be reflected as a preferred dividend and will result in an
increase in the loss applicable to Common Stock in computing loss per share.
The failure of the Company to produce positive operating results may affect
the future value of the Common Stock, may contribute to the Company losing its
eligibility for listing of the Common Stock on the Nasdaq SmallCap Market
System, may adversely affect the Company's ability to obtain debt or equity
financing on terms acceptable to the Company, and may prevent the Company from
completing future acquisitions.
VOLATILITY OF STOCK PRICES.
The over-the-counter markets for securities such as the Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and trends in the Company's industry and the investment
markets generally, as well as economic conditions and quarterly variations in
the Company's results of operations, may adversely affect the market price of
the Common Stock. In addition, there can be no assurance that the Company's
Common Stock will remain eligible for listing on the Nasdaq SmallCap Market
System.
FINANCING RISKS.
The acquisition of complementary businesses although currently
de-emphasized, is still an element of the Company's business strategy. 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 as
interest and principal payments, thus reducing the resources available to
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expand its existing businesses. Equity financing may be dilutive to 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
that, if available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing would have a
material adverse effect on the Company's acquisition strategy. Further, the
refusal of potential acquisition candidates to accept Common Stock in payment of
the Company's purchase price obligations, in whole or in part, could require the
Company to reduce or curtail its acquisition strategy. To the extent that
Common Stock is used as consideration in an acquisition transaction, such stock
issuance may be dilutive to the Company's existing stockholders. Even if the
Company is able to obtain financing needed for an acquisition, the terms of such
financing may involve considerable costs to the Company. In this regard, as of
December 31, 1998, 10,059 shares of Preferred Stock and accrued dividends were
converted into 901,160 shares of Common Stock at an average price per share of
about $0.90.
VPI'S STRATEGIC RELATIONSHIP WITH CENTIGRAM COMMUNICATIONS CORPORATION.
VPI's business is based upon the integration of hardware and software and
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, or any other adverse change in the Company's distributor
relationship with Centigram, would adversely affect the Company's business for
an indeterminate period of time until new supplier relationships could be
established. In this regard, Centigram recently sold to its customer premises
equipment ("CPE") business to Mitel Corporation ("Mitel") and is now known as
Baypoint Innovations ("Baypoint"). The distributor agreement entered into with
Centigram may be canceled by either party upon ninety (90) days' notice and is
subject to termination in the event that the Company defaults on or is otherwise
in breach of various of its obligations under the agreement. Baypoint has
continued to distribute the CPE products and honor the VPI distribution
agreement. Any disruption to product supplied by Centigram or Baypoint would
have a significant adverse impact upon the Company's business for an
indeterminate period of time until new supplier relationships could be
established.
RELIANCE UPON COMPANY'S DISTRIBUTOR AND SUPPLIER RELATIONSHIPS; DEPENDENCE ON
SIGNIFICANT CUSTOMERS.
VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of these 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 any exclusive distribution rights, and/or 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.
For the fiscal year ended September 30, 1998, revenues from sales to two of
the Company's customers accounted for approximately 26% and 12% of the total net
revenues for the nine-month period. The loss of one or more significant
customers of the Company would have a material adverse effect upon the Company's
financial condition. In addition, while Infotel's business is diversified over
several business segments and customer groups, its systems and networking
business is characterized by very large contracts and projects directed at a
limited number of customers in any one period. The loss or rescheduling of one
or more such contracts would affect the timing of Infotel's revenues and cash
flow, and could result in a material adverse effect upon the Company's financial
condition.
COMPETITION IN VPI'S VOICE PROCESSING AND CUSTOMER PREMISES EQUIPMENT
BUSINESSES.
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The voice processing and customer premises equipment markets are highly
competitive and competition in this industry is expected to 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 operating 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
greater revenues than the Company, and, as a result, may encroach on the
Company's voice processing equipment and service markets. Additionally, in the
CPE 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 (now owned by Lucent).
Digital Sound Corporation, Active Voice Corporation, Applied Voice Technology,
Inc., Glenayre Technologies, Inc. and Comverse Technology, Inc., among others,
also compete with the Company in the service provider market. VPI's competitors
have better name recognition in the market, a larger installed base of customers
and greater financial, marketing and technical resources than the Company.
COMPETITION IN INFOTEL'S INFRASTRUCTURE COMMUNICATIONS EQUIPMENT BUSINESSES.
Infotel competes against several large companies in Singapore that are
better capitalized. Although Infotel has in the past managed to compete
successfully against such larger companies on the basis of its engineering and
project management expertise; there can be no assurance that such expertise will
permit Infotel to compete effectively with such larger companies in the future.
Further, various large manufacturers have established their own branch offices
in Singapore and compete against Infotel.
RISKS IN INTEGRATING ACQUIRED COMPANIES.
Acquisitions may involve a number of special risks, including adverse
short-term effects on the Company's operating results, diversion of
management's attention from the operations of the Company, 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. Successfully
integrating 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 operations
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. As
discussed in previous sections, the acquisition of Voice Plus and Advantis
have yielded operating results that were significantly lower than expected.
Other acquisitions could generate results different from our expectations.
Accordingly, no assurance can be given that the future performance of the
Company's subsidiaries will be commensurate with the consideration paid to
acquire such companies. If management fails to establish the needed controls
and to manage growth effectively, the Company's operating results, cash flows
and overall financial condition will be adversely affected.
RISKS INVOLVED IN CHANGES OF MANAGEMENT.
Management changes often have a disruptive effect on businesses and can
lead to the loss of key employees because of the uncertainty inherit in
change. The loss of key employees could have a materially adverse effect on
the Company's operations. Furthermore, no assurances can be given that the
current changes in management of the Company will be adequate to reverse
losses recorded in previous years, to return the Company to profitability or
to meet future growth targets.
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.
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YEAR 2000 DISCLOSURE
The Company has developed an implementation plan to correct any internal
computer systems that could be affected by "Year 2000" issue. 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 middle of calendar year 1999. 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 in North America, 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.
As for our Asian operations, the Company has only begun its review of
third-party products distributed by 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 system of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.
The Company's internal computer systems for North American operations were
purchased this year from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant. As for Asian operations, the Company
acquired Infotel, a company organized under the laws of Singapore on June 22,
1998. The Company has since completed its review of the internal computer
systems of Infotel and is aware that Infotel's systems are not Year 2000
compliant; thus, a plan has been established to convert Infotel to the Company's
internal business system during fiscal 1999. The estimated cost of the new
business systems for all locations combined is $400,000 and was needed not only
because of Year 2000 compliance but also in order to maintain proper controls by
which to manage the Company.
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
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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 December 31, 1998. As indicated in the table and
accompanying footnotes, in January 1999, Esmond T. Goei resigned as CEO and
President, Messrs. Boyle, Das and Nemetz resigned as Directors, Douglas S. Zorn
was appointed Interim CEO and President and James S. Gillespie was reappointed
as a Director.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Esmond T. Goei (resigned officer positions January 1999. . . 47 Chairman and Director
Douglas S. Zorn. . . . . . . . . . . . . . . . . . . . . . . 49 President, Chief Executive Officer, Chief Financial
Officer, Treasurer, Secretary and Director
Linda V. Moore . . . . . . . . . . . . . . . . . . . . . . . 52 Vice President, General Counsel and Assistant
Secretary
James S. Gillespie . . . . . . . . . . . . . . . . . . . . . 45 Former Vice President Sales and President of Voice
Plus, Inc.; appointed Director January 6, 1999
James Linkous. . . . . . . . . . . . . . . . . . . . . . . . 42 Sr. Vice President Sales, General Manager of Voice
Plus, Inc.
James Han. . . . . . . . . . . . . . . . . . . . . . . . . . 49 General Manager, Infotel Technologies Pte Ltd
Gary L. Nemetz (resigned January 1999) . . . . . . . . . . . 46 Director
James H. Boyle (resigned January 1999) . . . . . . . . . . . 44 Director
Santanu Das (resigned January 1999). . . . . . . . . . . . . 54 Director
Thomas L. Lawrence . . . . . . . . . . . . . . . . . . . . . 62 Director
</TABLE>
Esmond T. Goei. Mr. Goei served as President and Chief Executive
Officer of the Company from its incorporation in October 1996 until his
resignation on January 6, 1999. Mr. Goei continues to serve as Chairman of
the Board and Director of the Company, but is expected to resign these
positions promptly following filing of this report of Form 10-KSB. 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. 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 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. Mr. Goei currently serves as a
director of Mayan Network Systems, a newly formed and privately financed
early stage company in the high technology internet market.
Douglas S. Zorn. Effective January 6, 1999 Mr. Zorn became Interim
President and Chief Executive Officer to fill the vacancy created by Mr.
Goei's resignation. Mr. Zorn had served as Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a director of the Company since
its incorporation in October 1996. Mr. Zorn's current titles are Interim
President, CEO, CFO and Secretary. Mr. Zorn also had 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., including Operation Controller of the Biomation
Division, a manufacturer of sophisticated logic test instruments. Mr. Zorn
is a licensed certified public accountant.
Linda V. Moore. Ms. Moore has served as Vice President, General Counsel
and Assistant Secretary of the Company since September 7, 1998. From 1989, until
she joined the Company, Ms. Moore served as General Counsel and Secretary for
Jabil Circuit, Inc., a printed circuit board assembly manufacturer. Ms. Moore
has also held positions with El Camino Resources, Ltd., Chrysler Systems
Leasing, Inc., Caterpillar Inc. and CMI Corporation.
24
<PAGE>
James S. Gillespie. Mr. Gillespie served as Vice President of Sales and
a Director of the Company since its incorporation in 1996. He resigned his
position as Vice president of Sales in April 1998, and resigned as a director
of the Company on September 22, 1998; he was reappointed as a director on
January 6, 1999. In addition, he currently serves as a consultant to the
Company. Mr. Gillespie was the founder of VPI and has served as President
from VPI's incorporation in 1987 until his resignation in April 1998. 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.
James B. Linkous. Mr. Linkous has served as Sr.Vice President of Sales and
General Manager of VPI since April 1998. Mr. Linkous has worked for several key
telecommunications distributors, including most recently COM-AID/NEXUS
Integrated Solutions, where he was Vice President and General Manager. Linkous
helped position COM-AID as the largest independent NEC dealer in the Western
U.S. previously he was National and Major Accounts Manager for U.S. WEST
Communications. He also has extensive background in Call Center and CTI
applications, which are future target markets for NHancement Technologies Inc.
James Han. Mr. Han is a founding member of Infotel and has served as
General Manager since the company started operation in 1984. Prior to joining
Infotel, he was with an Australian company, Associated Technical Services Pte.
Ltd. (ATS), from 1977 to 1984 and was the General Manager at the time of his
departure. ATS is a wholly owned subsidiary of Elders IXL, an Australian public
company. AST was involved in distribution and support of telecommunication
products, marine communication and navigational equipment and medical and
analytical instruments.
Gary L. Nemetz. Mr. Nemetz became a director of the Company in February
1996, upon the consummation of the Company's IPO and served until his
resignation on January 6, 1999. 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 March 1995, to
June 1997, Mr. Nemetz served as a director of YES! Entertainment Corporation and
has served since May 1998. YES! Entertainment Corporation is listed on Nasdaq
NMS. Mr. Nemetz is a general partner of DCC Growth Fund.
James H. Boyle. Mr. Boyle was appointed to the Company's Board of Directors
July 7, 1997, to fill a vacancy created by a resignation, was elected as a
director at the Company's 1997 annual meeting of stockholders and served until
his resignation on January 6, 1999. 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.
Santanu Das. Dr. Das became a director of the Company at its 1997 annual
meeting of stockholders and served until his resignation on January 6, 1999.
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.
Thomas J. Lawrence. Mr. Lawrence was appointed to the Company's Board of
Directors to fill a vacancy created by the resignation of James Gillespie, the
former owner of Voice Plus. Mr. Lawrence is Chairman and CEO of TJL, Inc., a
sales and marketing consulting company specializing in high technology. From
1970 to 1986, Mr. Lawrence served as the General Manager of the European
subsidiaries of Intel Corporation, Apple Computer, Valid Logic Systems and
Silicon Compilers. Mr. Lawrence has held various positions at Lockheed Missiles
and Space,
25
<PAGE>
Stanford University and RCA Corporation. He also served on the European Boards
of Directors of Intel, Apple, Valid Logic and Option International and on the
United States Boards of Directors of Intel and Apple.
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 for the fiscal year ended September 30, 1998,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
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 September 30, 1998 and December 31,
1997 and 1996 by (i) the Company's Chief Executive Officer and (ii) the three
other highly compensated executive officers of the Company (or its subsidiaries)
at September 30, 1998, who received compensation of at least $100,000 during the
fiscal year ended September 30, 1998 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#)
----------------- ---- ---------- --------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei . . . . . . . . . . 1998 (1) $157,500 $ -- $9,700 (2) $ -- --
Chairman of the Board, 1997 163,750 -- 38,000 (6) -- 100,000 (10)
President and Chief 1996 (3) 135,000 125,000 -- (4) --
Executive Officer
Douglas S. Zorn. . . . . . . . . . 1998 (1) $112,500 $ -- $ 8,400 (2) $ -- --
Executive Vice President, 1997 150,000 -- $86,000 (7) -- 100,000 (10)
Chief Financial Officer and 1996 (3) 135,000 125,000 -- (4) -- --
Secretary
James S. Gillespie (8) . . . . 1998 (13) $93,700 -- $88,400 (14)
Vice President of Sales and 1997 150,000 -- $230,00 (5) -- --
President of VPI 1996 300,000 550,000 $1,003,130 (9) -- --
James B. Linkous . . . . . . . . . 1998 (11) $65,400 $ 36,000 (16) $13,650 (12) -- 100,000 (15)
Vice President of Sales and
General Manager of VPI
</TABLE>
- -----------------
(1) Represents the nine-month period ended September 30, 1998.
(2) Automobile allowance for the nine-month period ended September 30, 1998.
(3) 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.
(4) Perquisites do not exceed the lesser of $50,000 or 10% of the Named
Executive Officer's total annual salary and bonus.
(5) Represents sales commissions paid to Mr. Gillespie.
(6) Mr. Goei was reimbursed by the Company in fiscal 1997 $25,000 for previous
years vacation accrued but not taken and automobile expenses.
26
<PAGE>
(7) 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.
(8) Data reflects compensation paid by VPI for 1995, 1996 and January 1997.
Thereafter, compensation was paid by the Company.
(9) 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.
(10) 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.
(11) Represents the period from Mr. Linkous hire date April 18, 1998 through
September 30, 1998.
(12) Represents commissions of $10,900 and automobile allowance of $2,750.
(13) Represents the period January 1, 1998 through his last date of employment
April 16, 1998.
(14) Represents accrued vacation pay of $39,500, consulting fees of $44,700
accrued for the period April 16, 1998 through September 30, 1998 and
automobile allowance of $4,200.
(15) These options were granted on July 2, 1998 under the Company's Equity
Incentive Plan ("Plan"). The options become exercisable at the rate of
1/4 after one year and then 1/36 per month over 36 months.
(16) Represents signing bonus repayable to the Company if Mr. Linkous leaves the
Company within 1 year.
OPTION GRANTS IN CALENDAR 1998
The following option grants were made to the Named Executive Officers
during the fiscal year ended September 30, 1998:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Number of Percent of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted (1) Fiscal Year ($/Shr) (2) Date
- -------------------------------------- ------------ -------------- --------------- -----------
<S> <C> <C> <C> <C>
James B. Linkous, VP Sales and General 100,000 38.9% $2.06/share 7/2/2008
Manager of VPI
</TABLE>
(1) 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 Market System.
(2) These options were granted on July 2, 1998 under the Company's Equity
Incentive Plan ("Plan"). The options generally expire in ten years,
become exercisable at the rate of 1/4 after one year and then 1/36 per
month over 36 months.
The following table sets forth certain information regarding option
exercises during the 9 month period ended September 30, 1998 and the number of
shares covered by both exercisable and unexercisable stock options as of
September 30, 1998 for each of the Named Executive Officers:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number of Securities
Shares Underlying Unexercised Value of Unexercised
acquired Options at In-the-Money Options at
on Value September 30, 1998 September 30, 1998
--------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei -- -- 218,750 50,000 -- --
Douglas S. Zorn -- -- 190,625 50,000 -- --
James S. Gillespie -- -- -- -- -- --
James B. Linkous -- -- -- 100,000 -- --
</TABLE>
27
<PAGE>
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. Prior to November
1998, non-employee directors were 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 were 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 were each entitled to be paid $12,000 per year in
addition to compensation for Board of Director meetings. Effective November
1998, non-employee directors no longer receive fees for attendance at board
meetings requiring personal attendance, telephonic board meetings or committee
meetings. In addition, the non-employee director who chairs the Board's
compensation or audit committee will not receive additional compensation for
either of these positions.
On October 30, 1998, the Company granted to Thomas Lawrence, in connection
with his appointment to the Board of Directors, a Non Statutory Option to
purchase 20,000 shares of Common Stock at a price per share of $1.15625, one
quarter of which vests on each of the four succeeding anniversary dates of the
grant. As of December 31, 1998, none of Messrs. Nemetz, Boyle or Das had
exercised any of their options. These former Board members have until March 6,
1999 to exercise their vested options. As of December 31, 1998, none of Mr.
Lawrence'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 2,000 shares of Common Stock, which will vest one-third on
each of the first, second and third anniversaries of the date of grant. Messrs.
Boyle, Das and Nemetz who resigned as directors in January 1999, did not receive
these grants.
EMPLOYMENT AGREEMENTS
Prior to recent changes in management, the Company had 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. In January 1999, Mr. Goei resigned
his officer positions and Mr. Zorn was appointed Interim CEO and President.
Each officer's base salary under such agreements was adjustable from time to
time by mutual agreement between each such officer and the Board of
Directors. The base salary for calendar year 1998 of Mr. Goei was $210,000
and the base salary of Mr. Zorn in 1998 was $150,000. The agreements
provided, subject to their terms, for an annual bonus to be paid to each
officer pursuant to a written bonus plan to be approved by the Board of
Directors. The agreements also provide that each officer was entitled to
reasonable expense reimbursements, four weeks paid vacation per year and
participation in any of the Company's benefit and deferred compensation
plans. In fiscal 1998, Mr. Goei and Mr. Zorn received a $1,100 monthly
automobile allowance. 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. Mr. Goei's Separation
Agreement supercedes his Employment Agreement.
On January 7, 1999, Mr. Goei resigned his position as President and Chief
Executive Officer of the Company pursuant to a Separation Agreement which
modified his Employment Agreement. The Agreement provides that Mr. Goei will
receive 6 1/2 months' severance pay and payment for all accrued vacation time.
He will remain as an employee of the Company for a period of 3 months during
which time he will be available to advise and counsel the Company. During this
period of employment he will continue to receive all benefits for which he was
eligible as an officer of the Company. The Agreement also contains provisions
for confidentiality, covenants not to compete, to solicit customers or hire
employees for a period of 2 years from Mr. Goei's resignation.
The Company previously had a three-year employment agreement with James S.
Gillespie, former Vice President of Sales of the Company and President of VPI.
Mr. Gillespie's agreement provided 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
provided that Mr. Gillespie was 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 contained provisions for
28
<PAGE>
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 provided that in the event of
termination without cause or a material breach by the Company, Mr. Gillespie
would 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 would be
accelerated and immediately become due and payable. Mr. Gillespie has
reached verbal agreement with the Company to terminate his employment and to
provide consulting services to the Company. Mr. Gillespie no longer has the
rights afforded him under his previous employment agreement. Instead, Mr.
Gillespie's rights are now governed by the terms of the consulting agreement
which provides for annual payments to Mr. Gillespie of $115,000.
Additionally, the agreement also contains provisions for confidentiality,
convenants not to compete, to solicit customers or hire employees for two
years after the expiration of this consulting agreement.
VPI has a two-year employment agreement with Bradley J. Eickman, former
Director of Operations who has since transferred into a sales position for VPI.
This agreement will expire in March, 1999. This employment agreement provides
for a base salary of $65,000, sales commissions payable pursuant to an annual
sales manager compensation plan and performance-based bonus payments. The
agreement also provides 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 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 Company granted to
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
grant date and the remaining 50% of which will vest on the second anniversary of
the date of grant.
VPI has a two-year employment agreement with Diane E. Nowak, former Vice
President of Sales, Western Region. This agreement will expire in March, 1999.
This employment agreement provides for a base salary of $65,000, sales
commissions payable pursuant to an annual sales manager compensation plan and
performance-based bonus payments. The agreement also provides 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 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. Ms. Nowak's employment with VPI was terminated
September 18, 1998 however, VPI will continue to pay Ms. Nowak through March,
1999 according to the terms of her employment agreement.
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 December 30, 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. Subsequent to the end
of the Company's fiscal year ended September 30, 1998, Messrs. Boyle, Das and
Nemetz resigned as directors of the Company and Mr. Gillespie was reappointed to
serve as a director of the Company. Mr. Lawrence, currently a director of the
Company, was appointed as a director on October 30, 1998.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------------ ---------------------------------
BENEFICIALLY OWNERSHIP (1) BENEFICIALLY OWNERSHIP (1)
NAMES AND ADDRESSES OWNED (1) % OWNED (1) %
------------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
James S. Gillespie
198 Country Club Drive
Incline Village, Nevada 89451 815,000 (2) 13.1% -- --
Esmond T. Goei
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538 427,070 (3) 6.6% -- --
Douglas S. Zorn
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538 405,325 (4) 6.3% -- --
29
<PAGE>
Gary L. Nemetz
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025 142,725 (5) 2.3% -- --
Santanu Das
14 Hunter Ridge Road
Monroe, Connecticut 06468 38,593 (6) * -- --
James H. Boyle
4564 Daffodil Trail
Plano, TX 75093 5,000 (7) * -- --
Thomas J. Lawrence
505 Cypress Point Dr.
Mountain View, CA 94043 -- * -- --
The Endeavour Capital Fund S.A.
c/o Endeavour Management Inc.
14/14 Divrei Chaim St.
Jerusalem 94479 469,490 (8) 6.2% 2,441 100.0%
AMRO INTERNATIONAL S.A.
50 ULTRA FINANCE
Gross Munster Platz 26
Zurich LH 8022
Switzerland 401,734 (9) 6.5% -- --
Directors and executive officers
as a group (10 persons) 1,838,518(10) 26.6% 2,441 10.0%
---------- ----- ------ -----
---------- ----- ------ -----
</TABLE>
- --------------------------------
- -- Less than 1%
(1) Based on 5,808,682 shares of Common Stock and 2,441 shares of Preferred
Stock issued and outstanding as of December 31, 1998
(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 168,750 shares of Common Stock at
an exercise price of $3.20 per share, 63,900 shares of Common Stock at
$3.875 per share 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 140,625 shares of Common Stock at
an exercise price of $3.20 per share, 63,900 shares of Common Stock at
$3.875 per share and warrants to purchase 61,375 shares of Common Stock.
(5) Includes 46,025 shares beneficially owned by Admiral Capital Corporation,
as to which Mr. Nemetz has sole voting and investment power, options that
are presently exercisable or that will become exercisable within 60 days
to purchase 16,875 shares at an exercise price of $4.00 per share, 3,125
shares at $3.50 per share and warrants to purchase 55,000 shares of
Common Stock.
(6) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 5,000 shares of Common Stock at an
exercise price of $3.5625 per share and a warrant to purchase 26,875
shares of Common Stock.
(7) Represents options that are presently exercisable or that will become
exercisable within 60 days to purchase 5,000 shares of Common Stock at an
exercise price of $3.50 per share.
(8) Includes 382,965 shares of Common Stock received upon conversion of
Preferred Stock and 357,559 shares of Common Stock receivable upon
conversion of Preferred Stock (including accrued dividends) held by the
Endeavour Capital Fund S.A. assuming conversion as of December 31, 1998.
(9) Represents the number of shares of Common Stock received upon conversion of
Preferred Stock (including accrued dividends) held by AMRO INTERNATIONAL
S.A.
(10) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 467,178 shares of Common Stock and
warrants to purchase 222,269 shares of Common Stock.
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Employees
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 on April 18, 1999. As of September 30, 1998, principal and
unpaid interest totaled approximately $66,100. According to the terms of Mr.
Goei's separation agreement, the amount Mr. Goei owed on the note will be offset
against accrued moving and relocation expenses that the Company owed to Mr.
Goei.
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 September 30, 1998, the Company had no further involvement with
this loan arrangement as the disposal of Advantis had been completed prior to
the end of September 1998.
Loans to Company
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 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
September 30, 1998, Mr. Gillespie was owed a total of $187,500 on these notes.
See Item 10, "Employment Agreements." Except for 150,000 shares which were
registered under an S-3 Registration Statement declared effective by the SEC on
June ___, 1998, 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. Regardless of the lock-up agreement and the
shares registered on Form S-3, Mr. Gillespie is an affiliate of the Company and,
as such, is subject to various restrictions on any transfers of his shares.
The Company entered into a bridge loan with the holders of the Series A
Convertible Preferred Stock (the "Preferred Stockholders") and certain
management stockholders. NHancement Technologies Inc. used the funds in the
aggregate amount of $1,400,000 to complete the acquisition of Infotel. Interest
was payable on the promissory notes at a rate of 10% per annum. Funds loaned to
the Company by the Preferred Stockholders totaled $750,000. The notes payable to
the Preferred Stockholders provided for repayment on the earlier of the closing
of the next tranche of the Company's Preferred Stock in accordance with the
terms of the Securities Purchase Agreement, as amended, or 90 days from the date
of issuance. The Company amended the agreement in September of 1998
31
<PAGE>
limiting further dilutive issuances under the financing agreement, except by
mutual consent of the parties. Additionally, the notes payable to the
preferred Stockholders, which were originally to be applied against the purchase
price of additional Preferred Stock available for purchase under the Securities
Purchase Agreement, subject to receipt by the Company of certain stockholder
approvals, and all accrued interest and a $135,000 premium, were on September
30, 1998. Management loans of $650,000 were repaid with interest in November,
1998.
Other Related Party Transactions
At various times in 1997 and 1998, Advantis purchased inventory from
certain companies whose directors were also stockholders of Advantis. At
September 30, 1998, the Company had no further involvement with these
arrangements as the disposal of Advantis was completed prior to the end of
September 1998.
The Company's former subsidiary, Advantis, 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. At September 30, 1998, the
Company had no further involvement with these arrangements as the disposal of
Advantis was completed prior to the end of September 1998.
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,
the terms of certain of the Company's employment arrangements and the terms of
Mr. Goei's Separation Agreement.
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
-------- ----------------------
<S> <C> <C>
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. (8)
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 (8)
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. (8)
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 (8)
32
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
<S> <C> <C>
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)
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-Registered Trademark- Service Contract (2)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16, 1996,
between Centigram Communications Corporation and VPI (2)
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 S. 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 (8)
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. (9)
10.30 -- Form of Escrow Instructions related to Securities Purchase
Agreement, dated as of April 13, 1998. (8)
33
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
<S> <C> <C>
10.31 -- Form of Reseller Agreement between Interactive Intelligence
Inc. and the Company dated July 8, 1998.
10.32 -- Form of Associate Agreement between NEC, Inc. and the Company
dated May 26, 1998.
10.33 -- Form of Loan and Security Agreement between AEROFUND FINANCIAL
and the Company dated October 9, 1998.
10.34 -- Form of Guaranty from Lee Giam Teik, Man Yiew Ming and Ng Kok
Wah dated September 30, 1998.
10.35 -- Letter Agreement between Lee Giam Teik, Man Yiew Ming and Ng
Kok Wah and the Company dated September 30, 1998.
10.36 Agreement relating to the sale and purchase of 500,000
ordinary shares in the Capital of Infotel Technologies (Pte)
Ltd ("Infotel"), dated as of January 19, 1998, by and between
the Company and the stockholders of Infotel (the "SALE
AGREEMENT"). (10)
10.37 -- Letter Agreement amending the Sale Agreement, dated as of
April 2, 1998, by and between the Company and the stockholders
of Infotel ("SUPPLEMENT NO. 1"). (11)
10.38 -- Form of letter agreement amending the Sale Agreement, as
amended by Supplement No. 1, dated as of April 22, 1998, by
and between the Company and the stockholders of Infotel
("SUPPLEMENT NO. 2"). (12)
10.39 -- Letter agreement amending the Sale Agreement, as amended by
Supplement No. 1 and Supplement No. 2, dated as of June 22,
1998, by and between the Company and stockholders of Infotel.
(13)
10.40 -- Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to AMRO
INTERNATIONAL S.A. ("AMRO"). (14)
10.41 -- Promissory Note, dated as of June 15, 1998, in the original
principal amount of $375,000, payable by the Company to
Endeavour Capital Fund S.A. ("ENDEAVOUR"). (15)
10.42 -- Letter agreement, dated as of June 15, 1998, amending
Securities Purchase Agreement, dated as of April 13, 1998, by
and among the Company, AMRO and Endeavour. (16)
10.43 -- Letter Agreement, dated as of June 12, 1998, by and among the
Company, Esmond T. Goei, Douglas S. Zorn and James S.
Gillespie. (17)
10.44 -- Promissory Note, dated as of June 12, 1998, in the original
principal amount of $125,000 payable by the Company to Esmond
T. Goei. (18)
10.45 -- Promissory Note, dated as of June 12, 1998, in the original
principal amount of $225,000 payable by the Company to Douglas
S. Zorn. (19)
10.46 -- Promissory Note, dated as of June 12, 1998, in the original
principal amount of $300,000 payable by the Company to James
S. Gillespie. (20)
21 -- Subsidiaries
24 -- Power of Attorney - included on signature page(s) to this
Report on Form 10-KSB.
27.1 -- Financial Data Schedule for the nine months ended September
30, 1998 and 1997.
27.2 -- Financial Data Schedule for the year ended December 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.
(8) Incorporated by reference to the document bearing the same exhibit number
on registrant's Form 10-KSB, SEC file number 333-15563 as filed with the
Securities and Exchange Commission on April 15, 1998.
34
<PAGE>
(9) Incorporated by reference to document 2.1 contained in the Company's form
10-KSB, SEC File No. 0-21999, as filed with the Securities and Exchange
Commission on April 15, 1998.
(10) Incorporated by reference to Exhibit 2.1 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(11) Incorporated by reference to Exhibit 2.2 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(12) Incorporated by reference to Exhibit 2.3 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(13) Incorporated by reference to Exhibit 2.4 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(14) Incorporated by reference to Exhibit 10.1 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(15) Incorporated by reference to Exhibit 10.2 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(16) Incorporated by reference to Exhibit 10.3 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(17) Incorporated by reference to Exhibit 10.4 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(18) Incorporated by reference to Exhibit 10.5 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(19) Incorporated by reference to Exhibit 10.6 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(20) Incorporated by reference to Exhibit 10.7 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.
(b) Reports on Form 8-K
None
35
<PAGE>
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/ Douglas S. Zorn
------------------------------------
Douglas S. Zorn, President, Chief
Executive Officer, Chief Financial
Officer, Secretary and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Esmond T. Goei, Douglas S. Zorn and Linda V.
Moore 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
- ---------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ Esmond T. Goei
- -------------------------- Chairman of the Board and Director Dec. 12, 1998
Esmond T. Goei (Former Principal Executive Officer)
/s/ Douglas S. Zorn
- -------------------------- President, Chief Executive Officer, Dec. 12, 1998
Douglas S. Zorn Chief Financial Officer, Secretary
and Director (Principal Executive,
Financial and Accounting Officer)
/s/ James S. Gillespie
- -------------------------- Director Dec. 12, 1998
James S. Gillespie
/s/ Thomas J. Lawrence
- -------------------------- Director Dec. 12, 1998
Thomas J. Lawrence
</TABLE>
36
<PAGE>
Nhancement Technologies Inc.
And Subsidiaries
Consolidated Financial Statements
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND YEAR ENDED DECEMBER 31, 1997
F-1
<PAGE>
Nhancement Technologies Inc.
And Subsidiaries
Table of Contents
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1998 F-4 - F-5
Consolidated Statements of Operations for the nine months F-6
ended September 30, 1998 and 1997 (unaudited) and year
ended December 31, 1997
Consolidated Statements of Stockholders' Equity (Deficit) F-7
for the nine months ended September 30, 1998 and year ended
December 31, 1997
Consolidated Statements of Cash Flows for the nine months F-8
ended September 30, 1998 and 1997 (unaudited) and year ended
December 31, 1997
Summary of Accounting Policies F-9 - F-14
Notes to the Consolidated Financial Statements F-15 - F-27
</TABLE>
F-2
<PAGE>
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 September 30, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for the year ended December 31, 1997, and the nine months ended
September 30, 1998. 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
did not audit the financial statements of Infotel Technologies (Pte) Ltd, a
wholly-owned subsidiary, as of September 30, 1998 and from June 22, 1998
(date of its acquisition) through September 30, 1998, which statements reflect
total assets and revenues constituting 42 percent and 32 percent,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Infotel
Technologies (Pte) Ltd, is based solely on the report of other auditors.
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 9 to the consolidated financial statements, a
significant subsidiary of the Company purchases substantially all of its
inventory from two vendors.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of NHancement Technologies Inc. and
Subsidiaries at September 30, 1998 and the results of their operations and their
cash flows for the year ended December 31, 1997 and the nine months ended
September 30, 1998 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California
December 8, 1998, except for Note 17 which is as of January 6, 1999
F-3
<PAGE>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents (Note 9) $ 1,677,200
Restricted cash 369,000
Accounts receivable, less allowance for doubtful
accounts of $246,000 (Note 9) 4,579,300
Inventory 1,341,100
Current portion of notes receivable from related
parties (Notes 3 and 8) 171,400
Income tax receivable 140,600
Prepaid expenses and other 242,100
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,520,700
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Office equipment 688,400
Computers and software 756,500
Automobiles 125,100
Furniture and fixtures 340,300
- --------------------------------------------------------------------------------
1,910,300
Less accumulated depreciation 664,900
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,245,400
- --------------------------------------------------------------------------------
Excess of cost over net assets acquired of
Voice Plus, Inc. (Note 2) 750,000
Excess of cost over net assets acquired of Infotel,
net of accumulated amortization of $47,600 (Note 2) 1,880,500
Long-term portion of notes receivable from related parties
(Notes 3 and 8) 227,900
Other assets 246,800
- --------------------------------------------------------------------------------
$12,871,300
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Due to factor (Note 4) $ 231,000
Accounts payable 1,888,400
Accrued liabilities 1,451,400
Payroll related liabilities 228,500
Deferred revenue 1,735,300
Income tax payable 332,000
Notes payable to stockholders (Notes 4 and 8) 2,247,500
Capital lease obligations, current portion (Note 4) 45,000
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,159,100
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (NOTE 4) 68,300
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 8,227,400
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 2, 7, 9, AND 11)
STOCKHOLDERS' EQUITY (NOTES 5 AND 6)
Convertible preferred stock, $0.01 par value, 2,000,000
shares authorized, 3,200 shares issued and outstanding 252,200
Common stock, $0.01 par value, 20,000,000 shares authorized,
5,579,235 shares issued and outstanding 55,800
Additional paid-in capital 21,020,900
Accumulated deficit (16,510,100)
Cumulative translation loss (174,900)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,643,900
- --------------------------------------------------------------------------------
$ 12,871,300
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1997 1998
(UNAUDITED)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES (NOTE 9) $8,737,800 $6,720,800 $9,442,200
Cost of sales 4,967,300 3,513,400 5,863,300
- ------------------------------------------------------------------------------------------------
GROSS PROFIT 3,770,500 3,207,400 3,578,900
- ------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 3,778,900 2,507,100 4,211,500
Amortization of excess of cost over net assets
acquired, including impairment loss of $4,084,300
in 1997 and $525,000 in 1998 (Note 2) 4,644,900 409,800 797,600
- ------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 8,423,800 2,916,900 5,009,100
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,653,300) 290,500 (1,430,200)
OTHER INCOME (EXPENSE)
Interest income 136,900 103,300 76,900
Interest expense (77,900) (71,300) (138,900)
Other -- -- 39,800
- ------------------------------------------------------------------------------------------------
Total other income (expense) 59,000 32,000 (22,200)
Income (loss) from continuing operations before
income taxes (4,594,300) 322,500 (1,452,400)
Income taxes (Note 10) -- 92,500 70,800
- ------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (4,594,300) 230,000 (1,523,200)
- ------------------------------------------------------------------------------------------------
Discontinued operations: (Note 15)
Income (loss) from operations of Advantis 3,100 -- (581,400)
Loss from disposal of Advantis -- -- (368,600)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ($4,591,200) $ 230,000 ($2,473,200)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Preferred dividends -- -- (435,700)
- ------------------------------------------------------------------------------------------------
Income (loss) available to common stockholders ($4,591,200) $ 230,000 ($2,908,900)
- ------------------------------------------------------------------------------------------------
Basic and diluted income (loss) from continuing
operations per common share ($1.18) $0.06 ($0.41)
Basic and diluted income (loss) from discontinued
operations per common share -- -- ($0.20)
Basic and diluted net income (loss) per common
share (Note 13) ($1.18) $0.06 ($0.61)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
PAR VALUE PAR VALUE PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT GAIN (LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1997 -- -- 612,800 $6,100 $5,363,900 ($9,010,000) $-- ($3,640,000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for Voice -- -- 1,312,500 13,100 4,666,900 -- -- 4,680,000
Plus, Inc. acquisition (Note 2)
Sale of common stock in an -- -- 2,045,000 20,500 6,499,300 -- -- 6,519,800
initial public offering, net of
stock issuance costs of
$1,660,200 (Note 12)
Conversion of debt and accrued -- -- 258,200 2,600 1,030,000 -- -- 1,032,600
interest into common stock
(Note 12)
Issuance of common stock -- -- -- -- 3,800 -- -- 3,800
options for payment of outside
service fees
Common stock issued for -- -- 208,500 2,100 456,700 -- -- 458,800
Advantis acquisition (Note 2)
Comprehensive income (loss):
Net loss -- -- -- (4,591,200) -- (4,591,200)
Cumulative translation gain -- -- -- -- -- -- 11,300 11,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- -- -- -- (4,591,200) 11,300 (4,579,900)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- -- 4,437,000 44,400 18,020,600 (13,601,200) 11,300 4,475,100
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of Preferred Stock, net 12,500 984,700 -- -- -- -- -- 984,700
of stock issuance costs of
$265,300 (Note 5)
Deemed dividend on preferred
stock convertible at a discount -- -- -- -- 416,700 (416,700) -- --
(Note 5)
Dividends on preferred stock -- -- 8,400 100 11,400 (11,500) -- --
converted into common shares
(Note 5)
Dividends payable on preferred
stock (Note 5) -- -- -- -- -- (7,500) -- (7,500)
Preferred shares converted into (9,300) (732,500) 700,835 7,000 725,500 -- -- --
common stock (Note 5)
Issuance of common stock -- -- -- -- 10,600 -- -- 10,600
options for payment of outside
service fees
Common stock issued for -- -- 433,000 4,300 1,836,100 -- -- 1,840,400
Infotel acquisition (Note 2)
Comprehensive income (loss):
Net loss -- -- -- -- -- (2,473,200) -- (2,473,200)
Cumulative translation loss -- -- -- -- -- -- (186,200) (186,200)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss: -- -- -- -- -- (2,473,200) (186,200) (2,659,400)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 3,200 $252,200 5,579,235 $55,800 $21,020,900 ($16,510,100) ($174,900) $4,643,900
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1997 1998
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(4,591,200) $230,000 $(2,473,200)
Adjustments to reconcile net (income) loss to net cash used in operating
activities:
Depreciation and other amortization 159,500 108,800 296,000
Amortization of excess cost over net assets
acquired, including impairment loss 4,649,100 409,800 797,600
Compensation related to grant of stock options and common stock 3,800 3,800 10,600
Other 8,800 -- (21,200)
Loss on sale of Advantis, net of cash of $1,000 -- -- 367,600
Changes in operating assets and liabilities:
Accounts receivable (265,600) 64,400 (95,400)
Income tax receivable (172,000) -- 31,400
Inventory 653,900 539,100 666,900
Prepaid expense and other (89,300) (186,000) (90,100)
Other assets (48,100) (36,100) (89,500)
Income tax payable -- -- 67,800
Accounts payable and other current liabilities (3,186,200) (3,136,700) 50,200
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,877,300) (2,002,900) (481,300)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash -- -- (369,000)
Deferred acquisition costs (188,000) (52,400) --
Advantis acquisition costs -- -- (196,400)
Cash acquired from VPI acquisition 851,900 851,900 --
Cash purchase price of Infotel, net of cash
acquired of $2,326,000 -- -- (30,300)
Note receivable from Advantis, preacquisition -- (306,200) --
Note receivable from related party (63,000) (61,900) --
Proceeds from sale of fixed assets -- -- 16,200
Purchases of property and equipment (252,500) (181,800) (501,200)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 348,400 249,600 (1,080,700)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering of common
stock, net of offering costs 6,519,800 6,519,800 --
Net borrowing under line of credit -- -- 263,200
Capital leases -- -- 113,200
Proceeds from notes payable -- -- 1,400,000
Deferred stock offering costs 376,200 376,200 --
Principal payment on notes payable (1,814,000) (1,814,000) (837,800)
Principal payment on long-term debt due to stockholders (1,250,000) (1,062,500) --
Proceeds from sale of preferred stock, net of -- -- 984,700
offering costs
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,832,000 4,019,500 1,923,300
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- (47,300)
Net increase in cash and cash equivalents 1,303,100 2,266,200 314,000
Cash and cash equivalents, beginning of period 60,100 60,100 1,363,200
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,363,200 $2,326,300 $1,677,200
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental data:
Interest paid $267,700 $200,700 $119,900
Income taxes paid $191,200 $191,200 $--
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
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 (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, 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 became a wholly-owned subsidiary of
NHancement. Advantis is a telecommunications systems integrator. The operations
of the entity were conducted under the name of "Advantis Network & System Sdn
Bhd," which is headquartered in Kuala Lumpur, Malaysia. The acquisition was
accounted for as a purchase, and, accordingly, the results of Advantis
operations were included in the Company's consolidated financial statements
commencing December 15, 1997.
On September 24, 1998, management made a decision to dispose of Advantis. On
September 30, 1998, the Company and three of the former shareholders of Advantis
entered into a guarantee agreement pursuant to which each such shareholder
agreed to guarantee repayment of the outstanding loan (Note 2) made by the
Company to Advantis (together with all the interest accrued to date) pursuant to
that certain loan agreement and related promissory notes dated July 7, 1997. In
exchange, the Company delivered all of the Advantis shares and transferred its
ownership interest in Advantis to the original shareholders in full and final
settlement of any and all damages the Company may have suffered as a result of
the breaches of certain representations and warranties made by such shareholders
pursuant to that certain agreement for the sale of shares in Advantis dated June
20, 1997.
On June 22, 1998, NHancement purchased one hundred percent (100%) of the
outstanding shares of Infotel Technologies (Pte) Ltd ("Infotel"). As a result of
the acquisition, Infotel became a wholly-owned subsidiary of
NHancement. The operations of the entity are being conducted under the name of
"Infotel Technologies (Pte) Ltd" which is headquartered in Singapore. The
acquisition was accounted for as a purchase, and, accordingly, the
results of Infotel's operations were included in the Company's consolidated
financial statements commencing June 22, 1998.
The business of NHancement is conducted by its operating company subsidiaries,
Voice Plus, Inc., whose name was recently changed to NHancement Technologies
North America, Inc. and Infotel Technologies (Pte) Ltd.
F-9
<PAGE>
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 68% of total 1998
consolidated net revenues. VPI maintains offices in the states of California,
New York, Georgia, Arizona, Utah and Texas.
Infotel is a provider and integrator of infrastructure communications
equipment products, providing radar system integration, turnkey project
management services and test instrumentation, as well as a portfolio of
communication equipment in Asia. Infotel was acquired on June 22, 1998, and
represented approximately 32% of total 1998 consolidated net revenues.
In March 1998, the Company formalized a plan to exit from the business
related to its FACTOR 1000-Registered Trademark- 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 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-Registered Trademark- product at September
30, 1998 and 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 of the FACTOR 1000-Registered Trademark- product.
The Company's FACTOR 1000-Registered Trademark- 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 granted an exclusive world-wide
sublicense for sports and on-field-athletic-performance related users of the
FACTOR 1000-Registered Trademark- system through November 2008.
CHANGE IN FISCAL YEAR-END
On July 30, 1998, the Board of Directors of NHancement Technologies Inc.
approved a resolution to change the Company and its Subsidiaries fiscal year-end
to September 30. As a result, a transition period for the nine
months ended September 30, 1998, is presented herein. Consequently, the
Consolidated Balance Sheet has been prepared as of September 30, 1998. The
Consolidated Statements of Operations and Cash Flows present audited
information for the year ended December 31, 1997, and the nine months ended
September 30, 1998 as well as unaudited information for the nine months ended
September 30, 1997.
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
Infotel Technologies (Pte) Ltd. since their respective dates of
acquisition (Note 1). The results of operations related to Advantis have been
reported as discontinued operations. 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
F-10
<PAGE>
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. Revenues under fixed price contracts is
recognized under the percentage-of-completion method of accounting in which the
estimated sales value is determined on the basis of physical completion to date
(the total contract amount multiplied by percent of performance to date less
sales value recognized in previous periods). Claims for extra work are included
in revenues when collection is probable.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
RESTRICTED CASH
The Company's Infotel subsidiary maintains fixed deposits to secure bankers'
guarantees of its performance on radar system integration projects. The
restrictions on these funds are released when the projects are completed.
Guaranteed work secured by these deposits is expected to be completed within one
year.
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 Infotel Technologies (Pte) Ltd. is
being amortized over a five to ten year period using the straight-line method.
Effective September 30, 1998 the Company reduced the amortization period on the
Voice Plus, Inc. goodwill from five years to three years based on management s
estimate.
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 issues 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 depreciation or amortization. In determining whether
an impairment exists, the Company compares
F-11
<PAGE>
undiscounted future cash flows to the carrying value of the asset. When
undiscounted future cash flows are less than the carrying value of the asset,
the Company records an impairment loss based on the estimated fair market value
of the impaired asset.
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 for transactions involving employees.
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 1997 and
1998, calculations under SFAS No. 128 were the same as those under the prior
method. Options and warrants to purchase 1,225,200 and 1,154,100 shares were
outstanding during the nine months ended September 30, 1998 and year ended
December 31, 1997 respectively, but were not included in the computation of
diluted loss per common share because the effect would be antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
F-12
<PAGE>
Summary of Accounting Policies
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 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. These financial statements reflect the adoption of
this standard, and report comprehensive income (loss) of $(2,659,400) and
($4,579,900) for the nine months ended September 30, 1998 and year ended
December 31, 1997. Results of operations and financial position, however, were
unaffected by the 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 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. These financial statements include the disclosures
required by this statement.
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. The Company's financial statement disclosures did not need to be
modified and the results of operations and financial position were unaffected by
implementation of this standard.
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its recent acquisition of Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.
FOREIGN CURRENCY TRANSLATION
F-13
<PAGE>
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 and as a
separate component of comprehensive income (loss).
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 debt approximates fair value based upon short-term borrowings at
market rate interest.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation.
F-14
<PAGE>
Notes To Consolidated Financial Statements
1. LIQUIDITY
The Company has incurred losses from continuing operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998 of $4.6 million
and $1.5 million and it expects to incur a net loss in excess of $1.0 million
for the quarter ended December 31, 1998. The losses in 1997 and for the
nine-month period ended September 30, 1998 include non-cash charges for goodwill
impairment of $4.0 million and $525,000. Working capital at September 30, 1998
was $400,000 and likely will decrease as of December 31, 1998 based on the
expected loss and negative cash flow for the quarter then ended. Continued
losses could have a material adverse effect on the financial condition of the
Company.
To improve the liquidity and future cash flows, management made the decision to
restructure operations in early January 1999, subject to Board approval, and
expects to implement the plan in the month of January. Under the plan,
headcount is expected to decrease by 10%, including the President of the
Company, cost reductions will be implemented in corporate overhead, travel,
discretionary sales expenses, outside services and general and administrative
expenses. Additionally, the Company negotiated an increase in its short- term
credit facility from $1 million to $2 million. Based on discussions with its
financial advisors, management believes it can raise additional equity.
Although no assurances can be given that above efforts will be successful,
management believes these measures, together with its cash balances as of
December 31, 1998 of about $1.3 million, will provide sufficient cash flow for
future operations.
2. 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 NHancement Common Stock for every four shares of BFI Common Stock.
Also, on February 3, 1997, the Company entered into a stock purchase agreement
with Voice Plus, Inc., pursuant to a transaction by which the Company merged a
wholly-owned subsidiary with and into VPI whereupon VPI, as the surviving
corporation, became a wholly-owned subsidiary of the Company. This merger
provided for the exchange of (i) the Company's unsecured promissory note in a
principal amount of $1,000,000, bearing interest at the medium term T-bill rate,
with all principal and accrued interest paid in full during 1997, (ii) the
Company's unsecured promissory note in a principal amount of $500,000, bearing
interest at the medium term T-bill rate, due on the third anniversary of the
consummation of the merger subject to accelerated payment based upon quarterly
earnings, of Voice Plus, and (iii) shares of NHancement common stock with an
estimated fair value of $4,680,000 (of which, shares valued at $2,400,000 were
sold in the IPO, and the remainder of the shares are subject to restrictions on
transferability under the Securities Act of 1933 (as amended) and pursuant to a
lock-up agreement with the underwriter of the IPO), for all the issued and
outstanding common stock of VPI.
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 continued changes occurring in voice processing technology and
continued losses in the Voice Plus subsidiary, 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 September 30, 1998. As such, the Company has
recorded an impairment loss of $525,000, 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. In addition,
the useful life of the $750,000 balance of the goodwill of Voice Plus, Inc. at
September 30, 1998 was reduced from five years to three years. In addition, the
Company recorded an impairment loss of $4,084,300 at December 31, 1997. Net
operating losses in 1997 led management to evaluate goodwill related to Voice
Plus, Inc for impairment. The impairment resulted from voice processing
technology changes and uncertainties regarding the Company's distributor
relationship with its principal supplier, Centigram Communications Corporation.
These aforementioned factors led management to downgrade its expectations of
future operating results from those anticipated at the time of the acquisition.
On December 15, 1997, the Company consummated the acquisition of Advantis
Network & System Sdn Bhd, a Malaysian corporation, pursuant to a transaction by
which Advantis merged with NHancement, whereupon Advantis became a wholly-owned
subsidiary of NHancement. The initial consideration payable to the Advantis
shareholders in connection with the acquisition was 208,500 shares of common
stock of NHancement to be paid to each Advantis shareholder pro rata
proportional to his Advantis share ownership. As discussed in the "Organization"
section in the Summary of Accounting Policies, the Company returned all its
Advantis shares to the former Advantis shareholders in exchange for their
personal guarantee of repayment of an outstanding loan made by the Company to
Advantis.
On June 22, 1998, the Company acquired all outstanding shares of common stock of
Infotel Technologies (Pte) Ltd., a Singapore corporation. The consideration paid
to the Infotel shareholders consisted of cash of S$3,780,000 (US$2,356,300 at a
translation rate of 1.62) and 433,000 shares of common stock of NHancement
F-15
<PAGE>
("Acquisition Shares"). If the price per share of the Company's Common Stock
is less than $5.00 on the first anniversary of the Infotel acquisition, 50%
of the initial shares issued to the Infotel shareholders is subject to
adjustment and the remaining 50% is subject to adjustment on the second
anniversary if the per share price is less than $5.00. Should the Company's
Common Stock price be below $5.00 per share on either of these dates, the
Infotel shareholders would be entitled to receive that number of shares equal
to the lesser of (i) one-half the initial shares valued at $5.00 per share
divided by the fair market value per share minus one-half of the initial
shares or (ii) one-half the initial shares valued at $5.00 per share divided
by $2.75 (subject to adjustment for stock splits and the like). At the
September 30, 1998 price per share of the Company's Common Stock, these
calculations would result in approximately 354,000 of additional shares being
issued to the Infotel shareholders. Additionally, the Infotel shareholders
have the opportunity to receive up to a maximum of S$3,200,000 (approximately
US$1,907,000 at current rates) in additional cash payments if Infotel exceeds
certain minimum profit levels totaling S$1.6 million (US$953,500) during the
two year period ending June 30, 1999. Management has recorded as additional
purchase consideration of $1,390,400 based on Infotel's profits for the year
ended June 30, 1998. All Acquisition shares were distributed to the Infotel
shareholders pursuant to the Agreement were issued by NHancement in reliance
upon Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"),
and are subject to restrictions on transferability under the 1933 Act. In
addition, the Acquisition Shares are subject to a lock-up provision
prohibiting transfer of fifty percent (50%) of the shares for one year
following the effective date of the initial agreement, and prohibiting
transfer of the remaining fifty percent (50%) until the second anniversary of
the effective date of the initial agreement.
As of September 30, 1998, the purchase price of Infotel and excess of cost over
net assets acquired ("goodwill") recorded in connection with the Infotel
acquisition are summarized as follows:
<TABLE>
<S> <C>
CONSIDERATION
Common stock - 433,000 shares subject to a share price guarantee $1,840,400
Cash 2,356,300
Accrued purchase consideration 1,390,400
------------
Total consideration 5,587,100
------------
------------
Net assets acquired (1) 3,849,000
Cost of acquisition (190,000)
------------
3,659,000
------------
Excess of cost over net assets acquired $1,928,100
------------
------------
(1) Consists principally of the following:
Cash and cash equivalents $2,326,000
Accounts receivable 2,050,000
Inventories 1,651,000
Property and equipment 374,000
Other assets 101,000
Accounts payable and accrued expenses (2,014,000)
Other liabilities (639,000)
------------
$3,849,000
------------
------------
</TABLE>
(1) The Company is in the process of valuing the net assets acquired from
Infotel. Accordingly, the allocation of purchase price may be adjusted in future
periods.
The following unaudited pro forma financial data consolidates the results of
operations of the Company, Voice Plus and Infotel as if the acquisitions had
occurred January 1, 1997 and January 1, 1998. The pro forma
F-16
<PAGE>
information gives effect to certain adjustments, including the amortization of
excess cost over net assets acquired, the effect resulting from the
renegotiation of employment agreements with key management employees of VPI, and
additional interest expense on notes payable. This pro forma summary does not
necessarily reflect results of operations as they would have been if the
Company, Voice Plus and Infotel had constituted a single entity during such
periods and is not necessarily indicative of results which may be obtained in
the future. These proforma results exclude the loss from discontinued
operations.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $20,142,900 $15,788,200
Loss before income taxes (4,534,000) (895,600)
Net loss (4,724,400) (1,150,400)
Preferred dividends -- (435,700)
Loss available to common stockholders (4,724,400) (1,586,100)
- -------------------------------------------------------------------------------------
Basic and diluted loss per share:
Net loss per common share ($1.07) ($0.33)
Weighted average shares 4,433,400 4,867,000
- -------------------------------------------------------------------------------------
</TABLE>
3. NOTES RECEIVABLE FROM RELATED PARTIES
At September 30, 1998, notes receivable from related parties consist of the
following:
<TABLE>
<S> <C>
----------------------------------------------------------------------
Note receivable from Advantis guaranteed by
shareholders of Advantis, principal and interest due
in monthly payments beginning January 1, 1999 through
June 1, 2001 interest at 7% $333,200
Note receivable from an officer of the Company,
interest at 7% with principal and unpaid interest due
April 1999 66,100
----------------------------------------------------------------------
399,300
Less current portion 171,400
----------------------------------------------------------------------
$227,900
----------------------------------------------------------------------
</TABLE>
4. DUE TO FACTOR, STOCKHOLDERS AND OTHER OBLIGATIONS
Due to factor and other obligations consists of the following at September 30,
1998:
<TABLE>
<S> <C>
----------------------------------------------------------------------
Due to factor with recourse, interest of 2% every 15
days that the amount remains unpaid, collateralized
by accounts receivable. This agreement provides for
borrowings up to 80 % of eligible accounts receivable
not to exceed $1,000,000. The outstanding balance was
repaid in October 1998. $231,000
----------------------------------------------------------------------
DUE TO STOCKHOLDERS
Additional purchase consideration to former Infotel
stockholders pursuant to the terms of the acquisition
agreement of Infotel in June 22, 1998, due in February
1999 (1) $1,390,400
F-17
<PAGE>
Note payable to certain management stockholders,
interest at 10% principal and interest originally due
September 30, 1998, repaid on November 5, 1998 without
penalty. 669,600
Note payable to former sole stockholder of Voice Plus
pursuant to the terms of the acquisition of Voice Plus
in February 1997, interest at medium term T-bill rate
(5.3% at September 30, 1998). (2) 187,500
----------------------------------------------------------------------
Total due to stockholders $2,247,500
----------------------------------------------------------------------
Capital lease obligations to various institutions
interest at 12.25% - 14.56% payable over 2-3 years,
commencing April 1998 through June 2001. (3) $113,300
Less current portion 45,000
----------------------------------------------------------------------
Long term portion $68,300
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
(1) The purchase agreement allows for the former Infotel stockholders to
receive up to a maximum of S$3,200,000 (approximately US$1,907,000 at current
rates) in additional cash if Infotel exceeds certain minimum profit levels
totaling S$1.6 million (US$953,500) during the two year period ending June 30,
1999. The Company has recorded additional purchase consideration on Infotel's
profits for the year ended June 30, 1998.
(2) The Company issued an unsecured promissory note in a principal amount of
$500,000, bearing interest at the medium term T-bill rate to the former 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 September 30, 1998, a principal balance of
$187,500 remained unpaid.
(3) In 1998, the Company capitalized computer equipment with an original cost
basis of $133,200 financed through capital leases. Accumulated depreciation for
the assets at September 30, 1998 was $12,900.
Future minimum annual principal payments on these obligations are as follows:
<TABLE>
<CAPTION>
---------------------------------------------
YEARS ENDING SEPTEMBER 30 AMOUNT
---------------------------------------------
<S> <C>
1999 $2,523,500
2000 43,200
2001 25,100
---------------------------------------------
$2,591,800
---------------------------------------------
---------------------------------------------
</TABLE>
5. 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. However, all equity issuances that result in dilution to stockholders
of over 20% requires a vote of the existing stockholders, pursuant to Nasdaq
rules.
On April 13, 1998, the Company issued 12,500 shares of Preferred Stock. Under
the terms of the Securities Purchase Agreement, the Company received
$1,250,000 (less commissions and certain other costs and expenses of
approximately $265,300). The preferred stock is convertible into common stock
at the lesser of the five day average closing bid price at the time of
signing or 75% of the five day average closing bid price at the time of
conversion. The 25% conversion discount has been reflected as a preferred
stock dividend and has resulted in an increase in the loss applicable to
common stockholders in computing net income (loss) per share. For the nine
months ended September 30, 1998, the Company has recorded a deemed dividend
of $416,700.
F-18
<PAGE>
As of September 30, 1998, 9,300 preferred shares were converted into common
stock. Additionally, the Company amended the agreement in September of 1998
limiting further dilutive issuances under the financing agreement, except by
mutual consent of the Preferred Stockholders and the Company.
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 (Note 2).
Accordingly, all references in the consolidated financial statement to share
amounts and per share amounts have been adjusted to reflect the BFI Merger
exchange.
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.
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 (Note 12).
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 (Note 12).
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
Shd. Bhd. Effective September 30, 1998, the Advantis common shares were
transferred from the Company to the former shareholders of Advantis in exchange
for a guarantee of repayment of a loan made by the Company to Advantis (Notes 3
and 15).
Effective June 22, 1998, the Company issued 433,000 shares of its common stock,
paid cash of $2,356,300 and recorded a payable of $1,390,400, which reflects
performance payments due to the former Infotel shareholders based on Infotel's
fiscal 1998 earnings results, in exchange for all of the outstanding shares of
Infotel, and Infotel became a wholly-owned subsidiary of the Company. (Note 2)
From June 22, 1998, through September 30, 1998, 9,300 preferred shares plus
dividends earned of $11,500 were converted into 709,235 shares of common stock.
6. 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 (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 Company's
Board of Directors administers the Equity Incentive Plan. 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
F-19
<PAGE>
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 compensation expense related to grants and exercise of stock
options of $3,800 in 1997 and $10,600 in 1998.
The following table summarizes transactions pursuant to the Company's Plan:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Option Price Available for Contractual
Per Share Outstanding Exercisable Grant Life
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1997 $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
- -----------------------------------------------------------------------------------------------------------------------------------
Granted 2.05 258,000 -- (258,000) 10 years
Canceled 2.69 (186,900) (98,400) 186,900
Became Exercisable 3.68 -- 161,300 --
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 $3.00 1,225,200 503,500 251,300 8.5 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
assumption used for grants in nine months ended September 30, 1998 and the year
ended December 31,1997, respectively: no dividend yield for any year; expected
volatility of 42% and 20%; risk-free interest rates of 6.6% in both periods; and
expected lives of approximately three to five years. The weighted average fair
value of options granted in nine months ended September 30, 1998 and the year
ended December 31,1997 was $0.96 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:
F-20
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
--------------------------------------------------------------------------
<S> <C> <C>
Net loss
As reported $(4,591,200) $(2,473,200)
Pro forma $(4,749,100) $(2,647,600)
Per share as reported $(1.18) $(0.61)
Per share pro forma $(1.22) $(0.64)
--------------------------------------------------------------------------
</TABLE>
The above pro forma information includes only the effects of 1997 and 1998
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 WEIGHTED AVERAGE
AVERAGE REMAINING
WARRANT PRICE CONTRACTUAL LIFE
PER SHARE OUTSTANDING
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JANUARY 1, 1997 $5.18 617,100 3.0 years
- ------------------------------------------------------------------------------------------------------
Warrants issued to Underwriter in connection with $4.80 230,000
Initial Public Offering
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 $5.08 847,100 2.6 years
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 $5.08 847,100 1.9 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
7. COMMITMENT AND CONTINGENCIES
The Company's impairment testing business exposes it to potential litigation (i)
by employees of companies using the FACTOR 1000-Registered Trademark- 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 September 30, 1998, the Company maintained general
liability insurance in the amount of $1.0 million per occurrence and $2.0
million in the aggregate, and an umbrella policy with a $5.0 million limit. The
Company maintains product liability insurance of $2.0 million per occurrence and
$2.0 million in the aggregate.
The Company's FACTOR 1000-Registered Trademark- 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 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-Registered Trademark- product. The Company has not
currently met their minimum aggregate payment. If the Company does not make the
payment they will loose
F-21
<PAGE>
exclusivity of the licensed technology. At this time, the Company will allow
the exclusivity of the technology to lapse if necessary.
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>
---------------------------------------------------
YEAR ENDING SEPTEMBER 30, 1998 AMOUNT
---------------------------------------------------
<S> <C>
1999 $417,800
2000 229,600
---------------------------------------------------
$647,400
---------------------------------------------------
</TABLE>
Rent expense for the years ended December 31, 1997 and nine months ended
September 30, 1998 was $287,500 and $271,200.
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. The Company also had an employment
agreement with the former president of the Voice Plus subsidiary (Mr.
Gillespie). Mr. Gillespie decided to terminate his employment in April 1998 and
to provide consulting services to the Company with annual payments of $115,000.
Additionally, the agreement also contains provisions for confidentiality and
convenants not to compete, solicit customers or hire employees for two years
after the expiration of this consulting agreement.
8. RELATED PARTY TRANSACTIONS
During 1998, the Company paid notes payable from certain management stockholders
totaling $669,600 in principal and interest (Note 4).
At September 30, 1998, the Company had additional purchase consideration to the
former Infotel stockholders pursuant to the terms of the acquisition totaling
$1,390,400 (Note 4).
At September 30, 1998, the Company had notes receivable from stockholders and
former subsidiary totaling $399,300 (Note 3). As of December 31, 1997 there was
a $204,000 note receivable from Advantis stockholders to Advantis that was
included in the consolidated financial statements of the Company. This
receivable was returned to Advantis in conjunction with the disposal of Advantis
(Note 2).
At September 30, 1998, the Company owed $187,500 to a stockholder of the Company
in connection with the acquisition of Voice Plus (Note 4). During 1998, the
Company paid $62,500 in principal and $10,100 in interest to this stockholder.
During 1997 the Company paid $1,250,000 in principal and $36,100 in interest to
this stockholder.
9. CONCENTRATION RISK
Revenues from two customers accounted for approximately 19% and 7% of total net
revenues during the year ended December 31, 1997, and 26% and 12% of total net
revenues during the year ended September 30, 1998.
F-22
<PAGE>
Included in accounts receivable at September 30, 1998 is $988,700 and $579,400
due from these two customers.
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States and Singapore. 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"). In May 1998, Centigram sold its Customer Premise
Equipment ("CPE") to Mitel Corporation which now markets certain Centigram's
products through a newly formed subsidiary, Baypoint Innovations. Any
termination or adverse change in the Company's distributor relationship with
Centigram or Baypoint Innovations would have a material adverse impact upon
the Company's voice processing business.
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.
10. INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. For the year ended December 31 1997, substantially
all of the loss was attributable to domestic operations. For the nine months
ended September 30, 1998, $1,615,800 of the pretax loss was attributable to U.S.
operations, $414,200 was attributable to foreign operations and a loss of
$368,600 was incurred for the disposal of Advantis. As of September 30, 1998,
the Company's net operating losses for federal income tax purposes were
approximately $9 million, and expire between the years 2008 and 2013. For state
income tax purposes, as of September 30, 1998, the Company had net operating
loss carryforwards of approximately $811,000, which expire in 2003. The use of
Federal net operating loss caryforwards is subject to an annual limit of
approximately $250,000 as the Company has incurred an ""ownership change".
Deferred tax assets, the majority of which are noncurrent, at September 30, 1998
consist primarily of following:
<TABLE>
<CAPTION>
---------------------------------------------------------------
<S> <C>
Cash to accrual change for tax purposes $297,800
Reserves and accrued liabilities 426,400
Depreciation and amortization (109,900)
Net operating loss carryforwards 3,013,100
-----------------------------------------------------------------
Gross deferred tax asset 3,627,400
Less valuation allowance (3,627,400)
-----------------------------------------------------------------
Net deferred tax asset $--
-----------------------------------------------------------------
</TABLE>
Income taxes for the nine months ended September 30, 1998 consist primarily of:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
CURRENT DEFERRED EXPENSE
----------------------------------------------------------------------
<S> <C> <C> <C>
Continued Operations:
Federal $ -- $ -- $ --
State 1,800 -- 1,800
Singapore 71,000 (2,000) 69,000
---------------------------------------------------------------------
72,800 (2,000) 70,800
---------------------------------------------------------------------
Discontinued Operations:
Malaysia 3,800 -- 3,800
----------------------------------------------------------------------
$76,600 ($2,000) $74,600
----------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
There was no income tax expense for the year ended December 31, 1997.
The differences between income taxes and amounts determined by applying the
federal statutory rate to income before income taxes were:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Year Ended Nine Months Ended
December 31, 1997 September 30, 1998
------------------------------------------------------------------------
<S> <C> <C>
Federal Tax $(1,561,000) $(904,200)
State Tax (282,000) (162,200)
Foreign Taxes -- 73,000
Goodwill 1,865,000 300,700
Loss on Sale of Subsidiary -- 30,000
Other $(22,000) --
Tax benefits from losses not recognized -- 737,300
------------------------------------------------------------------------
$-- $74,600
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
The valuation reserve increased by $870,300 during the nine months ended
September 30, 1998 and decreased by $342,900 during the year ended December 31,
1997. At September 30, 1998, the Company established a 100% valuation allowance
for the gross deferred tax asset in the U.S. since management could not
determine that it was more likely than not that the deferred tax asset can be
realized.
11. 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. There were no matching contributions during the year ended December 31,
1997, or the nine-month period ended September 30, 1998.
12. 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
Small Cap 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.
13. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128, EARNINGS PER
SHARE. The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
F-24
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED 9 MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
NET INCOME (LOSS) - NUMERATOR 1997 1997 1998
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss) ($4,591,200) $230,000 ($2,473,200)
Preferred stock dividends (1) -- -- (435,700)
- ---------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) applicable to common stock ($4,591,200) $230,000 ($2,908,900)
- ---------------------------------------------------------------------------------------------------------------
COMMON SHARES - DENOMINATOR
Basic weighted average common shares outstanding 3,883,300 3,713,000 4,802,300
Options and warrants -- 77,900 --
- ---------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 3,883,300 3,790,900 4,802,300
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes deemed dividend on preferred stock convertible at a discount
of $416,700
14. SEGMENT REPORTING
NHancement adopted SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, during 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different products and serves different markets.
NHancement's reportable operating segments include Voice Plus and Infotel. Voice
Plus a systems integrator and distributor of voice processing equipment
operating in the U.S., provides equipment installation, technical support and
ongoing maintenance. Voice Plus derives substantially all of its revenue from
sales in the U.S. Infotel, a provider and integrator of infrastructure
communications equipment products, operating in Asia, provides radar system
integration, turnkey project management services and test instrumentation,
Infidel derives substantially all of its revenue from sales in Asia.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
September 30, 1998(1)
- ------------------------------------------------------------------------------------------------------------------------------
VPI INFOTEL OTHER(2) TOTAL(4)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales to external customers $6,391,700 $3,036,000 $14,500 $9,442,200
Income (loss) from continuing operations (1,100,000) 94,400 (517,600) (1,523,200)
Interest Income 37,300 15,000 24,600 76,900
Interest Expense (97,900) -- (41,000) (138,900)
Tax expense 1,800 69,000 -- 70,800
Total assets 4,165,400 5,488,600 3,217,300 12,871,300
Depreciation and Amortization (3) 884,700 88,600 10,300 983,600
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
(1) The data presented for 1998 represents the nine-month period from January
1, 1998 through September 30, 1998, except for the Infotel data that
represents the period from acquisition on June 22, 1998 through September
30, 1998.
(2) Other includes corporate expenses. Additionally, management's reports
include goodwill for Infotel in total assets.
(3) VPI includes goodwill impairment loss of $525,000 and amortization of the
excess of costs over net assets acquired of $225,000.
(4) The data presented does not include the loss on the sale of Advantis or the
loss from its Advantis' operations.
<TABLE>
<CAPTION>
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
VPI INFOTEL OTHER(2) TOTAL(4)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales to external customers $8,714,800 $ -- $23,000 $8,737,800
Income (loss) from continuing operations (3,694,300) -- (900,000) (4,594,300)
Interest Income 37,700 -- 99,200 136,900
Interest Expense (43,900) -- (34,000) (77,900)
Total assets 3,584,100 -- 2,726,100 6,310,200
Depreciation and Amortization(1) 4,794,100 -- 14,500 4,808,600
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) VPI loss includes an impairment loss $4,084,300 and amortization of the
excess of costs over net assets acquired of $564,800.
(2) Other includes corporate expenses.
(3) The data presented does not include the operations and assets of Advantis.
15. DISPOSAL OF ADVANTIS
On September 30, 1998 the Company sold its Advantis operations. The measurement
date is September 24, 1998 and the disposal date is September 30, 1998, The loss
from operations as of the measurement date to the disposal date was immaterial.
Three of the former stockholders of Advantis entered into a guarantee agreement
pursuant to which each such stockholders agreed to guarantee repayment of the
outstanding loan of $300,000 made by the Company to Advantis (together with all
the interest accrued to date) pursuant to a loan agreement and related
promissory notes dated July 7, 1997 (Note 2). In exchange, the Company delivered
all of the Advantis shares and transferred its ownership interest in Advantis to
the original stockholders in full and final settlement of any and all damages
the Company may have suffered as a result of the breaches of certain
representations and warranties made by the three former Advantis stockholders
who signed the guarantee pursuant to that certain agreement for the sale of
shares in Advantis dated June 20, 1997. Revenues from Advantis were $569,500 and
$245,200 for the nine months ended September 30, 1998 and the year ended
December 31, 1997.
16. DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
On February 3, 1997, the Company issued 1,312,500 shares of its Common Stock and
$1,500,000 in promissory notes for all the outstanding shares of Voice Plus
pursuant to a purchase and plan of merger agreement (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 (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 (Note 1).
On April 13, 1998, the Company issued 12,500 shares of preferred stock with a
25% conversion discount (Note 5). The 25% conversion discount has been
reflected as a preferred stock dividend and has resulted in a
F-26
<PAGE>
$416,700 increase in the loss applicable to common stockholders. From April 13,
1998 through September 30, 1998, $732,500 of preferred stock (9,300 preferred
shares) and $11,500 of dividends on preferred stock were converted into 7,100
shares of common stock.
On June 22, 1998, the Company acquired all outstanding shares of Common Stock of
Infotel Technologies (Pte) Ltd. In exchange for approximately 433,000 shares of
the Company's Common Stock with an estimated value of $1,840,400 and $2,356,300
in cash. Additionally, management accrued additional purchase consideration of
$1,390,400 based on Infotel's profits through June 30, 1998.
During the nine months ended September 30, 1998, the Company financed the
purchase of $133,200 of computer equipment through capital leases.
17 SUBSEQUENT EVENTS:
On January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly
created vacancy on the Board of Directors of NHancement. Subsequently at the
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board. On
January 6, 1999, Mr. Goei resigned his positions as President and CEO
pursuant to the terms of Separation Agreement approved by the Board of
Directors, which modifies the terms of his Employment Agreement.
Subsequently, Mr. Goei also resigned both from his position as Chairman of
the Board and as a Board member. In exchange for Mr. Goei's resignation, the
Company has agreed to a severance package with the following principal terms
(i) six and one-half months of regular pay at his current rate, (ii) Mr. Goei
will continue to receive benefits under the Company's medical and group
insurance plans through May 15, 1999, (iii) Mr. Goei to have use of the
Company paid leased automobile through the end of the lease term in July
1999, (iv) the Company will reimburse moving expenses of approximately
$70,000, (v) the Company will issue warrants to purchase 50,000 shares of
NHancement Common Stock at the current fair market price, and (vi) Mr. Goei
and the Company agree to a mutual waiver of all claims related to Mr. Goei's
employment. On January 6, 1999, Mr. Douglas S. Zorn was appointed Interim
President and CEO.
In October 1998, the Company secured a line of credit, with a monthly rate of
2.75%, providing for borrowings of up to 80% of eligible accounts receivable
not to exceed $1 million, expiring in March 1999, with the option to renew
for an aditional year. In January 1999, the Company's available line of
credit was increased to $2 million and restrictions were eased on the types
of receivables eligible for inclusion in the Company's borrowing base.
F-27
<PAGE>
[INTERACTIVE INTELLIGENCE LOGO]
RESELLER AGREEMENT
THIS RESELLER AGREEMENT (this "Agreement"), effective July 8, 1998
(hereinafter "Effective Date") by and between Interactive Intelligence, Inc.
(hereinafter "Publisher"), a corporation organized under the laws of Indiana,
with principal offices located at 3500 DePauw Blvd., Suite 1060,
Indianapolis, IN 46268, and NHancement Technologies Inc. (hereinafter
"Reseller"), a corporation organized under the laws of Delaware, with
principal offices at 39420 Liberty Street, Suite 250, Fremont, CA 94538.
WITNESSETH:
WHEREAS, Publisher is willing to supply Reseller with software and related
training and certification to allow Reseller to deliver Publisher's
client/server computer telephony software (the "Products") to end-user
customers;
WHEREAS, Reseller represents that it is in the process of developing certain
members of its workforce to become technically skilled and experienced at
marketing, licensing and supporting client/server computer telephony
solutions of the type for which it is to be appointed as a reseller by
Publisher;
WHEREAS, Reseller either operates directly, has majority-owned subsidiaries
or controls certain affiliated companies which operate, offices for
consulting, selling and/or supporting the Products at locations identified at
Exhibit A attached hereto and made a part hereof (the "Authorized Locations")
or such other locations that may be identified and mutually agreed to from
time to time, which Reseller represents have facilities and competently
trained staff necessary for the marketing, sales and support of such Products;
WHEREAS, Reseller wishes to procure the rights to produce copies of the
Products from a master copy provided by Publisher in order to provide
solutions to its customers which may include the fulfillment of software,
hardware, consulting services, implementation services, support and/or
training as an authorized reseller of the Products under the terms and
conditions of this Agreement;
NOW, THEREFORE, the parties agree as follows:
SECTION 1
DEFINITIONS
When used in this Agreement, the following capitalized terms shall have the
meanings set forth in this Section:
1.1 "PROGRAM LEVEL." Publisher appoints resellers at one of two Program
Levels, either "Reseller Partner" or "Premier Partner" depending upon
Reseller's qualifications and level of commitment to Publisher. Premier
Partner shall execute and abide by the Premier Partner terms as defined in
Exhibit B, attached hereto and made a part hereof.
1
<PAGE>
1.2 "PROGRAM LICENSE FEE." Publisher's annual fee for active, ongoing
participation in one of Publisher's reseller programs as listed in the
then-current Reseller Price list and as amended from time to time by
Publisher.
1.3 "PRODUCTS." Publisher's software packages consisting of (1) program
code in machine-readable form recorded on electronic media; (2) a copy of the
standard end-user documentation for such programs; (3) an End-User License
Agreement setting forth license terms and establishing the rights and
obligations of an End-User with respect to such programs; and (4) other
written materials or electronic media relating to the programs and
documentation, in a form ready to be supplied to customers of Reseller.
1.4 "END-USER." Customer of Reseller who has executed an End-User
License Agreement and who has acquired Products directly from the Reseller
for its own use (and not for resale, re-marketing, timesharing, or service
bureau use) in accordance with the terms of Publisher's End-User License
Agreement.
1.5 "RESELLER PRICE LIST." A list of Publisher's prices to be paid by
Reseller, for program and Products and as amended from time to time by
Publisher.
1.6 "TECHNICAL SUPPORT." Technical assistance provided by Reseller
through telephone support or at Reseller's locations relating to installation
or use of Products by End-Users. Technical Support is to be provided by
personnel of Reseller who have been trained and certified by Publisher.
1.7 "PUBLISHER'S WARRANTY." The limited warranties with respect to the
Products as defined in Section 9 hereof.
SECTION 2
RESELLER'S APPOINTMENT
2.1 APPOINTMENT OF RESELLER. Publisher hereby appoints Reseller as a
reseller of the Products at the Authorized Locations specified in Exhibit A
or such other locations as may be identified and mutually agreed upon from
time to time, subject to the terms and conditions hereof. Reseller shall be
authorized to market, license, install, support and/or deliver services based
on Products at the Authorized Locations. With regard to the geographical area
in which Reseller can resell the Products from each specified Authorized
Location, it is agreed and understood that Reseller can resell the Products
to any location in North America. At such time as Reseller can reasonably
demonstrate to Publisher that Reseller has the ability to market, license,
install and support the Products to End-Users in other countries, Reseller
shall be permitted to apply for authorization to carry on such activities in
such countries by signing a copy of the Interactive Intelligence
International Reseller agreement.
2.2 PROGRAM LEVEL. The terms of Publisher's appointment of Reseller,
and Reseller's rights, shall be at the Program Level of "Reseller Partner" as
defined by the current reseller program and as amended from time to time by
Publisher at its discretion, unless and until Publisher and Reseller have
mutually executed Exhibit B.
2.3 NON-EXCLUSIVE. While this Agreement is in effect and at all times
thereafter, Publisher shall have the unrestricted right to appoint other
resellers to license the Products for installation in any industry or
territory, including those in which Reseller operates. Publisher will not
2
<PAGE>
appoint a Reseller's End User to license the products as a Reseller partner
without written notification to Reseller.
SECTION 3
RESELLER'S OBLIGATIONS
3.1 PROGRAM APPLICATION. Reseller represents and warrants that all the
information provided on its membership application for the Publisher's
reseller program is true and correct and warrants that the information will
continue to be so during the term of this Agreement. Should there be any
material changes in such information during the term of this Agreement,
Reseller agrees to promptly inform Publisher in writing, detailing such
changes.
3.2 BUSINESS PLAN. Reseller shall submit an annual business plan for
approval by Publisher within 30 days of the Effective Date or date of renewal
of this Agreement using Publisher's then-current business plan form. Reseller
acknowledges that a failure to submit such business plan may be grounds for
termination or non-renewal of this Agreement. Reseller represents that it will
use its best good faith reasonable business efforts to develop and implement
such business plan as approved by Publisher, provided, however, that the
failure to meet the goals or projections set forth in such annual business
plan shall not, of itself, constitute grounds for termination of this
Agreement.
3.3 DEMONSTRATION FACILITIES. Reseller shall maintain at its cost and
expense suitable demonstration facilities at which Products will be installed
within 90 days of the Effective Date of this Agreement. Such facilities
shall be comprised of appropriate compatible servers and associated
peripheral equipment and system software in good and operating condition.
3.4 CERTIFIED PERSONNEL. Reseller warrants that at all times it will
employ a sufficient number of, but in no event less thant two (2), full-time
technicians and one (1) full-time sales professional trained and certified by
Publisher on the Products, subject to the need from time to train
replacements for former or disabled employees. Reseller further warrants that
it will maintain at least one engineer trained and certified on the Products
at each Authorized Location located more than 250 miles from Reseller's
principal offices, or have a Publisher approved plan for providing local
service and support for these areas. Reseller shall bear the expense of such
training including travel, lodging, and personnel costs of Reseller's
employees.
3.5 TECHNICAL SUPPORT. Reseller agrees to offer first-level Technical
Support of Products for its customers, billable at Reseller's discretion at
reasonable terms and conditions, as follows: (i) Reseller shall provide
Technical Support to its customers, whether over the telephone, via
electronic mail, the internet or otherwise, regarding the use of Publisher's
Products; and (ii) Reseller shall offer and make available such Technical
Support to its customers 24 hours-per-day, 7 days-per-week. Any Technical
Support provided by Reseller to End-Users shall be provided by personnel of
Reseller that have been trained and certified by Publisher. Publisher shall
provide back-up support on a customer-by-customer basis only for those that
(i) have Product currently under Publisher's Warranty, or (ii) that have
purchased a maintenance version of a software license for which Reseller has
paid Publisher. At its sole discretion, Publisher may refer back to Reseller
for Reseller's prompt handling of any inquiries received by Publisher from
Reseller's customers.
3.6 CUSTOMER SATISFACTION. Reseller agrees to maintain an acceptable
level of customer satisfaction. Publisher reserves the right to contact
3
<PAGE>
Reseller's customers directly from time to time and survey Reseller's
customers for overall satisfaction.
3.7 SALES QUOTA. Reseller acknowledges that a failure to achieve the
minimum volumes defined in Exhibit C may be grounds for termination of this
agreement. With regard to Reseller's status as a Premier Partner, Publisher
shall be entitled to evaluate Reseller's progress quarterly. In the event
that Reseller fails to meet the Sales Quota for two (2) consecutive quarters,
Publisher may notify Reseller in writing that Reseller has been placed on a
minimum six (6) month probation as a Premier Partner. Reseller shall then
submit to Publisher, within thirty (30) days of such notice, a satisfactory
plan to meet the Sales Quota as a Premier Partner. If Publisher determines,
in it's good faith discretion, that Reseller has not made satisfactory
progress within the probation period, or has not met the applicable Sales
Quota for four (4) consecutive quarters following the probation notice, then
Publisher may terminate this agreement upon ten (10) days written notice to
Reseller. If Reseller achieves the assigned Sales Quota for Premier Partner
status for the following two (2) consecutive quarters, Reseller shall be
re-instated as a Premier Partner.
3.8 ORDERS. Reseller shall prepare and submit orders to Publisher
within two (2) business days of having received a valid order, contract or
End-User License Agreement from an End-User customer. Reseller's orders shall
be submitted (by written correspondence, electronic form, e-mail, or
facsimile) using Publisher's standard order form consistent with the terms
hereof and as otherwise approved by Publisher. Upon acceptance by Publisher,
Reseller's orders shall constitute binding commitments to accept and pay for
the number and type of Products stated therein, in accordance with the terms
and conditions hereof. Any terms or conditions contained in Reseller's
orders other than the number and type of Products that Reseller is ordering
shall not be binding unless accepted in writing by Publisher. Any conflict
between the terms and conditions of this Agreement and the terms and
conditions of any order or other communication submitted by Reseller to
Publisher shall be resolved in favor of the terms and conditions of this
Agreement.
3.9 END-USER DELIVERABLES. Reseller agrees to provide each End-User
with all Product warranty terms, limitations of liability, and license terms
as defined and provided by Publisher. Reseller further agrees to deliver
Products to each End-User in their entirety, reproduced accurately in their
current release on quality materials and free from any and all defects in
accordance with the original Products as provided by Publisher.
3.10 RETURN OF PRODUCTS. Reseller agrees to accept returns of opened
Products that are defective provided the Publisher's Warranty covers same and
Publisher performs all warranty obligations to Reseller. Opened Products that
are returned to Reseller by its customers solely by reason of defects may be
returned to Publisher, insured and shipping prepaid by Reseller, for
processing in accordance with the warranty provisions of this Agreement.
3.11 COMPLIANCE WITH LAWS. Reseller warrants that it shall, at its own
expense, (i) comply with any and all laws applicable to its activities and
obligations under this Agreement and (ii) without limiting the generality of
the foregoing, obtain and maintain in force at all times all licenses,
registrations and other reports and authorizations applicable to Reseller's
activities and obligations under this Agreement.
SECTION 4
RESELLER INTERNAL-USE SOFTWARE
4.1 DEVELOPER LICENSE. During the term of this Agreement, Publisher
grants Reseller a non-exclusive, non-transferable, royalty-free, software
4
<PAGE>
license of Product, which shall terminate with the termination of this
Agreement (the "Developer License") for: (i) use in prototyping and/or
developing custom applications; (ii) providing demonstrations to End-Users
and potential End-Users; and (iii) testing and debugging such applications.
This Developer License is for Reseller internal-use only and is limited to:
(a) a single server license at each Authorized Location and; (b) a total of
five (5) Call Center User Licenses. The Developer License is software only
and does not include required hardware.
4.2 RESELLER'S INTERNAL-USE LICENSE. During the term of this Agreement
Publisher shall license the Products to Reseller, pursuant to the execution
of an End-User License Agreement, solely for Reseller's internal use (the
"Reseller End-User License"). The Reseller End-User License shall survive
termination of this Agreement. While this Agreement is in effect, Reseller
may purchase non-exclusive, non-transferable, royalty-free, terminable
Reseller End-User Licenses and maintenance at a discount of 50% on the
then-current List Price as defined in the Reseller Price List. The Reseller
End-User License is software only and does not include required hardware.
Upon termination of this Agreement any further obligations of Publisher with
respect to the Products subject to the Reseller End-User License shall be at
the then-current List Price.
4.3 DEMONSTRATION SOFTWARE. Reseller may use multiple copies of each
Product at any Authorized Location for demonstration purposes. Further,
full-time representatives of Reseller may use copies of each Product in the
field for demonstrations.
SECTION 5
LEAD DISTRIBUTION AND REPORTING
5.1 LEAD DISTRIBUTION. Publisher may, at its discretion, transmit lead
information to Reseller. Reseller agrees to take appropriate action regarding
said leads within ten (10) business days of receipt of such information from
Publisher. Should Reseller fail to act upon leads provided by Publisher, then
Publisher reserves the right to reassign any such leads to another reseller,
or act directly thereupon for its own benefit. Nothing herein obligates
Publisher to provide lead information to Reseller, other than to Premier
Partners as defined in Exhibit B.
5.2 FOLLOW-UP REPORTS. Reseller agrees to submit follow-up reports to
Publisher, in a manner to be prescribed by Publisher, that explain the status
of leads supplied to Reseller by Publisher.
5.3 FORECAST REPORTS. Reseller agrees to submit monthly revenue
forecast reports to Publisher, in a manner prescribed by Publisher and as
amended from time to time by Publisher, that detail the status of Reseller's
prospective business for Publisher's products.
SECTION 6
PRICING AND PAYMENT
6.1 PROGRAM LICENSE FEE. Reseller shall pay Publisher an annual Program
License Fee according to the then-current Reseller Price List as defined by
Publisher. Publisher reserves the right to amend the Reseller Price List at
any time upon thirty (30) days prior written notice to Reseller. If Reseller
and Publisher renew this Agreement (and executed Exhibits, if any), pursuant
to Section 11.1 hereof, then the current Program License Fee shall be due and
payable on each anniversary of the Effective Date. Reseller shall be
responsible for paying any taxes
5
<PAGE>
applicable to such licenses, except those assessed on the net income of
Publisher.
6.2 RESELLER TRANSFER PRICE. The Reseller Transfer Price shall be in
accordance with Publisher's then-current Reseller Price List (referred to
herein as "Reseller Transfer Price"). All published prices are transfer
prices only. Publisher may increase or decrease its Reseller Transfer Prices
at any time upon thirty (30) days prior written notice to Reseller. Any such
change will apply to purchase orders placed with Publisher after the
effective date of such change. Reseller shall have the benefit of any price
decrease on accepted orders the scheduled shipment date for which is at least
thirty (30) days following the effective date of the price decrease, and
provided Reseller submits a change order notice to Publisher to effect such
change.
6.3 PAYMENT TERMS. All payments hereunder shall be made in U.S.
dollars within thirty (30) days from date of invoice. Late payments, except
as excluded in paragraph 7.3, are subject to a late payment charge of two
percent (2%) per month. Reseller shall receive a discount of one and one-half
(1 1/2%) from the then-applicable Transfer Price if Reseller's Order, as
submitted in accordance with Section 3.8 hereof, is accompanied by payment
for such order.
6.4 TAXES. Reseller shall be responsible for, and shall hold Publisher
harmless from, the payment of any taxes applicable with respect to the
Products provided hereunder, except for taxes imposed on the net income of
Publisher. Reseller shall provide Publisher with a current copy of Reseller's
permit showing that sales of Products to Reseller hereunder are exempt from
any state or local sales or use tax.
SECTION 7
PUBLISHER'S DELIVERY OF PRODUCTS
7.1 SHIPMENT AND PACKING. Unless otherwise agreed, Publisher shall, at
its expense, promptly fill Reseller orders and package Products in accordance
with Publisher's customary procedures. Reseller shall bear sole
responsibility for all other costs and expenses associated with shipment of
Products. Unless Reseller designates a preferred carrier, shipment shall be
by a carrier selected by Publisher. Products shall be shipped F.O.B. point of
shipment. Risk of loss of the tangible embodiment of the Products shall pass
to Reseller at the time of delivery to Reseller.
7.2 INVOICES. Publisher shall invoice Reseller upon receipt of order
for all Products ordered or upon shipment, whichever is later.
7.3 DELIVERY. Publisher shall devote reasonable efforts to ship the
Products within ten (10) days after receipt and acceptance of the order
pertaining to such Products.
SECTION 8
PROPRIETARY RIGHTS OF PUBLISHER
8.1 NO TRANSFER OF RIGHTS. All use of the Products by Reseller shall be
subject to the terms and conditions of the End-User License Agreement
included with each Product. This Agreement shall not be construed to grant to
Reseller any right, title, or interest in any intellectual property rights
embodied in or associated with the Products or any right to copy or modify
the Products except as set-forth in this Agreement. Under no circumstances
shall Reseller decompile the object code portion of the Products to a source
code version.
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<PAGE>
8.2 PROHIBITION ON LOANS OR ACCESS. Reseller agrees not to loan, rent,
or provide access to the Products, for a fee or otherwise, to any third party
for the purpose of any execution, use, or copying of such Products not
authorized by the End-User License included with each Product.
8.3 SURVIVAL OF PROVISIONS. The provisions of this Section 8 shall
survive termination of this Agreement for any reason.
SECTION 9
LIMITED WARRANTY; LIMITATION OF LIABILITIES AND REMEDIES
9.1 SCOPE OF WARRANTY; DISCLAIMER. Publisher warrants that, for the
term of one year from the execution of this Agreement and in accordance with
Section 9.4 hereof, the Products shall conform to the technical and
operational specifications set forth in its then-current Product
specifications, and shall be free in material respects from defects in
material and workmanship; provided, however, that the foregoing warranties
are expressly contingent (and shall otherwise be void) upon installation and
use of the Products strictly in accordance with such specifications and
without Reseller's misuse, damage, alteration, or modification thereto.
Publisher further warrants that it owns or has the right to license the
Products and enter into this Agreement. Warranty on any third party products
provided to Reseller by Publisher will be provided by the original
manufacturer of those products. THE WARRANTIES SET FORTH IN THIS SECTION 9.1
ARE IN LIEU OF ALL OTHER WARRANTIES AND PUBLISHER DISCLAIMS ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
9.2 EXCLUSIVE REMEDY. As Reseller's exclusive remedy for any defect or
nonconformity in the Product, Publisher shall at Publisher's expense,
promptly repair or replace the Products containing such defect or
nonconformity (referred to hereinafter as "Affected Products"). In
furtherance of such undertaking, if Reseller reasonably believes that any
Product contains a defect or nonconformity for which Publisher is
responsible, Reseller shall inform Publisher of the nature of such defect or
nonconformity in reasonable detail and shall request authorization from
Publisher to return the Affected Products to Publisher for repair or
replacement. All Products so returned shall be shipped prepaid to Publisher's
facility or authorized service center. If Publisher fails to repair or
replace the Affected Products within a reasonable time after Reseller has so
returned them to Publisher, Reseller shall be entitled to repayment or credit
of the original price of the defective or nonconforming Product as its
exclusive further remedy.
9.3 LIMITATION OF LIABILITY. The liability of Publisher to Reseller
for any claim whatsoever related to the Products or this Agreement, including
any cause of action sounding in contract, tort, or strict liability, shall
not exceed the total amount of payments made to Publisher hereunder in
connection with the individual sale from which the claim arose. Regardless of
any other breach hereunder or any other claim by Reseller against Publisher,
Publisher in no event shall be liable to Reseller for any loss of profits;
any incidental, special, exemplary, or consequential damages; or any claims
or demands brought against Reseller by any other party (except as
specifically provided in Section 9 hereof), regardless of whether Publisher
has been previously advised of the possibility of such claims or demands. The
foregoing limitation shall not apply in the event of willful misconduct by
Reseller in connection with misappropriation, disassembling, decompiling or
reverse engineering of any of the Products, or any portion thereof, by
Reseller, or willful misconduct by Publisher in connection with its
obligations hereunder.
7
<PAGE>
9.4 REPORTING OF WARRANTY CLAIMS. Reseller shall report all claims
based on breach of Section 9.1 hereof, including all defects or
non-conformities in the Products, to Publisher within the warranty period. In
its report to Publisher, Reseller shall describe the nature of its claim in
reasonable detail and shall specifically identify all Affected Products and,
if such claim arose after Reseller's delivery of such Products to its
customers, the identity of the customers having purchased any Affected
Products and the date of delivery or shipment of such Products by Reseller to
such customers. Reseller shall be entitled to no remedy at law or equity with
respect to any claim that Reseller has failed to report within such
limitations period.
9.5 WARRANTY TO END-USERS. Warranties and limitations on warranties
and related license terms respecting undertakings to End-Users of the
Products shall be as set forth in the End-User License Agreement included
with the Products, which warranties shall be no less extensive than as
contained herein, and which limitations on warranties shall be no less
restrictive than as contained herein. Reseller shall be entitled to assert
any breach of warranty claims that an End-User might have on behalf of that
End-User during the period in which End-User is covered by the warranty of
Publisher.
SECTION 10
INDEMNITIES
10.1 INDEMNITY BY PUBLISHER. Notwithstanding any other provision of
this Agreement, Publisher hereby indemnifies and shall hold harmless Reseller
from and against any claim, actions, costs, losses, and liabilities
(including, without limitation, reasonable attorney's fees) arising from
allegations that the Products supplied hereunder infringe any U.S. patent,
trademark, copyright or trade secret rights of any third party, and Publisher
shall pay resulting reasonable costs, damages, and attorney fees finally
awarded by a court of competent jurisdiction.
10.2 INDEMNITY BY RESELLER. Reseller hereby indemnifies and shall hold
harmless Publisher from and against any and all claims, actions, costs,
losses, and liabilities based on or arising out of (i) any false or
misleading statements made by or on behalf of Reseller to an End-User with
respect to the Products, except for statements that are a direct and correct
reference to information in the Product documentation and marketing materials
provided by Publisher, or (ii) any willful misconduct in connection with
the misappropriation, disassembling, decompiling, or reverse engineering of
any of the Products, or any portion thereof, by Reseller, or (iii) any
willful misconduct by Reseller constituting a material breach or violation
hereof by Reseller, and Reseller shall pay resulting reasonable costs,
damages, and attorney fees finally awarded by a court of competent
jurisdiction.
10.3 CONDITIONS TO INDEMNIFICATION. The foregoing indemnities are in
addition to rights otherwise arising hereunder, but shall be expressly
contingent on (i) the party seeking indemnify providing prompt notice to the
indemnifying party of any claim, demand, or cause of action for which
indemnity is sought and (ii) the indemnifying party shall fully control the
defense, negotiations or settlement of any and all claims, demands, or
actions.
8
<PAGE>
SECTION 11
TERM AND TERMINATION
11.1 TERM OF AGREEMENT. This Agreement shall commence on the Effective
Date, and shall continue for the period of two years (the "Initial Term").
The Program License Fee will remain annual and will be invoiced annually. All
Exhibits initially or subsequently executed by both parties as relate to this
Agreement shall become effective as of the date such Exhibits are accepted by
Publisher. This Agreement shall be extended automatically for successive one
(1) year terms unless one party notifies the other in writing of termination
at least 6 months prior to the anniversary date hereof. Notwithstanding the
foregoing, Publisher may assign Reseller a revised annual Sales Quota,
established in good faith and consistent with revisions applicable to other
resellers at the same Program Level, in writing for each succeeding one (1)
year term.
11.2 TERMINATION FOR CAUSE. Either party may terminate this Agreement
if the other party commits a material breach of any of the terms hereof which
is subject to cure by providing the other party with 30 days' written notice
of such termination, including the nature of the breach upon which such
notice is based. If the party receiving such notice cures the alleged breach
within said 30-day period, the notice shall be deemed null and void.
Notwithstanding the above, this Agreement shall terminate immediately without
notice in the event of any of the following: (i) Reseller reverse engineers,
disassembles or decompiles any Product to a source code version, or attempts
the same; or (ii) Reseller impermissibly transfers or assigns its rights or
rights to the Products.
11.3 CONTINUING OBLIGATIONS. Notwithstanding termination or expiration
in the Agreement, Reseller's obligation to pay for all Products provided
hereunder shall continue. Any obligations, duties, or rights that by their
nature extend beyond the expiration or termination of this Agreement,
including Reseller's right to provide support, maintenance, development,
upgrades and enhancements to Products, shall survive any expiration or
termination and remain in effect and Publisher shall provide such technical
support as may be reasonably required at Publisher's then-current fee
structure to enable Reseller to exercise such rights for inventory on hand at
time of notice of termination.
SECTION 12
MISCELLANEOUS
12.1 NOTICES. All notices, demands, or other communications between
the parties hereunder shall be in writing (by mail or facsimile) or
electronic transmission as and when permitted by this agreement, postage or
transmission costs prepaid, and shall be addressed to the parties at their
Notice Addresses set forth below. All such notices, orders, acceptances and
communications shall be deemed properly given when received by the party to
whom it is addressed.
Until changed by written notice given in accordance with the terms of this
Agreement, the Notice Addresses of the parties shall be as follows:
9
<PAGE>
<TABLE>
<CAPTION>
PUBLISHER: RESELLER:
<S> <C>
Interactive Intelligence, Inc. NHANCEMENT Technologies Inc.
3500 Depauw Blvd., Suite 1060 39420 Liberty St., Suite 250
Indianapolis, IN 46268 Fremont, CA 94538
Phone No. : 317-872-3000 x134 Phone No.: 510-744-3333
Fax No.: 317-872-3000 Fax No.: 510-744-3388
E-mail: [email protected] E-mail: [email protected]
[email protected]
Attention: Director, Channel Dev. Attention: Douglas Zorn, Exec Vice
President & CFO
James Linkous, Vice
President, Sales
</TABLE>
12.2 TRADEMARKS. All trademarks, service marks, trade names, logos or
other works or symbols identifying the Publisher's Products or business (the
"Marks") are and will remain the exclusive property of the Publisher or its
licensors, whether or not specifically recognized or perfected under the laws
of the United States, or elsewhere. Reseller will not take any action that
jeopardizes Publisher or its licensors' proprietary rights or acquire any
rights in the Marks, except the limited use rights verified in this
Agreement. Reseller will not register, directly or indirectly, any
trademarks, service marks, trade names, copyrights, company name or other
proprietary or commercial right which is identical or confusingly similar to
the Marks.
Reseller may identify itself as an "Interactive Intelligence Reseller
Partner" or "Premier Partner," as applicable, and use the Marks designed by
Publisher in designation of the program in the United States and/or Canada in
connection with Reseller's activities under this Agreement. The appropriate
trademark symbol, either "-TM-" (standard trademark) or "-Registered
Trademark-" (registered trademark), shall be used whenever Publisher's
product name is mentioned in any advertisement, brochure, or material
circulated or published in any form whatsoever by Reseller. The appropriate
trademark symbol must be used in conjunction with, at least, the first
reference to each Publisher product in all Reseller circulation or
publications. Publisher reserves the right to amend any Mark and agrees to
notify Reseller of any such amendments that are relevant to Reseller's
business.
Publisher reserves the right to require Reseller to submit all related
Product advertising and marketing material to Publisher for review and
approval prior to use. Publisher also reserves the right to require Reseller
to discontinue use of any such advertising and marketing materials that
Publisher reasonably believes will have a detrimental effect on Publisher's
business.
12.3 CONFIDENTIALITY. Each party agrees that all source code,
inventions, algorithms, and know-how it obtains from the other, as well as
all other business, technical and financial information it obtains from the
other are the confidential property of the disclosing party ("Proprietary
Information"). Proprietary Information shall also include other information,
whether written or oral, that by its nature is such that the parties, being
sensitive to the need to protect the confidential information of the other,
should inquire as to its confidential status (unless upon inquiry the party
is advised that the information is not confidential). Except as expressly
allowed herein, the receiving party will hold in confidence and not use or
disclose any Proprietary Information except to employees for whom access is
necessary in order to perform their jobs in accordance with the purposes of
this Agreement, and even then all
10
<PAGE>
such employees shall be subject to written agreements similarly binding them.
Notwithstanding the foregoing, Proprietary Information shall not include any
information which (i) is or falls within the public domain without fault of
the recipient (ii) is hereafter rightfully obtained by the recipient from a
third party without breach of any obligation to the disclosing party; (iii)
the recipient independently develops by employees without access to or the
benefit of any Proprietary Information as shown by documentary evidence; or
(iv) is produced in compliance with applicable law or the requirement of any
judicial, legislative or regulatory authority, provided that the recipient
first gives the disclosing party written notice of such law or order in order
that the disclosing party may have an opportunity to object and/or attempt to
limit such production.
12.4 NO ASSIGNMENT. Reseller shall not assign this Agreement without
the prior written consent of Publisher other than to a successor for
substantially all its business, providing that such successor is not a direct
competitor of Publisher as determined in the sole discretion of Publisher.
Any such impermissible attempt by Reseller to assign any of the rights,
duties, or obligations of this Agreement without such consent is void.
12.5 SEVERABILITY. If any provision or provisions of this Agreement
shall be held to be invalid, illegal, or unenforceable, the validity,
legality, and enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
12.6 APPLICABLE LAW AND CONSENT TO JURISDICTION. This Agreement shall
be deemed to be made in the State of Indiana and shall in all respects be
interpreted, construed, and governed by and in accordance with the laws of
the State of Indiana without regard to principles of conflicts of law.
12.7 INDEPENDENT CONTRACTORS. The parties to this Agreement are
independent contractors and are not partners, co-venturers, agents or
representatives of each other. Neither party shall have the power to bind the
other, nor shall either party misstate or misrepresent its relationship
hereunder.
12.8 NO WAIVER. Neither party shall, by mere lapse of time, without
giving notice or taking other action hereunder, be deemed to have waived any
breach by the other party of any of the provisions of this Agreement.
Further, the waiver by either party of a particular breach of this Agreement
by the other shall not be construed as nor constitute a continuing waiver of
such breach or of breaches of the same or other provisions of this Agreement.
12.9 FORCE MAJEURE. Neither party shall be in default if its failure to
perform any obligation hereunder is caused solely by supervening conditions
beyond that party's reasonable control; provided, however, that in order to
avail itself of the excuse from performance under this Section, the party
seeking such excuse shall demonstrate diligence in attempting to remedy any
such supervening conditions.
12.10 EXHIBITS. All exhibits referred to in and attached to this
Agreement are a part of this Agreement and are incorporated herein by
reference.
12.11 ENTIRE AGREEMENT. The parties hereto acknowledge that this
Agreement is the complete and exclusive statement of their agreement and
supersedes all prior understandings and other communications between the
parties relating hereto. This Agreement may be amended only by a subsequent
11
<PAGE>
writing that specifically refers to this Agreement and that is signed by both
parties.
12.12 RESELLER'S APPROVAL. As long as Reseller is performing in
accordance with assigned quotas, Publisher will not license into the I3
Reseller Program, any organization, which has been established with Voice
Plus employees as its principals, for a period of one (1) year from the
termination date of said employee without the prior written consent of
VoicePlus.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized representatives as set for forth below.
<TABLE>
<CAPTION>
[PUBLISHER] [RESELLER]
<S> <C>
INTERACTIVE INTELLIGENCE, INC. NHANCEMENT TECHNOLOGIES INC.
By: By: /s/ Douglas S. Zorn
------------------------------- -----------------------------
Name: Name: Douglas S. Zorn
----------------------------- --------------------------
Title: Title: Executive VP & CFO
---------------------------- --------------------------
Date: Date: July 8, 1998
--------------------, 19 --- --------------------------
</TABLE>
12
<PAGE>
EXHIBIT A
RESELLER'S AUTHORIZED LOCATIONS
Reseller designates the following as outlets to be approved by Publisher as
Authorized Locations for marketing, selling, and supporting Publisher's
Products (attach list if more than six):
SEE ATTACHMENT A FOR ADDITIONAL LOCATIONS
Location Name/Number:_________________ Location Name/Number:_________________
Voice Plus ______________________________________
Name
39420 Liberty Street ______________________________________
Fremont, CA 94538 Street Address
______________________________________
City, State, Zip Code
Phone Number 510-744-3301 ______________________________________
Telephone Number
Contact James Linkous ______________________________________
Contact
E-mail [email protected] ______________________________________
E-mail
Location Name/Number:_________________ Location Name/Number:_________________
______________________________________ ______________________________________
Name Name
______________________________________ ______________________________________
Street Address Street Address
______________________________________ ______________________________________
City, State, Zip Code City, State, Zip Code
______________________________________ ______________________________________
Telephone Number Telephone Number
______________________________________ ______________________________________
Contact Contact
______________________________________ ______________________________________
E-mail E-mail
Location Name/Number:_________________ Location Name/Number:_________________
______________________________________ ______________________________________
Name Name
______________________________________ ______________________________________
Street Address Street Address
______________________________________ ______________________________________
City, State, Zip Code City, State, Zip Code
______________________________________ ______________________________________
Telephone Number Telephone Number
______________________________________ ______________________________________
Contact Contact
______________________________________ ______________________________________
E-mail E-mail
13
<PAGE>
EXHIBIT B
"PREMIER PARTNER" TERMS
By agreeing to and observing the terms and conditions of this "Premier
Partner" Exhibit, Reseller shall be designated at the Program Level of
"Premier Partner".
SECTION B-1
RESELLER'S OBLIGATIONS AS A "PREMIER PARTNER"
B-1.1 REQUIREMENTS COMMITMENT. Reseller shall, during the term hereof,
seek to procure from Publisher Reseller's entire requirements for products of
a same or similar type as the Products, except to the limited extent Reseller
is unable to satisfy its requirements for such products by obtaining Products
from Publisher.
B-1.2 SALES PROFESSIONALS. Reseller warrants that at all times it will
employ a sufficient number of, but in no event less than two (2), full-time
sales professionals that market and sell the Products, subject to the need
from time to time to train replacements for former or disabled employees.
Reseller further warrants that it will maintain at least one (1) sales
professional that markets and sells the Products at each Authorized Location
located more than 250 miles from Reseller's principal offices.
B-1.3 CERTIFIED TECHNICAL PERSONNEL. Reseller warrants that at all
times it will employ a sufficient number of, but in no event less than four
(4), full-time technicians trained and certified by Publisher on the
Products, subject to the need from time to time to train replacements for
former or disabled employees. Reseller shall bear the expense of such
training including travel, lodging, and personnel costs of Reseller's
employees.
SECTION B-2
RESELLER INTERNAL-USE SOFTWARE
B-2.1 RESELLER INTERNAL-USE LICENSE. Upon execution of this Exhibit,
Publisher grants Reseller a non-exclusive, non-transferable, royalty-free,
terminable software license of Product (the "Reseller Internal-Use License")
for internal-use only and limited to; (i) a single EIC Server Bundle license
for use at one (1) location and; (ii) a total of thirty (30) station and
corresponding Business User Plus workstation licenses. The delivery of the
Reseller Internal-Use License by Publisher is subject to the execution by
Reseller of an End-User License Agreement which shall contain the terms and
conditions of the Reseller End-User License. The Reseller End-User License is
software only and does not include required hardware. Reseller may purchase
additional licenses for internal-use at a discount of 50% of the then-current
List Price as defined in Section 4.2 of this Agreement.
SECTION B-3
SALES QUOTA
B-3.1 SALES QUOTA. Reseller acknowledges that a failure to achieve the
Sales Quota defined in Exhibit C may be grounds for termination as a "Premier
Partner" and related benefits and reassignment to the "Reseller Partner"
level, but shall not constitute a breach or default.
14
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Exhibit B to be executed
by their duly authorized representatives.
[Publisher] [Reseller]
Interactive Intelligence, Inc. NHancement Technologies Inc.
______________________________________ /s/ Douglas S. Zorn
Signature --------------------------------------
Douglas S. Zorn
______________________________________ Executive Vice President & CFO
Title
______________________________________ July 8, 1998
Date
15
<PAGE>
EXHIBIT C
RESELLER SALES QUOTA
Reseller shall maintain a minimum quarterly purchase volume during the term
of this Agreement (the "Sales Quota"). The Sales Quota is subject to change
and may be adjusted by Publisher upon renewal of this Agreement.
Following is the minimum quarterly and annual Sales Quota assigned to
Reseller under the terms and conditions of this Agreement:
VOICE PLUS--FREMONT________________________________VOICE PLUS--DALLAS______
Location Name/Number Location Name/Number
1st Q $100K 1st Q $ 0K
------------- ----------------------
2nd Q $100K_150K 2nd Q $ 0K
------------- ----------------------
3rd Q $150K_250K 3rd Q $ 50K
------------- ----------------------
4th Q $250K_250K 4th Q $ 50K
------------- ----------------------
VOICE PLUS--ARIZONA________________________________VOICE PLUS--UTAH______
Location Name/Number Location Name/Number
1st Q $ 0K 1st Q $ 0K
--- ---------- ----------------------
2nd Q $ 0K 2nd Q $ 0K
------ ------- ----------------------
3rd Q $ 50K 3rd Q $ 50K
--------- ---- ----------------------
4th Q $ 50K 4th Q $ 50K
------------- ----------------------
VOICE PLUS--NEW YORK_______________________________VOICE PLUS--GEORGIA______
Location Name/Number Location Name/Number
1st Q $ 0K 1st Q $ 0K
--- ---------- ----------------------
2nd Q $ 0K 2nd Q $ 0K
------ ------- ----------------------
3rd Q $ 50K 3rd Q $ 50K
--------------- ----------------------
4th Q $ 50K 4th Q $ 50K
------------- ----------------------
TOTAL SALES QUOTA: = $ 1,250,000
----------------------
***As an incentive to increase the productivity in all remote locations,
Reseller is hereby granted three (3) additional training credits for the
first year only. Note: Questions: These are wholly owned subsidiaries or
controlled affiliates. Billing will be centralized through NHancement
Technologies Inc. in Fremont, CA. Sales quotas can be aggregated and/or
allocated
IN WITNESS WHEREOF, the parties have caused this Exhibit to be executed
by their duly authorized representatives.
[Publisher] [Reseller]
Interactive Intelligence, Inc. NHancement Technologies Inc.
/s/ Douglas S. Zorn
- ---------------------------------- --------------------------------
Signature Signature
Douglas S. Zorn
- ---------------------------------- ---------------
- ----------------------------------
Name Name
- ----------------------------------
CFO
----------------------------------
Title Title EXEC. VP & CFO
- ---------------------------------- --------------------------------
Date Date July 8, 1998
16
<PAGE>
Exhibit A Attachment
Voice Plus
EXHIBIT A ATTACHMENT
Voice Plus
39420 Liberty St., Suite 250
Fremont, CA 94538
Voice Plus
- -----------------------------
8502 E. Via de Ventura, Suite 221
Scottsdale, AZ 85258
Voice Plus
1398 Linfield Drive
Roseville, CA 95678
Voice Plus
342 Madison Ave., Suite 1425
New York, NY 10173-2002
Voice Plus
5485 Belt Line Road, Suite 395
Dallas, TX 75240
Voice Plus
3607 S. Royal Scott Drive
West Valley, UT 84128
Voice Plus
10145 Bluejack Court
Roswell, GA 30076
Voice Plus
316 S. 52nd Street, Suite 106
Tempe, AZ 85281
Voice Plus
116 North Page Street
Portland, OR 97227
17
<PAGE>
[LOGO] NEC America, Inc.
1555 W. Walnut Hill Lane
Irving, Texas 75038-3796
Tel. 972-751-7000
June 1, 1998
Voice Plus, Inc.
39899 Balentine Drive, Suite 350
Newark, California 94560
ATTENTION: Douglas Zorn
The current term of your existing Associate Agreement will expire June 30,
1998. In accordance with Section 6, any revisions to be incorporated in the
Agreement upon renewal were to have been sent to you within thirty (30) days
prior to that date. However, several last minute changes have resulted in
delays in mailing the contract renewals.
Enclosed is the renewal Agreement with the following applicable product
appendices and exhibits. Any orders received after July 1, 1998 will be
deemed in accordance with this new agreement unless we receive written notice
to the contrary.
1. ATM Products Appendix (if applicable)
2. Video Teleconferencing Products Appendix (if applicable)
3. Key Telephone Products Appendix
4. NEAX-Registered Trademark-2000 IVS & NEAX1000 IVS/VSP products Appendix
5. NEAX-Registered Trademark-2400 Products Appendix (if applicable)
6. Active Voice Products Appendix
7. Customer Software License Agreement (Exhibit C)
8. CTI Products Appendix
Also enclosed is a new InProtect-SM- Extended Hardware Warranty Products
Appendix and the System Protection Plan Customer Contract and Site
Registration/Software License Agreement.
Please note that no changes have been made to either the territories defined
in your existing Agreement or the following product appendix and exhibits:
1. Centigram Products Appendix
2. Electronic Data Interchange Agreement (Exhibit A)
3. NECAM Leasing Services Product Appendix (Exhibit B)
If you should have any questions regarding the revisions to your agreement,
please feel free to contact Mary R. McCollum, Manager of Contract
Administration, at (972) 518-4917, or Liz D'Auria, Contract Administrator, at
(972) 518-4916.
We wish to thank you and your staff for the sales contribution and high
quality of representation of NEC products for the past year and for your
understanding regarding this contract renewal. We look forward to another
successful and mutually beneficial year.
Sincerely,
NEC AMERICA, INC.
CORPORATE NETWORKS GROUP
/s/ Douglas P. Wonson
Douglas P. Wonson
Sales Vice President & A.G.M.
cc: Contract Administration
Regional Vice President
<PAGE>
TABLE OF CONTENTS
ASSOCIATE AGREEMENT
<TABLE>
<CAPTION>
SECTION TITLE PAGE
<S> <C> <C>
1. Products; Services; Territory; Discount 1
2. Agreement to Supply 2
3. Purchase Orders; Order Acceptance; Credit 2
4. Payment; Service Charges for Payment Delinquency 4
5. Security Agreement 4
6. Term 5
7. Prices; Price Changes 6
8. Transportation 6
9. Inspection and Acceptance 6
10. Shipping and Billing 7
11. F.O.B.; Title & Risk of Loss 7
12. Shipping Interval 7
13. Associate's Services 8
14. Training 10
15. Reports 10
16. Termination 11
17. Rights Upon Termination 13
18. Cancellation of Purchase Orders;
Revocation of Acknowledgments 13
19. Non-Exclusive Market Rights 14
20. Infringement 14
21. Hardware Warranty 15
22. Software License and Software Warranty 17
23. Repair/Replacement of Products Not Covered
Under Warranty 20
24. Technical Support 21
25. Documentation 21
26. Advertising and Promotion 21
27. Force Majeure 22
28. Assignment 22
29. Tax 22
30. Government Contracts 23
31. Limitation of Liability 23
32. Limitation of Time Concerning Causes of Action 24
33. Choice of Law; Jury Waiver 24
34. Severability 24
35. Notices 25
36. Licenses 25
37. Trademarks 25
38. Non-Waiver 25
39. Survival of Obligations 26
40. Shortages 26
41. Limitation of Authority 26
42. Entire Agreement 26
</TABLE>
<PAGE>
EXHIBITS
Exhibit A, Electronic Data Interchange Agreement
Exhibit B, NECAM Leasing Services Product Appendix
Exhibit C, Customer Software License Agreement
APPENDICES (IF APPLICABLE)
Key Telephone Products Appendix
NEAX-Registered Trademark-2000 IVS & NEAX-Registered Trademark-1000
IVS/VSP Products Appendix
NEAX-Registered Trademark-2400 Products Appendix
Video Teleconferencing Products Appendix
CTI Software Products Appendix
ATM Products Appendix
Extended Warranty Products Appendix
<PAGE>
ASSOCIATE AGREEMENT
WHEREAS, NEC AMERICA, INC. ("NECAM"), a New York Corporation, with principal
offices at 1555 West Walnut Hill Lane, Irving, Texas 75038, and Voice Plus,
Inc., ("ASSOCIATE"), with offices at 39899 Balentine Drive, Suite 350,
Newark, California 94560, desire to enter into an agreement to govern the
purchase and sale of telecommunications products,
NOW, THEREFORE, in consideration of the mutual promises contained herein,
NECAM and ASSOCIATE agree as follows:
GENERAL TERMS & CONDITIONS APPLICABLE TO ALL PRODUCTS AND SERVICES
1. PRODUCTS; SERVICES; TERRITORY; DISCOUNT
(a) "PRODUCTS" and "SERVICES" as used herein shall mean products
and services listed in the PRODUCTS and SERVICES Appendices
attached hereto and made a part of this AGREEMENT. The "PRODUCTS"
shall be limited to the versions of hardware and software for the
products specified in such PRODUCTS Appendices. Notwithstanding
anything contained herein to the contrary, NECAM may refuse to
accept orders from ASSOCIATE for PRODUCTS which are the subject of
such Appendices herein unless and until ASSOCIATE can demonstrate
to NECAM's reasonable satisfaction that ASSOCIATE shall be able to
provide installation, maintenance and support services to
ASSOCIATE's customers for such PRODUCTS in accordance with NECAM's
standards, either by utilizing its own employees who have
successfully completed applicable NECAM training as provided
herein, or by utilizing the services of third parties who are
authorized and certified by NECAM (or a combination of both).
(b) Proprietary models of the PRODUCTS developed by NECAM and/or its
affiliates for third parties shall not be subject to sale to
ASSOCIATE pursuant to this agreement. As used herein, the term
"proprietary" shall mean models of the products developed by NECAM
and/or its affiliates, based upon unique and/or special design or
cosmetic specifications.
(c) In its sole discretion, NECAM may add additional types or enhanced
versions of PRODUCTS or SERVICES to the scope of this AGREEMENT.
(d) NECAM reserves the right to:
(1) discontinue the manufacture or distribution of particular
models of various types of PRODUCTS, or
1
<PAGE>
(2) change or modify specifications, features, models,
housings, and/or other aspects of PRODUCTS.
upon written notice to ASSOCIATE pursuant to Section 35;
(e) TERRITORY means the geographic area designated in each PRODUCT
Appendix.
(f) DISCOUNT means the discount designated in the applicable PRODUCT
Appendix.
2. AGREEMENT TO SUPPLY
(a) NECAM hereby appoints the ASSOCIATE as an NEC America, Inc.,
ASSOCIATE to sell and otherwise distribute PRODUCTS to end-user
customers and to provide installation, repair, maintenance,
training and related services solely in the TERRITORY designated
on the applicable PRODUCT Appendix. The ASSOCIATE agrees to
aggressively promote the sale and distribution of PRODUCTS within
the TERRITORY in accordance with the minimum purchase
requirements, which may be set forth in applicable PRODUCT
Appendices. The ASSOCIATE further agrees to provide first-class
installation, maintenance, repair and related services for such
PRODUCTS as set forth herein in accordance with highest industry
standards.
(b) When ordering PRODUCTS, ASSOCIATE shall fill out and include with
such of its orders as NECAM may designate, a Customer Software
License, Exhibit C, or such other form, as NECAM, in its sole
discretion, shall require.
(c) ASSOCIATE shall not sell, distribute, install or maintain PRODUCTS
outside of the TERRITORY defined in the applicable PRODUCTS
Appendices without the prior written consent of NECAM.
3. PURCHASE ORDERS; ORDER ACCEPTANCE; CREDIT
(a) Each purchase order submitted by ASSOCIATE shall specify model
types and quantities and shall specify accessories and options or
supplies (if applicable). In addition, such orders shall include:
(1) A description of the ordered PRODUCTS, inclusive of any
numerical/alphabetical identification referenced in NECAM's
respective brochures, manuals or publications regarding
such PRODUCTS.
(2) The requested delivery date.
(3) The applicable price (reflecting any applicable discount).
2
<PAGE>
(4) The location to which such PRODUCTS are to be shipped.
(5) A Customer Software License or such other form as may be
required pursuant to Section 2 (b) herein.
(6) If ordering PRODUCTS intended to be subject to government
contract provisions, the conspicuous notice required by
Section 30 (b) of this AGREEMENT.
(b) NECAM may accept Purchase Orders by electronic data exchange
provided the ASSOCIATE agrees in writing to the attached
Electronic Data Interchange Agreement, Exhibit A.
(c) The terms and conditions of this AGREEMENT shall apply to all
orders placed by ASSOCIATE for PRODUCTS described herein. In the
event of conflict between the terms or conditions of this
AGREEMENT and terms or conditions which may appear on the face or
reverse side of the ASSOCIATE's orders form or NECAM's
acknowledgment form, including but not limited to price or
discount terms or conditions, the terms and conditions of this
AGREEMENT shall control. NECAM hereby expressly rejects any
additional terms or conditions contained in ASSOCIATE's order
form, regardless of any language contained in ASSOCIATE'S order
form stating that NECAM's acceptance of the order constitutes
NECAM's acceptance of the inclusion of such additional terms or
conditions. If this AGREEMENT is silent as to a particular
subject, ASSOCIATE hereby agrees that the terms and conditions,
which appear on the reverse side of NECAM's acknowledgment, shall
control over the terms and conditions, which appear in the
ASSOCIATE's order form.
(d) Orders for PRODUCTS shall be considered accepted upon
acknowledgment by NECAM; PROVIDED, HOWEVER, that
(1) NECAM may revoke or alter its acknowledgment and acceptance
at any time within five (5) days after NECAM's
acknowledgment, or
(2) NECAM may withhold shipment of PRODUCTS to ASSOCIATE at any
time, if ASSOCIATE has failed to make timely payment for
any previous NECAM invoice for PRODUCTS or SERVICES.
(e) Nothing in this AGREEMENT shall be deemed to have established, or
have prevented the establishment of, suitable credit arrangements
between NECAM and ASSOCIATE. Such credit arrangements and/or
limitations shall be as reasonably determined by NECAM from time
to time, in its sole discretion.
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4. PAYMENT; SERVICE CHARGES FOR PAYMENT DELINQUENCY
(a) Payment for PRODUCTS and SERVICES is due sixty (60) days from
date of invoice.
(b) Payments received by NECAM after their due dates will be subject
to a monthly service charge, which service charge will accrue
against the sum of all late payments for such month, plus
outstanding amounts due from previous months (if applicable).
The rate at which the service charge will be computed will be:
(1) 2% above the Chase Manhattan Bank preferred lending rate
in existence as of the close of business on the last day
of the month for which NECAM's statement is rendered,
compounded monthly, or
(2) the highest interest rate permitted by applicable law,
whichever is less.
(c) Any payment by the ASSOCIATE which is less than
(1) the sum of all amounts owed by ASSOCIATE to NECAM for the
purchase of PRODUCTS and SERVICES, plus
(2) the total of all outstanding service charges may be
applied by NECAM within its sole discretion, to
ASSOCIATE's account chronologically, by invoice date. For
each such invoice, payment may be applied first to the
relevant service charge and then to the principal amount
of the invoice itself, regardless of contrary instructions
received from the ASSOCIATE. Service charges are due and
payable upon NECAM's issuance of a service charge invoice.
(d) In addition to NECAM's remedy concerning late payment(s) provided
in Section 4(b), NECAM may withhold or delay shipment(s) of the
ASSOCIATE's order(s) for PRODUCTS and SERVICES until any payment
owed by the ASSOCIATE to NECAM which is overdue is made in full.
5. SECURITY AGREEMENT
(a) In order to secure payment of ASSOCIATE's payment obligations
under this AGREEMENT, ASSOCIATE grants to NECAM a security
interest in the following:
(1) the PRODUCTS which ASSOCIATE purchases from NECAM,
(2) the proceeds of the sale, lease, installation, servicing,
repair or maintenance of all such PRODUCTS (including, but
not limited to, the related accounts)
(3) contract rights related to the sale or lease of any of the
PRODUCTS, and
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(4) the list of all customers to whom ASSOCIATE has sold or
leased NEC PRODUCTS or provided related installation,
servicing, repair or maintenance services.
(b) If ASSOCIATE defaults in its payment obligations to NECAM, NECAM
may, in its discretion, declare all such payment obligations
immediately due and payable, and in such event NECAM shall have
all the rights and remedies of a secured party under the UCC.
(c) Also, in such event, ASSOCIATE shall cooperate fully with NECAM's
exercise of its rights under this Security Agreement, including
but not limited to the turnover of all information required by
NECAM to enforce its security interests hereunder, including all
accounts receivable and customer records, and the notification of
customers directing that payments on accounts receivable be sent
directly to NECAM or its designee.
(d) ASSOCIATE agrees to promptly sign and return to NECAM all
documents which are deemed by NECAM to be necessary or prudent to
perfect or otherwise protect the priority, validity and
continuity of the security interest granted by ASSOCIATE to NECAM
in Section 5(a). Such documents may include (but not necessarily
be limited to) an appropriate UCC-1 form. In the event ASSOCIATE
fails to execute such document(s), then, to the extent permitted
by law, NECAM may file such documents without obtaining
ASSOCIATE's signature, as ASSOCIATE's attorney-in-fact (but only
for this limited purpose).
6. TERM
(a) This AGREEMENT will commence on the date signed by an authorized
representative of NECAM, and will continue until June 30, 1999
unless terminated in accordance with the provisions of this
AGREEMENT.
(b) This AGREEMENT shall automatically renew each year, for an
additional one (1) year period, after the original term, unless
written notice of nonrenewal is provided by either party at least
thirty (30) days prior to the anniversary date or in accordance
with applicable state law requirements which may require a longer
notice period. The discounts applicable to the PRODUCTS listed on
the Appendices shall be adjusted effective on the renewal date
based on the discount schedules set forth on such Appendices.
(c) NECAM reserves the right to revise the terms of this Agreement,
including but not limited to product listings or the minimum
purchase requirements on the PRODUCTS Appendices or to redefine
the TERRITORY designated therein effective upon such
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renewal by providing written notice pursuant to Section 35 of
this Agreement of such deletion, revision or redefinition at
least thirty (30) days prior to the anniversary date.
7. PRICES; PRICE CHANGES
(a) Prices for PRODUCTS and/or SERVICES to which discounts shall
apply (if such discounts are applicable, as provided for herein)
shall be as published and/or quoted by NECAM.
(b) NECAM shall be entitled to change prices for PRODUCTS or SERVICES
upon thirty (30) days prior written notice to ASSOCIATE, pursuant
to Section 35 of this Agreement, PROVIDED, HOWEVER, that such
price changes shall not be applicable to PRODUCTS or SERVICES for
which a written price quotation had been issued prior to the date
of NECAM's notice of such price change, and such written
quotation offered to maintain the quoted price available for a
time period longer than the time period between the date of
NECAM's notice of price change and the effective date of such
price change.
8. TRANSPORTATION
NECAM shall ship from NECAM's facility capable of supplying ASSOCIATE via the
best way as arranged by NECAM, unless otherwise instructed by ASSOCIATE.
Transportation charges shall be prepaid by NECAM and added to the invoice to be
paid by ASSOCIATE as a separate item.
9. INSPECTION AND ACCEPTANCE
(a) All PRODUCTS ordered pursuant to this AGREEMENT shall be subject
to inspection by ASSOCIATE after delivery to determine their
conformity with the identification of material set forth in
ASSOCIATE's purchase order. If the PRODUCTS delivered are not
listed on such purchase order, ASSOCIATE shall have the right to
reject such PRODUCTS. ASSOCIATE shall have a period of twenty
(20) days following placement of the PRODUCTS within possession
of the carrier within which to inspect the PRODUCTS for
conformity with ASSOCIATE's purchase order and to provide NECAM
with written notice of acceptance or rejection. Unless such
written rejection is communicated to NECAM within such time
period, ASSOCIATE shall be deemed to have accepted the PRODUCTS.
In the event written notice of rejection is given, NECAM will
promptly undertake to remedy the delivery in a manner deemed by
NECAM to be appropriate under the circumstances. No PRODUCTS may
be returned to NECAM without its consent.
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(b) Loss or damage to PRODUCTS which occurred during delivery of
PRODUCTS shall not be a permissible basis upon which to reject
PRODUCTS; the provisions of Section 11, "F.O.B., & RISK OF LOSS"
shall be applicable.
(c) Defects in PRODUCTS shall not be a permissible basis upon which
to reject PRODUCTS; ASSOCIATE shall invoke the provisions of the
applicable "WARRANTY" section herein to remedy such defects.
10. SHIPPING AND BILLING
For Orders placed hereunder, NECAM shall:
(a) At the ASSOCIATE's direction, ship to the ASSOCIATE's warehouse
or to the Customer's address specified on the Customer Software
License or such other form as may be required under Section 2(b).
(b) Remit invoices, statements and notices to the address designated
in Section 35 unless advised otherwise agreed to by NECAM.
11. F.O.B.; TITLE & RISK OF LOSS
(a) Shipments of all PRODUCTS sold to ASSOCIATE hereunder shall be
made F.O.B. NECAM's warehouse(s) or F.O.B. Port of Entry,
whichever is applicable in accordance with NECAM's prevailing
policies for various types of PRODUCTS.
(b) Title to PRODUCTS and risk of loss or damage to PRODUCTS shall
pass to ASSOCIATE when PRODUCTS are placed in the possession of
the carrier at the respective F.O.B. points of shipment.
ASSOCIATE shall be responsible for assertion of claims against
carriers for loss or damage to PRODUCTS; such loss or damage will
not relieve ASSOCIATE of its obligation to pay NECAM for the
PRODUCTS.
12. SHIPPING INTERVAL
(a) Lead times for delivery of PRODUCTS applicable to each Order will
be determined by system size and specific configurations
required, and typical lead times shall be quoted by NECAM upon
ASSOCIATE's request.
(b) No firm delivery date for PRODUCTS shall be binding upon NECAM
unless such date is explicitly agreed to in a writing signed by
an officer or authorized representative of NECAM.
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13. ASSOCIATE'S SERVICES
(a) NECAM's appointment of ASSOCIATE was and will continue to be
predicated upon ASSOCIATE's commitment to provide installation,
maintenance, repair and customer training services in accordance
with highest industry standards. As a minimum requirement to meet
the above commitment, ASSOCIATE agrees to:
(1) Maintain an adequate number of service centers in the
TERRITORY as reasonably determined by NECAM, equipped with
adequate numbers and types of spare parts, technical and
engineering manuals, product brochures and other similar
items relating to PRODUCTS; keep NECAM notified of the
location(s) of such service center(s), and permit NECAM to
inspect such location(s), without advance notice, during
normal business hours.
(2) Staff such service center with engineering and repair
personnel sufficient in number and skill, and provide them
with the means to be able to reach by ground
transportation any place within the TERRITORY to perform
prompt repair services for PRODUCTS within a period of two
(2) hours of receipt of a telephone call from a customer
requesting such repair service.
(3) Permit NECAM personnel to inspect the quality of the
ASSOCIATE's installation, maintenance and repair services
on the site of any installed PRODUCT during normal
business hours. The ASSOCIATE agrees to use its best
efforts to secure the customer's consent for NECAM
personnel to visit the installation site, when such
consent is required.
(4) Offer full maintenance services for PRODUCTS to all of the
ASSOCIATE'S customers.
(5) Offer appropriate customer training services for PRODUCTS
sold or otherwise distributed by the ASSOCIATE to all of
the ASSOCIATE's customers. Such customer training shall
include training in the use of PRODUCTS and is the sole
responsibility of the ASSOCIATE.
(6) From time to time, as reasonably requested by NECAM, cause
an appropriate number of the ASSOCIATE's personnel to
attend training sessions conducted by NECAM, concerning
PRODUCTS in accordance with Section 14. NECAM reserves the
right to establish criteria, including but not limited to
successful completion of such training sessions for the
issuance of Technician Identification Numbers identifying
those employees of ASSOCIATE who are certified with
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respect to particular products. No employee of ASSOCIATE
shall install, maintain or service PRODUCTS until such
employee is certified by NECAM with respect to the
particular PRODUCT. Technical support will be provided by
NECAM only to those ASSOCIATE employees possessing valid
Technician Identification Numbers. Technician
Identification Numbers will be suspended or terminated
immediately upon the termination of said technician's
employment with the ASSOCIATE or upon termination or
non-renewal of this AGREEMENT.
(7) In ordering PRODUCT(S) and services, ASSOCIATES shall
submit all documentation as may be requested by NECAM,
including, but not limited to, such as may be required
pursuant to the NECAM Leasing Services Product Appendix
(Exhibit B) and the Extended Hardware Warranty Products
Appendix.
(8) Conduct business in a manner that reflects favorably at all
times on the Products and the good name, goodwill and
reputation of NECAM; (ii) avoid deceptive, misleading or
unethical practices that are or might be detrimental to
NECAM, the Products, end-users or the public, including but
not limited to disparagement of NECAM or Products; (iii)
make no false or misleading representations with regard to
NECAM or the Products; (iv) not publish or employ or
cooperate in the publication or employment of any
misleading or deceptive advertising material and; (v) to
make no representations, warranties or guarantees to
customers or to the trade with respect to the
specifications, features or capabilities of Products that
are inconsistent with the literature distributed by NECAM,
including all warranties and disclaimers contained in such
literature, if any.
(9) ASSOCIATE will not disseminate, or use for purposes not
specifically permitted by NECAM, either during or after the
termination of this Agreement, any information designated
as "CONFIDENTIAL" and disclosed by NECAM, and will restrict
dissemination of such Confidential Information to its own
personnel on a "need-to-know" basis. ASSOCIATE acknowledges
that premature revelation of NECAM confidential information
can have serious and irreparable impact on NECAM's
business; therefore, in addition to all other remedies at
law, the parties agree that injunctive relief would be
appropriate to prevent breach of this provision.
(10) ASSOCIATE shall notify NECAM immediately if its identity or
the nature of its business is materially changed by bulk
transfer of assets, sale of its business, transfer of
control of its outstanding stock, merger, or otherwise.
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(11) ASSOCIATE must have Internet access capability to access
notices which NECAM may post on its Web Page at
http://www.cng.nec.com and http://www.ilibrary.com/
docs.nsf/system/.
(12) ASSOCIATE shall be required to check the notice section of
such Web page on a daily basis.
(13) In order to support the above commitments, ASSOCIATE agrees
to comply with other reasonable requests by NECAM from time
to time which are designed to promote ASSOCIATE's adherence
to the highest industry standards. Failure of the ASSOCIATE
to comply with any of the requirements of this Section
shall subject the ASSOCIATE to possible termination under
Section 16, and shall entitle NECAM to immediately invoke
one or more of the remedies set forth in Section 6(c).
14. TRAINING
NECAM may make available to ASSOCIATE training courses for ASSOCIATE's
personnel in marketing, installation, operation and maintenance according to
published schedules. Nonrefundable registration fees, training fees, and
training materials fees (if applicable) will be charged at NECAM's prevailing
rates. No discounts shall apply to such rates. ASSOCIATE shall bear the cost
of transportation, meals, lodging and any other incidental expenses of
ASSOCIATE's personnel to, from and during such training. If mutually agreed
upon by NECAM and ASSOCIATE, training may be held at an off-site location
(i.e., not at NECAM's headquarters facility) designated by ASSOCIATE. In such
a case, in addition to the above mentioned charges, ASSOCIATE shall bear the
cost of transportation, meals and lodging for NECAM's instructor(s) as well
as all costs and expenses incurred in the handling and transportation of
necessary demonstration equipment.
15. REPORTS
(a) In order to assist NECAM in its efforts to monitor ASSOCIATE's
performance hereunder, ASSOCIATE will, as may be required by
NECAM:
(1) Meet with NECAM's representative at the ASSOCIATE's
principal place of business, as frequently as may be
reasonably required by NECAM, for a review of the market
conditions in the TERRITORY and ASSOCIATE's performance
under this AGREEMENT, including its achievement of
applicable PRODUCT purchases. Purchases of PRODUCTS for
resale outside the TERRITORY are not permitted without
NECAM's prior written consent and shall not be considered
in adjusting ASSOCIATE's discount pursuant to Section 6(b).
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(2) Submit to NECAM on a quarterly basis an estimate of the
ASSOCIATE's PRODUCT needs for the next two succeeding
quarters in the form required by NECAM.
(3) Submit to NECAM on or before the twentieth (20th) business
day following the end of each quarter, a written report in
the form required by NECAM stating the ASSOCIATE's sales of
PRODUCTS within the TERRITORY during the preceding calendar
quarter and the ASSOCIATE's stocks on hand of PRODUCTS as
of the last day of the preceding quarter.
(4) Submit to NECAM audited copies (or unaudited copies, if the
ASSOCIATE's financial statements are not audited) of the
ASSOCIATE's latest financial statements within sixty (60)
days following the end of the ASSOCIATE's fiscal year, and
if financial statements are also prepared quarterly on an
unaudited basis, also such unaudited quarterly statements,
within sixty (60) days following the end of each calendar
quarter or sooner if requested by NECAM.
(5) Submit to NECAM on a quarterly basis a list of all current
employees certified by NECAM to perform installation,
maintenance and repair services for each of the PRODUCTS
listed on the PRODUCT Appendices.
16. TERMINATION
(a) This AGREEMENT may be terminated, in full or in part, effective
immediately, without liability for said termination, upon the
occurrence of any of the following events:
(1) an ASSOCIATE files a voluntary petition in bankruptcy,
(2) an ASSOCIATE is adjudged bankrupt,
(3) a court assumes jurisdiction of the assets of an ASSOCIATE
under a federal reorganization act,
(4) a trustee or receiver is appointed by a court for all or a
substantial portion of the assets of an ASSOCIATE,
(5) an ASSOCIATE becomes insolvent or suspends its business,
(6) an ASSOCIATE makes an assignment of its assets for the
benefit of its creditors except for the company's line of
credit from its lender in the normal course of business,
(7) the identity of an ASSOCIATE or the nature of its business
is materially changed by bulk transfer of assets, sale of
its business, transfer of control of its outstanding stock,
merger, or otherwise,
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(8) ASSOCIATE fails to make payment for any NECAM invoice for
PRODUCTS within thirty (30) days of the due date for
payment of such invoice,
(9) any other AGREEMENT between ASSOCIATE and NECAM terminates
or expires, pursuant to the terms and conditions of such
agreement,
(10) ASSOCIATE breaches any of the terms and conditions of
Section 37 governing the use of NECAM's trade names or
trademarks,
(11) ASSOCIATE sells PRODUCTS to any other resellers (including
but not limited to NECAM Distributors),
(12) ASSOCIATE sells, installs, maintains or services PRODUCTS
outside of its authorized territory, without NECAM's prior
written consent, or
(13) ASSOCIATE subcontracts without NECAM's prior written
consent to an entity other than an Authorized ASSOCIATE,
(14) ASSOCIATE assigns any of its rights or responsibilities
hereunder except as permitted herein or with NECAM's prior
written consent, or
(15) ASSOCIATE breaches the terms of Section 13(a)(7).
(b) The entire AGREEMENT or portions thereof relating to specific
types of PRODUCTS may be terminated by NECAM, in the event that:
(1) ASSOCIATE fails to provide any purchasing forecast required
by Section 15 of this AGREEMENT relating to such specific
type of PRODUCTS, or
(2) ASSOCIATE knowingly provides false information on a
"Customer Software License", or
(3) ASSOCIATE fails to provide installation, maintenance,
repair and support services in accordance with NECAM's and
industry standards for such specific type of PRODUCTS.
(c) In the event of any default or failure on the part of a party in
the performance of any of its duties, obligations or
responsibilities under this AGREEMENT, other than default or
failure specified in 16(a) or 16(b) above, the non-defaulting
party may terminate this AGREEMENT, provided that with respect to
defaults susceptible of immediate cure, the defaulting party had
been given fifteen (15) days' prior written notice of the default
and failed to cure the default within such fifteen (15) day
period.
(d) Except in those cases where ASSOCIATE has been terminated because
of a breach of its obligations under Section 13, NECAM may
complete any order for PRODUCTS accepted by NECAM prior to
termination and will accept and complete any order for PRODUCTS
where ASSOCIATE, prior to the effective date of termination, has
entered into a binding contract for the resale of such PRODUCTS to
an end-user.
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Notwithstanding the foregoing, NECAM may condition acceptance and
completion of such orders on reasonable conditions which NECAM may
impose, including but not limited to prior payment in full for
these and any other previous orders, proof of a binding contract
with an end-user customer, and/or subcontracting of service
obligations to an Authorized ASSOCIATE.
(e) Upon any termination of this AGREEMENT, the parties shall have all
of the remedies of a seller and buyer under the applicable UCC, to
the extent such remedies have not been limited or otherwise
modified by this AGREEMENT.
(f) ASSOCIATE will not be entitled to compensation for loss of its
ASSOCIATE appointment if termination was accomplished in
accordance with the termination or nonrenewal provisions of this
AGREEMENT, or was otherwise legally justified.
17. RIGHTS UPON TERMINATION
(a) In the event of termination by NECAM, NECAM shall have all the
remedies of a seller under the New York Uniform Commercial Code,
including, but not limited to, the remedies provided for in
Section 2-702, 2-703, 2-704 and 2-705 of such Code, where
applicable.
(b) Neither party shall be liable to the other under any legal or
equitable theory for compensation, reimbursement for investments
or expenses, lost profits or incidental or consequential damages
of any other kind or character as a result of any termination of
this Agreement.
18. CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGMENTS
(a) In the event that NECAM shall fail to deliver material within ten
(10) days of a firm delivery date established pursuant to Section
12 (b), then ASSOCIATE shall have the right to cancel such Order.
(b) In the event that ASSOCIATE shall be in material breach or default
of any terms, conditions or covenants of this AGREEMENT
(including, but not limited to, timely payment for PRODUCTS
purchased), then (in addition to all other rights and remedies
contained herein, or at law, equity or otherwise) NECAM shall have
the right to suspend delivery of PRODUCTS on all outstanding
Orders, or revoke its acknowledgment of any such Order.
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19. NON-EXCLUSIVE MARKET RIGHTS
(a) NECAM reserves its right to:
(1) directly or through its subsidiaries, affiliates, agents or
any other type of distribution entity market, sell, license
or distribute any type of telecommunications products
whether or not listed in the PRODUCTS Appendices or provide
installation, repair, maintenance and related SERVICES for
any such telecommunications products, wherever NECAM deems
necessary or appropriate.
(2) directly, or through its subsidiaries, affiliates, agents
or any other type of distribution entity distribute,
install, license and/or maintain (directly or indirectly)
any such telecommunications products,
(3) utilize the customer identification information contained
on the Customer Software License or such other form as
NECAM shall require, to conduct surveys or perform other
marketing and sales functions, as NECAM deems necessary or
appropriate.
20. INFRINGEMENT
(a) In the event of a claim or suit against ASSOCIATE alleging (a) the
PRODUCT(S) as sold by NECAM infringes any patent issued by or
copyright registered in the country in which the PRODUCT(S) was
sold to ASSOCIATE, NECAM shall defend ASSOCIATE to the extent the
claim or suit concerns such infringement, provided ASSOCIATE gives
NECAM prompt notice of such claim or suit and continuous
cooperation in such defense.
(b) In any claim or suit against ASSOCIATE that is defended by NECAM
pursuant to paragraph 1, NECAM shall control the defense, shall
pay all litigation costs, including reasonable attorney's fees
incurred by NECAM in such defense, and shall indemnify ASSOCIATE
for all damages awarded by a court or settlement payments approved
by NECAM.
(c) If, in any claim or suit against ASSOCIATE that is defended by
NECAM pursuant to paragraph 1, as a result of a court order not
subject to further appeal or a settlement approved by NECAM,
ASSOCIATE is enjoined or otherwise prevented from using the
PRODUCT(S) sold by NECAM, NECAM, at its option, may (a) procure
for ASSOCIATE the right to continue using the PRODUCT(S), (b)
replace or modify the PRODUCT(S) to avoid infringement, or (c)
repossess the PRODUCT(S) in exchange for a refund of the
depreciated value of the PRODUCT(S). NECAM's option selected
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under this paragraph shall be ASSOCIATE'S sole remedy for any
prospective effects of any court order or settlement.
(d) NECAM's total cumulative liability under paragraphs 2 and 3 shall
be limited to the price paid to NECAM by ASSOCIATE for the
PRODUCT(S).
(e) Notwithstanding any other provision of this Article, NECAM shall
not be obligated to defend and shall not be liable for costs or
damages awarded in any claim or suit for infringement in which (a)
the PRODUCT(S) was made by NECAM pursuant to specifications
supplied by ASSOCIATE, or (b) the alleged infringement is based on
use by ASSOCIATE, without NECAM's permission, of the PRODUCT(S) as
sold by NECAM in combination with another item not sold by NECAM,
where the alleged infringement arises from the combination or from
practice of a method made possible by the combination, or (c) the
alleged infringement is based on the PRODUCT(S) as modified by
ASSOCIATE without NECAM's permission.
21. HARDWARE WARRANTY
(a) As to any hardware PRODUCTS purchased by the ASSOCIATE in
accordance with the terms of this AGREEMENT, NECAM warrants that
the hardware PRODUCTS:
(1) will conform to the applicable specifications for such
hardware PRODUCTS published by NECAM at the time of sale,
and
(2) will be free from defects in material and workmanship,
under normal use and service when correctly installed and
maintained, for a period of fourteen (14) months from date
of shipment to ASSOCIATE. NECAM reserves the right to
modify such warranty period on written notice to ASSOCIATE.
(3) will be Year 2000 Compliant only to the extent specifically
set forth on the NEC Web Page at http://www.cng.nec.com.
(b) NECAM's liability for any hardware PRODUCT which is shown to be
defective during its warranty is limited to:
(1) replacing the hardware PRODUCT or part thereof with a
functionally equivalent hardware PRODUCT or part,
(2) repairing the hardware PRODUCT, or
(3) issuing credit for the hardware PRODUCT
(c) NECAM shall select which of the above warranty remedies to utilize
concerning any particular hardware PRODUCT.
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(d) In the event that any hardware PRODUCT is shown to be defective
during the warranty period, the ASSOCIATE, or such Authorized
ASSOCIATE as may be providing service to the end-user to whom such
PRODUCT has been sold or leased, shall:
(1) notify NECAM promptly in writing of any claims,
(2) provide NECAM with an opportunity to inspect and test the
hardware PRODUCTS claimed to be defective, and
(3) if repair or replacement of the hardware PRODUCT is
selected by NECAM, return the hardware PRODUCT to NECAM
only in accordance with NECAM's prevailing Material Return
Authorization ("MRA") policy and procedures, which are
incorporated herein by reference and are subject to change
by NECAM from time to time.
(e) The above warranty excludes coverage for hardware PRODUCTS which
were installed, repaired or maintained by an unauthorized service
provider or which were subjected to misuse, abuse, improper
installation or application, improper maintenance or repair,
alteration, accident or negligence in use, improper temperature,
humidity or other environmental condition (including, but not
limited to, lightning or water damage), storage, transportation or
handling, unless caused by NECAM or its authorized representative.
(f) NECAM's hardware PRODUCTS warranty extends only to ASSOCIATE and
ASSOCIATE is not authorized to ASSIGN this warranty to its
customers or to any other party. Rather, the ASSOCIATE agrees to
extend a hardware PRODUCTS warranty to its end-user customers
which is no greater in substance and scope than that extended by
NECAM to ASSOCIATE, and which shall incorporate the warranty
exclusions and liability limitations provided in Sections 21 (e),
21 (h) and 31.
(g) All hardware PRODUCTS warranty claims must be forwarded to NECAM
by an Authorized ASSOCIATE. NECAM will accept no hardware PRODUCTS
warranty claims from former ASSOCIATES whose ASSOCIATE AGREEMENTS
have expired or been terminated, or directly from ASSOCIATE's
customers.
(h) THE HARDWARE PRODUCTS WARRANTY CONTAINED IN THIS AGREEMENT IS IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING (BUT
NOT LIMITED TO) ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, INCLUDING BUT NOT LIMITED TO
PREVENTION, DETECTION OR DETERRENCE OF TOLL FRAUD, COMPUTER
VIRUSES OR OTHER UNAUTHORIZED OR IMPROPER USE OF THE HARDWARE
PRODUCTS.
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<PAGE>
22. SOFTWARE LICENSE AND SOFTWARE WARRANTY
(a) As to any software PRODUCTS licensed to the ASSOCIATE in
accordance with the terms of this AGREEMENT, NECAM warrants that
the software PRODUCTS:
(1) will conform to the published specifications for such
software PRODUCTS, applicable at the time of licensing and
(2) will be free from defects in material and workmanship,
under normal use and service when correctly installed and
maintained, for fourteen (14) months from date of shipment
to ASSOCIATE. NECAM reserves the right to modify such
warranty period on written notice to ASSOCIATE.
(3) will be Year 2000 Compliant only as specifically set forth
on the NEC Web Page at http://www.cng.nec.com.
(b) NECAM's liability for any software PRODUCT which is shown to be
defective during its warranty period is limited to:
(1) replacing the PRODUCT or part thereof with a functionally
equivalent software PRODUCT or part,
(2) repairing the PRODUCT, or
(3) issuing credit for the software PRODUCT
(c) The choice of which of the above warranty remedies to utilize
concerning any particular software PRODUCT shall be NECAM's.
(d) In the event that any software PRODUCT is shown to be defective
during the warranty period, the ASSOCIATE or such authorized
ASSOCIATE as may be providing service to the end-user to whom such
software PRODUCT has been licensed shall:
(1) notify NECAM promptly in writing of any claims,
(2) provide NECAM with an opportunity to inspect and test the
software PRODUCTS claimed to be defective, and
(3) (if repair or replacement of the software PRODUCTS is
selected by NECAM) return the software PRODUCTS to NECAM
only in accordance with NECAM's prevailing Material Return
Authorization policy and procedures, which are incorporated
herein by reference and are subject to change by NECAM from
time to time.
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<PAGE>
(e) Unless caused by NECAM or its authorized third party
representatives, the above warranty excludes coverage for software
PRODUCTS which were installed, repaired or maintained by an
unauthorized service provider or which were subjected to misuse,
abuse, improper installation or application, improper maintenance
or repair, alteration, accident or negligence in use, improper
temperature, humidity or other environmental condition (including,
but not limited to, lightning or water damage), storage,
transportation or handling.
(f) Except as otherwise provided in writing, NECAM's software PRODUCTS
warranty extends only to ASSOCIATE and ASSOCIATE is not authorized
to assign this warranty to its customers. Rather, the ASSOCIATE
agrees to extend a software PRODUCTS warranty to its customers
which is no greater in substance and scope than that extended by
NECAM to ASSOCIATE, and which shall incorporate the warranty
exclusions and liability limitations provided in Section 22(d),
22(g) and 31. NECAM shall not be liable for software PRODUCTS
warranty terms extended by the ASSOCIATE to its customers which
are different from or greater than those set forth above.
(g) Except as otherwise provided in writing, all software PRODUCTS
warranty claims must be forwarded to NECAM by an Authorized
ASSOCIATE. NECAM will accept no software PRODUCTS warranty claims
from former ASSOCIATES whose ASSOCIATE AGREEMENTS have expired or
been terminated or directly from ASSOCIATE's customers.
(h) THE SOFTWARE PRODUCTS WARRANTY CONTAINED IN THIS AGREEMENT IS IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING (BUT
NOT LIMITED TO) ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, INCLUDING BUT NOT LIMITED TO
PREVENTION, DETECTION OR DETERRENCE OF TOLL FRAUD, COMPUTER
VIRUSES OR OTHER UNAUTHORIZED OR IMPROPER USE OF THE SOFTWARE
PRODUCTS.
(i) NECAM hereby grants to ASSOCIATE a non-exclusive license in the
following rights in software PRODUCTS, which licensed rights may
be exercised by ASSOCIATE only when related to the resale by
ASSOCIATE within the TERRITORY or otherwise with NECAM's consent
of related hardware PRODUCTS purchased directly from NECAM:
(1) the right to distribute the software PRODUCTS,
(2) the right to use the software PRODUCTS for demonstration,
testing, installation, maintenance and repair of related
hardware PRODUCTS,
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<PAGE>
(3) the right to reproduce and preserve, for back-up purposes
only, one (1) copy of each software PRODUCTS acquired by
ASSOCIATE from NECAM, and
(4) the right to grant sublicenses to end-users for the
following rights only:
(i) the right of the end-user to use the software
PRODUCTS, but only in conjunction with related
hardware PRODUCTS sold by an authorized ASSOCIATE
to the end-user,
(ii) the right of the end-user to make one (1) copy of
the software PRODUCTS for archival/back-up purposes,
(iii) the right of the end-user to transfer the end-user's
software PRODUCTS rights to a third party who
acquires title to the end-user's related hardware
PRODUCTS, provided such transferee assents in
writing to the conditions and limitations of the
sublicense and pays any applicable transfer fee.
(j) The above license may be exercised by ASSOCIATE with respect to
specific software PRODUCTS only upon payment by ASSOCIATE of any
applicable licensing fee.
(k) NECAM reserves all other rights, title and interest to the
software PRODUCTS, and neither ASSOCIATE nor its end-user
customers shall acquire any rights, title or interest in the
software PRODUCTS other than as specifically set forth in this
Section.
(l) ASSOCIATE and ASSOCIATE's customers may not:
(1) sublicense or distribute the software PRODUCTS except as
authorized by this Section, or
(2) reverse compile, disassemble, alter, add to, delete from,
or otherwise modify the software PRODUCTS, except to the
extent that such modification capability is an intended
feature of the software PRODUCTS.
(m) ASSOCIATE agrees to notify NECAM promptly in the event any of
ASSOCIATE's end-user customers violates the conditions of its
sublicense.
(n) ASSOCIATE hereby agrees to execute (and secure end-users'
execution of) any additional documents relating to software
PRODUCTS as reasonable required by NECAM from time to time, to
protect the respective rights, title and licensing interest of
NECAM or third parties to the software PRODUCTS. ASSOCIATE agrees
to utilize standard sublicensing forms, if provided by NECAM, for
the purpose of licensing or sublicensing software PRODUCTS to its
end-user customers.
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<PAGE>
(o) ASSOCIATE's license shall continue in effect unless terminated by
NECAM due to:
(1) a breach by the ASSOCIATE of the terms of this Section,
(2) mutual agreement, or
(3) termination or expiration of this AGREEMENT,
provided, however, that termination of such licenses shall not act
to rescind sublicenses granted by the ASSOCIATE in accordance with
the terms of this AGREEMENT prior to termination of the
ASSOCIATE's license.
(p) ASSOCIATE agrees to use best efforts to protect software PRODUCTS
from reproduction, modification or distribution except as
specifically authorized by this AGREEMENT and to notify NECAM
promptly if the ASSOCIATE learns of any attempt to do so.
THE SOFTWARE LICENSE PROVISIONS CONTAINED IN THIS SECTION APPLY ONLY TO SOFTWARE
OWNED BY NECAM OR ITS AFFILIATES. IN THE EVENT THAT NECAM PROVIDES SOFTWARE
OWNED (IN WHOLE OR IN PART) BY A THIRD PARTY, NECAM MAY BE REQUIRED TO OBTAIN
ASSOCIATE'S ASSENT TO DIFFERING OR ADDITIONAL TERMS AND CONDITIONS IN ORDER TO
LAWFULLY GRANT A LICENSE TO ASSOCIATE FOR SUCH SOFTWARE. THEREFORE, NECAM
RESERVES THE RIGHT TO WITHHOLD PROVISION OF SUCH SOFTWARE UNTIL ASSOCIATE'S
ASSENT IS OBTAINED.
23. REPAIR OR REPLACEMENT OF PRODUCTS NOT COVERED UNDER WARRANTY
(a) NECAM agrees, at its option, to repair PRODUCTS no longer under
warranty, or to replace such PRODUCTS with functionally equivalent
PRODUCTS, for a period of no less than five (5) years after such
PRODUCT has been manufacturer-discontinued. PRODUCTS to be
repaired or replaced under this Section are to be returned by an
authorized ASSOCIATE to a location designated by NECAM.
(b) If a PRODUCT is returned to NECAM for repair as provided in this
Section, and is determined to be beyond repair, NECAM may, at its
option (i) return such PRODUCT to the ASSOCIATE at ASSOCIATE's
expense or (ii) offer to sell to ASSOCIATE replacement PRODUCTS at
NECAM's then current prices.
(c) Replacement and repaired PRODUCTS shall be warranted as set forth
in Section 21. The repaired PRODUCT hardware warranty period
shall be six (6) months from the date of repair, or such other
period as NECAM may specify in writing.
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<PAGE>
(d) All transportation charges for, and risk of in-transit loss or
damage to, out-of-warranty PRODUCTS returned to NECAM for repair
will be borne by ASSOCIATE. All transportation charges associated
with the return of such repaired and replaced PRODUCTS to
ASSOCIATE shall be borne by ASSOCIATE and shall be prepaid by
NECAM and listed as a separate item on NECAM's invoice for repair.
ASSOCIATE shall bear the risk of in-transit loss and damage for
shipments of repaired or replaced.
(e) Prices for out-of-warranty repairs made pursuant hereto shall be
NECAM's prevailing charges. Discounts do not apply to such repair
charges.
(f) ASSOCIATE hereby agrees to comply with NECAM's Material Return
Authorization ("MRA") procedures, as may be amended by NECAM from
time to time.
24. TECHNICAL SUPPORT
(a) ASSOCIATE shall be entitled to ongoing technical support,
including field service and assistance, provided, however, that
the availability or performance of this technical support service
shall not be construed as altering or affecting NECAM's warranty
obligations as set forth in this AGREEMENT.
(b) Ongoing technical support via telephone will be available to
ASSOCIATE from NECAM at NECAM's then current charges. NECAM's
field service technical support shall be available to ASSOCIATE,
including emergency (service affecting) twenty-four (24) hour
technical assistance as determined by NECAM. Such field service
technical support shall be subject to availability of NECAM's
technical support personnel. Charges, if any, for such field
service technical support will be NECAM's then prevailing charges.
No discounts shall apply to such charges.
25. DOCUMENTATION
From time to time, NECAM may make available to ASSOCIATE various types of
documentation. Certain types of documentation may be made available to ASSOCIATE
via electronic media. Charges, if any, for documentation will be NECAM's
prevailing charges.
26. ADVERTISING AND PROMOTION
Under the provisions of NECAM's applicable Cooperative Advertising program,
ASSOCIATE may be eligible to accrue funds in an account to be used for
advertising, media and/or promotion efforts utilized to promote the sale of
PRODUCTS. These funds will be made available based upon the terms and conditions
of NECAM's Cooperative Advertising program, as may be amended from
21
<PAGE>
time to time, the provisions of which are hereby incorporated by reference as
if fully set forth herein.
27. FORCE MAJEURE
NECAM shall not be responsible for any losses resulting if the fulfillment by
NECAM of any terms or provisions of this AGREEMENT or any order is delayed or
prevented by revolution or other disorders, war, acts of enemies, strikes,
fires, floods, transportation delays or shortages, labor disputes, riots,
insurrections, accidents, storms, inability to obtain materials or supplies,
excessive demand for PRODUCTS over the available supply, customs duties or
surcharges, any interruption for any reason in the manufacture of PRODUCTS by
NECAM's suppliers, any act of God, the action of any government, or other cause
not within NECAM's control, whether of the class of causes set forth above or
not.
28. ASSIGNMENT
(a) Except as otherwise provided herein, the rights and obligations of
the parties hereunder shall not be assigned, subcontracted,
delegated or otherwise transferred without the prior written
consent of the other party, PROVIDED THAT NECAM may assign or
delegate its rights and obligations hereunder, in whole for in
part, to its parent or subsidiary upon prior written notice to the
ASSOCIATE.
(b) The limitation on assignment does not apply to an assignment
confined solely to monies due or to become due under this
AGREEMENT, provided ASSOCIATE or NECAM is given thirty (30)
calendar days prior written notice of such assignment. Assignment
of monies shall be void to the extent that it attempts to impose
upon ASSOCIATE or NECAM obligations to the assignee additional to
the payment of such monies, or to preclude ASSOCIATE or NECAM from
dealing solely and directly with the other in all matters
pertaining hereto, including negotiation of amendments or
settlement of amounts due.
29. TAX
Prices for PRODUCTS are exclusive of the following taxes, which shall be added
by NECAM to its invoice and payable by ASSOCIATE, unless ASSOCIATE provides
proof to NECAM of a valid exemption from the applicability of such tax(es):
Federal Manufacturers' and Retailers' Excise Taxes, State and Local Sales Taxes,
and/or Use Taxes.
22
<PAGE>
30. GOVERNMENT CONTRACTS
(a) The parties hereby acknowledge that NECAM typically has not sold
certain types of PRODUCTS which are included within the scope of
this AGREEMENT for resale under government contracts. Accordingly,
notwithstanding any other provision(s) of this AGREEMENT, and
without incurring any liability to ASSOCIATE or third party, NECAM
hereby reserves the right to reject any ASSOCIATE Order for
PRODUCTS to which government contract provisions will apply.
(b) In the event that ASSOCIATE orders PRODUCTS to which Government
contract provisions are intended to apply, ASSOCIATE's order must
conspicuously state such fact on its face, for the purpose of
notifying NECAM and permitting NECAM the opportunity to consider
whether to accept or reject such order. If such order fails to
have such fact conspicuously stated on its face, then
(notwithstanding Section 3 (a)(6) or any other provision of this
AGREEMENT) NECAM shall be AUTOMATICALLY deemed to have rejected
such order, and any acknowledgment which NECAM may have issued for
such order shall be deemed void and of no effect.
(c) If the software PRODUCTS will be supplied to a unit or agency of
the United States government by ASSOCIATE, NECAM will supply
commercial computer software or commercial computer software
documentation to be acquired under licenses customarily provided
to the public. NECAM shall not be required to:
(1) Furnish technical information related to commercial
computer software or commercial computer software
documentation that is not customarily provided to the
public; or
(2) Relinquish to, or otherwise provide, the Government rights
to use, modify, reproduce, release, perform, display, or
disclose commercial computer software or commercial
computer software documentation except as mutually agreed
to by the parties.
(3) With regard to commercial computer software and commercial
computer software documentation, the Government shall have
only those rights specified in the license contained in any
addendum to the contract, or alternatively, any shrink-wrap
license delivered with the software. (See 48 CFR 12.212).
31. LIMITATION OF LIABILITY
NECAM's liability for PRODUCT malfunction shall be limited to performing one of
the remedies under the hardware or software PRODUCT warranties, provided that
the malfunctioning PRODUCT is covered by the applicable warranty. NECAM and
ASSOCIATE hereby agree that if such limitation is declared invalid by a court of
competent jurisdiction, then NECAM's liability
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<PAGE>
shall be limited solely to a U. S. dollar amount equal to the cost of the
malfunctioning PRODUCT to the ASSOCIATE. THESE REMEDIES SHALL BE EXCLUSIVE
AND SHALL BE THE ASSOCIATE'S SOLE REMEDIES AGAINST NECAM OR ANY OF ITS
AFFILIATES FOR PRODUCT MALFUNCTION.
IN NO EVENT SHALL NECAM BE LIABLE FOR CONSEQUENTIAL, SPECIAL, INCIDENTAL OR
SIMILAR DAMAGES, SUCH AS (BUT NOT LIMITED TO) "DOWNTIME", EXCESS COSTS OR
LOST BUSINESS REVENUES RESULTING FROM NECAM'S BREACH OF ANY OF THE PROVISIONS
OF THIS AGREEMENT, NECAM'S TORTIOUS CONDUCT IN OR RELATED TO THE PERFORMANCE
OF ITS OBLIGATIONS HEREUNDER, A PRODUCT MALFUNCTION OR FROM UNAUTHORIZED OR
IMPROPER USE OF PRODUCTS INCLUDING BUT NOT LIMITED TO TOLL FRAUD OR COMPUTER
VIRUSES.
32. LIMITATION OF TIME CONCERNING CAUSES OF ACTION
Any cause of action based upon an alleged breach of this AGREEMENT or otherwise
related to the parties' rights, obligations and/or performance thereunder must
be commenced within one (1) year of the accrual of the cause of action.
33. CHOICE OF LAW; JURY WAIVER
The construction, interpretation and performance of this AGREEMENT shall be
governed by and construed in accordance with the domestic laws of the State of
New York.
Each of the parties waives trial by jury and the right to trial by jury in any
and all actions or proceedings in any court between them or to which they may be
parties, whether arising out of, under or by reason of this AGREEMENT, or any
acts or transactions, hereunder to the interpretation or validity thereof, or
under, or by reason of any other contract, agreement, loan, or transaction of,
any kind between them, or to which they may be parties, of any kind, nature, or
description whatsoever.
34. SEVERABILITY
If any of the provisions of this AGREEMENT shall be invalid or unenforceable,
such invalidity or unenforceability shall not invalidate or render unenforceable
the entire AGREEMENT, but rather the entire AGREEMENT shall be construed as if
not containing the particular invalid or unenforceable provision or provisions,
and the rights and obligations of NECAM and ASSOCIATE shall be construed and
enforced accordingly.
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35. NOTICES
All communications and notices required by or relating to this AGREEMENT shall
be deemed to have been duly given (1)upon receipt by the addressee when sent via
registered mail, overnight mail, or via facsimile directed to the attention of
the individual signing this agreement at the address specified in the preamble
hereto or (2) when posted by NECAM on its Web Page at http://www.cng.nec.com
and http://www.ilibrary.com/docs.nsf/system/.
Except as with respect to notices posted by NECAM on its Web page as set forth
above, the addresses to which notices or communications may be given by either
party may be changed by written notice given by such party to the other pursuant
to this Section.
36. LICENSES
Except as specifically set forth herein, or unless otherwise expressly agreed in
writing, no licenses, expressed or implied, under any patents, copyright, trade
names or trade secrets are granted by one party to the other.
37. TRADEMARKS
(a) Other than as set forth below, ASSOCIATE acquires no right, title
or interest in any trademark, tradename or other intellectual
property right of NECAM or its affiliates.
(b) So long as this AGREEMENT remains in effect, ASSOCIATE may use the
trade names and trademarks specified by NECAM on a non-exclusive
basis for advertising and promotion of the PRODUCTS consistent
with reasonable guidelines established by NECAM.
(c) ASSOCIATE shall not remove any trade name or trademark of NECAM or
its affiliates from any PRODUCT without NECAM's prior express
written consent.
38. NON-WAIVER
No course of dealing or failure of either party to strictly enforce any term,
right or conditions of this AGREEMENT shall be construed as a waiver of such
term, right or condition.
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<PAGE>
39. SURVIVAL OF OBLIGATIONS
The respective parties' obligations under this AGREEMENT which by their nature
would continue beyond the termination, cancellation or expiration of this
AGREEMENT, shall survive such termination, cancellation or expiration of this
AGREEMENT.
40. SHORTAGES
NECAM will endeavor to fully satisfy ASSOCIATE's specific requirements for
respective types of PRODUCTS at all times, and to ship Orders which NECAM has
accepted within customary respective shipment time periods. However, in the
event of PRODUCTS shortage(s), NECAM reserves the right to allocate the supply
of, and/or assign priorities to the shipment of, NECAM's then-available stock of
such PRODUCTS based upon all of the circumstances and NECAM's assessment of the
respective order requirements and respective shipping date requirements of all
purchasers of PRODUCTS.
41. LIMITATION OF AUTHORITY
It is expressly understood that this AGREEMENT does not give ASSOCIATE any right
or authority to act for or represent NECAM or its affiliates or to pledge their
credit or contract any liability whatsoever on their behalf. It is understood
that this AGREEMENT does not confer upon ASSOCIATE any authority to warrant any
PRODUCTS sold hereunder, or to make any adjustments on NECAM's behalf in
connection with PRODUCTS without NECAM's express consent.
42. ENTIRE AGREEMENT
This AGREEMENT constitutes the entire understanding between NECAM and the
ASSOCIATE and replaces and supersedes any prior agreements between NECAM and the
ASSOCIATE, and/or any prior agreements between either of them and the other's
predecessor(s) concerning any of the subject matters contained herein. In the
event of any conflict between the "General Terms & Conditions Applicable to All
Products" and the terms and conditions set forth in a Product Appendix, the
terms and conditions of such product Appendix shall control.
This AGREEMENT may not be changed, modified or amended except as provided for
herein or by an instrument in writing signed by both NECAM and the ASSOCIATE.
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<PAGE>
WHEREBY this Agreement is effective upon the signature of NEC America, Inc.
as appearing below:
NEC AMERICA, INC.
BY: /s/ Douglas P. Wonson
----------------------
NAME: DOUGLAS P. WONSON
--------------------
TITLE: ASSISTANT G.M. & SALES V.P.
-----------------------------
DATE: MAY 26, 1998
------------------------------
27
<PAGE>
05/21/98
KEY TELEPHONE PRODUCTS APPENDIX
1. PRODUCTS
PRODUCTS include:
1) Electra Professional-Registered Trademark- Key telephone systems
2) Electra Professional Voice Processing Equipment
3) Spare parts for manufacture discontinued Electra Key telephone systems
2. DISCOUNTS
(a) During the first year of the term of this AGREEMENT, NECAM shall grant to
ASSOCIATE a twenty-five percent (25%) discount off of NECAM's list prices for
the Electra Professional and Electra Professional Voice Processing Equipment
PRODUCT(S). Excluded from such discount are certain items of Electra
Professional, Electra Professional Voice Processing Equipment PRODUCT(S) and
discontinued Electra Key telephone systems that are offered at a net
(non-discountable) price.
Such discount(s) will be increased during such original or renewal term if
ASSOCIATE'S purchases exceed the Net Dollar Purchase amount listed below as
qualifying for such higher discount(s).
(b) On April 1 of each year during the term of this AGREEMENT, NECAM will
conduct an annual review of the performance of ASSOCIATE under this AGREEMENT.
ASSOCIATE's purchases during the preceding twelve (12) month period (April 1
through March 31) of each year in which this AGREEMENT is in effect shall be
used to determine ASSOCIATE's discounts for the next successive twelve (12)
month period. For purposes of determining ASSOCIATE's discounts after the first
year of the term of this AGREEMENT, the following discount schedule shall apply:
ELECTRA PROFESSIONAL
<TABLE>
<CAPTION>
List Dollar Purchases Discount
--------------------- --------
<S> <C>
1 - 199,999 25%
200,000 - 499,999 29%
500,000 or Over 33%
</TABLE>
In the event that this Agreement does not commence on April 1, the above
discount schedules shall be pro-rated for the first year of the term of this
AGREEMENT. NECAM reserves the right to change or modify the above discount
schedules upon written notice to ASSOCIATE.
<PAGE>
05/21/98
NEAX-Registered Trademark-2000 IVS & NEAX-Registered Trademark-1000
IVS/VSP PRODUCTS APPENDIX
1. PRODUCTS
PRODUCTS include:
1) NEAX-Registered Trademark-2000 IVS
2) NEAX-Registered Trademark-1000 IVS/VSP
2. DISCOUNTS
(a) During the original term of this AGREEMENT, NECAM shall grant to
ASSOCIATE a twenty-five percent (25%) discount off of NECAM's list prices for
the NEAX2000 IVS and the NEAX1000 IVS/VSP PRODUCT(S). Excluded from such
discount are certain items of the NEAX2000 IVS and the NEAX1000 IVS/VSP
PRODUCT(S) that are offered at a net (non-discountable) price.
Such discount will be increased during such original or renewal term if
ASSOCIATE'S purchases exceed the Net Dollar Purchases amount listed below as
qualifying for such higher discount.
(b) On April 1 of each year during the term of this AGREEMENT, NECAM will
conduct an annual review of the performance of ASSOCIATE under this
AGREEMENT. ASSOCIATE's purchases during the preceding twelve (12) month
period (April 1 through March 31) of each year in which this AGREEMENT is in
effect shall be used to determine ASSOCIATE's discount for the next
successive twelve (12) month period. For purposes of determining ASSOCIATE's
discounts after the first year of the term of this AGREEMENT, the following
discount schedule shall apply:
NEAX-Registered Trademark-2000 IVS & NEAX-Registered Trademark-1000 IVS/VSP
<TABLE>
<CAPTION>
LIST DOLLAR PURCHASES DISCOUNT
--------------------- --------
<S> <C>
1 - 199,999 25%
200,000 - 499,999 29%
500,000 - 999,999 33%
Over 1,000,000 36%
</TABLE>
* List Dollar Purchases exclude Dterm Series II, Dterm Series III, Dterm
Series E and Electra Professional terminal equipment on NEAX-Registered
Trademark-2000 IVS and the NEAX-Registered Trademark-1000 IVS/VSP schedule.
In the event that this Agreement does not commence on April 1, the above
discount schedule shall be pro-rated for the original term. NECAM reserves
the right to change or modify the above discount schedule upon written notice
to ASSOCIATE.
<PAGE>
3. SPECIAL CONDITIONS APPLICABLE TO NEAX-Registered Trademark-2000
INTEGRATED WIRELESS OR ADJUNCT PRODUCTS
(a) ASSOCIATE shall not sell, distribute or activate any NEAX-Registered
Trademark-2000 Integrated Wireless or Adjunct product unless the end-user
customer has acknowledged and agreed in writing that the use and operation
thereof will comply with all applicable Federal Communication Commission
(FCC) rules and regulations and all requirements and instructions of UTAM,
Inc., including without limitation, rules with respect to interference and
relocation. Each agreement between ASSOCIATE and such end-user shall include
the following provision:
[Customer] hereby acknowledges that the use and operation of any
intentional radiator equipment requiring a Part 15.311 FCC label and
subject to UTAM clearing fees, the operation of which makes use of any
part of the unlicensed personal communications services ("UPCS")
frequency spectrum ("UPCS Radiating Part"), is subject to FCC rules and
regulations and UTAM requirements and instructions with respect to
interference with licensed fixed microwave facilities and to the
relocation of any such UPCS Radiating Part. [Customer] agrees that [its]
use or operation of any UPCS Radiating Part shall comply with all rules,
regulations, requirements and instructions.
Associate shall submit proof in a form satisfactory to NECAM of end-user's
written agreement to such provision with each purchase order for any
NEAX-Registered Trademark-2000 Integrated Wireless or Adjunct product to
which such requirement applies.
(b) NECAM shall not be responsible for the failure of any NEAX-Registered
Trademark-2000 Integrated Wireless or Adjunct Product to conform to published
specifications, which failure is attributable to environmental or structural
causes beyond NECAM's control. Each Agreement between ASSOCIATE and an
end-user shall include an analogous disclaimer in a form satisfactory to
NECAM.
<PAGE>
EXTENDED HARDWARE WARRANTY PRODUCTS APPENDIX
1. SCOPE OF THE WARRANTY
In connection with the Extended Hardware Warranty offered by NECAM to
participating ASSOCIATE to be offered for resale to ASSOCIATE's
Customers ("Customers") in connection with each sale by Associate of an
NEC pbx or key system, NECAM agrees to provide ASSOCIATE with the
services described herein as to those hardware components covered by an
Extended Warranty provided by ASSOCIATE to its Customers. A sample copy
of such System Protection Plan Customer Contract and Site
Registration/Software License Agreement is attached hereto.
2. TERM
Such Extended Warranty shall commence on the date of system installation
as set forth on the Extended System Protection Plan Customer Contract or
sixty days from the date of shipment, whichever occurs first, and shall
be for a period of five years from such date. Such extended Warranty shall
be conditioned upon NECAM receiving a fully executed copy of the Extended
System Protection Plan Customer Contract, Site Registration/Software
License Agreement and an identification of the bar codes of all covered
components.
3. EQUIPMENT ELIGIBLE FOR COVERAGE
To be eligible for warranty coverage, the hardware components must
a. be purchased from a NECAM authorized distributor;
b. have all applicable bar codes properly registered with NEC America
by the authorized NECAM ASSOCIATE installing the system or
replacement component; and
c. receive all manufacturers recommended service and maintenance,
performed by a NECAM authorized distributor.
NECAM RESERVES THE RIGHT TO REFUSE WARRANTY COVERAGE ON ANY
HARDWARE COMPONENTS WHICH ARE NOT ELIGIBLE FOR WARRANTY COVERAGE
UNDER THIS AGREEMENT AND TO NOTIFY THE CUSTOMER OF SUCH REFUSAL.
1
<PAGE>
4. SERVICE PROVIDED
NECAM SHALL REPAIR OR REPLACE ALL HARDWARE COMPONENTS FOUND TO BE
DEFECTIVE. PARTS WHICH ARE REPLACED SHALL BECOME NECAM'S PROPERTY. UPON
REGISTRATION OF THEIR BAR CODES WITH NECAM AND IDENTIFICATION OF THE BAR
CODES AND RETURN OF THE DEFECTIVE PARTS THEY REPLACE, ALL REPLACEMENT
COMPONENTS SHALL BE WARRANTED FOR THE REMAINING TERM OF THE EXTENDED
WARRANTY TERM. ASSOCIATE MAY REPLACE A DEFECTIVE COMPONENT WITH A
COMPONENT FROM ITS INVENTORY, PROVIDED SUCH COMPONENT IS EITHER NEW OR
HAS BEEN RECONDITIONED IN ACCORDANCE WITH ANY PROCEDURES OR REQUIREMENTS
OF NECAM. IF ASSOCIATE REPLACES A DEFECTIVE HARDWARE COMPONENT WITH A
COMPONENT FROM ITS INVENTORY, THEN NECAM SHALL RETURN TO ASSOCIATE
EITHER THE REPAIRED COMPONENT OR A REPLACEMENT COMPONENT. IN SUCH EVENT,
SUCH COMPONENT SHALL BE WARRANTED FOR WHATEVER TERM OF WARRANTY REMAINED
ON THE COMPONENT INSTALLED AS A REPLACEMENT COMPONENT IN THE CUSTOMER'S
SYSTEM. DEFECTIVE COMPONENTS WHOSE BAR CODES DO NOT CORRESPOND TO THE
BAR CODES PREVIOUSLY REGISTERED WITH NECAM WILL NOT BE REPAIRED OR
REPLACED BY NECAM AND WILL RESULT IN THE IMPOSITION OF THE THEN
APPLICABLE NECAM PROCESSING FEE.
5. WARRANTY
NECAM warrants that all repaired or replacement components will conform
to specifications applicable at the time of the effective date of such
warranty or such revised specifications as may be applicable.
ASSOCIATE's sole remedy for breach of this warranty is repair or
replacement of the defective hardware component or pro rata refund of
the price paid for such extended warranty. THIS IS THE EXCLUSIVE
WARRANTY RELATING TO HARDWARE COMPONENTS AND NO OTHER WARRANTIES,
EXPRESSED OR IMPLIED, SHALL APPLY. NECAM SPECIFICALLY DISCLAIMS THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
6. EXCLUSIONS FROM SERVICE
The following are not included under this Agreement:
a. Repair or replacement of components, which, in NECAM's opinion, are
required due to misuse, abuse, improper installation or
application, improper maintenance or repair, alteration, accident
or negligence in use, improper temperature, humidity or other
environmental condition (i.e. lightning, water, shock damage),
improper storage, transport or handling or failure of components or
supplies not furnished by NECAM.
2
<PAGE>
b. Repair or replacement of components which are required due to
unauthorized attempts by persons not authorized by NEC America to
provide service to repair, maintain, or modify the hardware
components covered by this Agreement.
c. Repair or replacement of components which are not part of the
original system installed by the Associate and whose bar codes have
not been registered with NEC as covered by the Extended Warranty.
d. Repair or replacement of components which, when installed, were
neither new nor reconditioned in accordance with NECAM procedures
and requirements.
EXTENDED WARRANTY COVERAGE WILL BE AVAILABLE ON ADDED OR SUBSTITUTE
COMPONENTS ON PAYMENT OF THE APPLICABLE FEE SET BY NECAM.
Any service excluded by this Agreement and provided at the request
or with the agreement of the ASSOCIATE shall be paid for by
ASSOCIATE based on current rates for materials and labor in effect
when the service is provided.
7. TRANSFER AND ASSIGNMENT
a. This Extended Warranty is not transferable by ASSOCIATE and may be
enforced only by the original ASSOCIATE purchaser, except with the
written consent of NECAM and upon payment by an authorized NECAM
ASSOCIATE transferee of any applicable transfer fee and execution
of required documentation confirming the terms of such assignment.
b. This Extended Warranty shall not operate to extend the term of
ASSOCIATE's Associate Agreement and shall terminate immediately
upon termination or nonrenewal of the ASSOCIATE's Agreement or of
ASSOCIATE's authorization to distribute the covered hardware
components. In such event, ASSOCIATE hereby consents to the
assignment of this Agreement to a then currently authorized NEC
America ASSOCIATE.
8. LIMITATION OF LIABILITY
IN NO EVENT SHALL NEC AMERICA, INC. BE LIABLE FOR ANY DAMAGES RESULTING
FROM LOSS OF DATA, THE CONFIDENTIALITY OF DATA, LOSS OF SOFTWARE, LOSS
OF USE, LOSS OF REVENUE OR PROFITS, OR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES. THIS LIMITATION WILL APPLY REGARDLESS OF THE FORM
OF ACTION, WHETHER CONTRACT OR TORT.
3
<PAGE>
9. MISCELLANEOUS
A. NECAM RESERVES THE RIGHT TO TERMINATE THIS EXTENDED WARRANTY
PROGRAM PROSPECTIVELY.
B. NECAM ALSO RESERVES THE RIGHT TO TERMINATE PROSPECTIVELY
ASSOCIATE'S PARTICIPATION IN THIS EXTENDED WARRANTY PROGRAM AT ANY
TIME UPON WRITTEN NOTICE TO ASSOCIATE.
C. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, ALL PROVISIONS OF THE
ASSOCIATE AGREEMENT, INCLUDING BUT NOT LIMITED TO SECTION 20
PERTAINING TO HARDWARE WARRANTY, SHALL APPLY TO ASSOCIATE'S
PARTICIPATION IN THIS PROGRAM.
4
<PAGE>
NEC AMERICA, INC. CORPORATE NETWORKS GROUP SPONSORED
EXTENDED SYSTEM PROTECTION PLAN
CUSTOMER CONTRACT
(TERMS AND CONDITIONS BETWEEN NEC AMERICA ASSOCIATE AND CUSTOMER)
The following terms and conditions reflect the Extended System Protection
Plan's contract parameters between the NEC America, Inc. (NECAM) ASSOCIATE
and the CUSTOMER (end user). These terms and conditions must be provided to
the customer upon the sale of an NEC system provided with the Extended System
Protection Plan and must become a part of the contract between the ASSOCIATE
that is implementing the plan and the customer that is purchasing the plan. A
copy of these terms and conditions must be provided to the customer by the
ASSOCIATE in order for the plan to be valid with the NECAM Corporate Networks
Group (CNG)
ASSOCIATE NAME: START DATE:
------------------------ ----------------
CUSTOMER NAME: SITE NUMBER:
------------------------- ---------------
(Internal NECAM Use)
PERIOD OF COVERAGE
This Agreement shall commence on the date of system installation as stated on
a properly executed Site Registration/Software License Agreement or sixty
days from the date of shipment from NECAM to the ASSOCIATE, whichever occurs
first, and shall be for a term of five (5) years from such date.
EQUIPMENT ELIGIBLE FOR COVERAGE
To be eligible for warranty coverage under this Agreement, the new NEC system
hardware components and eligible station terminal equipment must meet the
following requirements.
1. The system and all of its components must be purchased from and
installed by a NECAM Corporate Networks Group authorized ASSOCIATE.
2. All components must have all applicable serial numbers (bar codes)
properly registered with NECAM by the authorized NECAM ASSOCIATE
installing the system or replacing the component.
3. The system must have been, and presently receiving manufacturer
recommended service and maintenance, performed by a NECAM authorized
ASSOCIATE.
THE ASSOCIATE RESERVES THE RIGHT TO REFUSE WARRANTY COVERAGE ON ANY HARDWARE
COMPONENTS OR TERMINAL EQUIPMENT WHICH ARE NOT ELIGIBLE FOR WARRANTY COVERAGE
UNDER THIS AGREEMENT.
SERVICE PROVIDED BY ASSOCIATE
The authorized NECAM ASSOCIATE shall repair or replace all hardware
components and terminal equipment found to be defective to ensure that such
components are performing in good working order. Parts which are replaced
shall become the ASSOCIATE's property. ASSOCIATE shall register the serial
numbers (bar codes) of all replaced components. Replacement components may be
new or reconditioned in accordance with all procedures or
<PAGE>
requirements of NECAM. All replacement components shall be warranted for the
remaining term of this Extended System Protection Plan.
WARRANTY
The NECAM ASSOCIATE warrants that all services will be provided in a
workman-like manner. The customer's sole remedy for breach of this warranty
is repair or replacement of the defective hardware component or pro rata
refund of the price paid for such warranty.
THIS IS THE EXCLUSIVE WARRANTY RELATING TO HARDWARE COMPONENTS AND SELECTED
NEC TERMINALS AND NO OTHER WARRANTIES, EXPRESSED OR IMPLIED, SHALL APPLY. THE
ASSOCIATE SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
EXCLUSIONS FROM THIS WARRANTY
The following services are not included under this NECAM Extended System
Protection Plan:
1. Component replacement and/or services which, are required due to
misuse, abuse, alteration, accident or negligence in use, improper
temperature, humidity or other environmental condition (i.e.
lightning, water, shock damage, improper storage, transport or
handling, or failure of components or supplies not furnished by
ASSOCIATE.
2. Component replacement and/or services which are required due to
unauthorized attempts by persons not authorized by NECAM to provide
service to repair, maintain, or modify the hardware components covered
by this Agreement.
3. Repair or replacement of third-party components or peripherals that
are installed with, mounted within, attached to, or integrated with
the new NEC system and is not manufactured by NEC, NECAM, and/or CNG.
4. NECAM ASSOCIATE labor and materials that are required in the servicing
of the NEC system and the replacement of components covered under the
Extended System Protection Plan.
5. Any services provided or components replaced that are excluded by this
Agreement and provided at the request or with the agreement of the
Customer shall be paid for by Customer based on current rates for
materials and labor in effect when the service is provided.
TRANSFER AND ASSIGNMENT
This Extended System Protection Plan agreement is not transferable by
Customer and may be enforced only by the original end-user purchaser, except
with the consent of ASSOCIATE and upon payment, by transferee, of any
applicable transfer fee and execution of required documentation confirming
the terms of such assignment. The customer shall have the right to terminate
or assign this Agreement immediately upon any material change in the status
of ASSOCIATE as an authorized NECAM ASSOCIATE with respect to the covered
hardware components. In such event, ASSOCIATE hereby consents to the
assignment of this Agreement to a then currently authorized NECAM ASSOCIATE.
In the event of breach by ASSOCIATE of any of its obligations under this or
any other agreement between customer and ASSOCIATE, Customer shall also have
the right to effectuate the assignment of this Agreement to another
authorized ASSOCIATE upon payment of any applicable transfer fee to NECAM and
acceptance of such assignment by such other ASSOCIATE. ASSOCIATE hereby
consents in such event to the assignment of this Agreement.
<PAGE>
LIMITATION OF LIABILITY
The Customer should keep for their own protection copies of all software and
data files that could be affected by a hardware malfunction.
IN NO EVENT SHALL ASSOCIATE OR NECAM BE LIABLE FOR ANY DAMAGES RESULTING FROM
LOSS OF DATA, THE CONFIDENTIALITY OF DATA, LOSS OF SOFTWARE, LOSS OF USE,
LOSS OF REVENUE OR PROFITS, OR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES. THIS LIMITATION WILL APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER
CONTRACT OR TORT.
GENERAL PROVISIONS
This Extended System Protection Plan agreement sets forth the entire
understanding of the parties with respect to the subject matter of the
extended hardware warranty. Any amendment must be in writing signed by the
parties.
WHEREFORE, the parties have executed this agreement by their duly authorized
representatives.
CUSTOMER: ASSOCIATE:
--------------------------- ------------------------
Signature: Signature:
-------------------------- ------------------------
Name: Name:
------------------------------- -----------------------------
Title: Title:
------------------------------ ----------------------------
Date: Date:
------------------------------- -----------------------------
<PAGE>
NEC AMERICA, INC. NEW TELECOMMUNICATIONS SYSTEM
SITE REGISTRATION SOFTWARE LICENSE AGREEMENT
EXTENDED SYSTEM PROTECTION PLAN
This Site Registration Form and the attached Software License Agreement must be
completed before your customer's system site can qualify for the standard NECAM
one-year warranty and the CNG Extended System Protection Plan. One of these
forms must be completed for each site in a multiple site configuration.
ASSOCIATE (LICENSOR) INFORMATION
ASSOCIATE NAME: NUMBER:
---------------------------- -------------
LOCATION: PHONE:
---------------------------------- -------------
CUSTOMER (LICENSEE) INFORMATION
CUSTOMER NAME:
--------------------------------------------------------------
ADDRESS:
--------------------------------------------------------------------
CITY: STATE: ZIP:
------------------------ ------------------ --------
PHONE: FAX:
---------------------------- --------------------------------
SALES CONTACT: PHONE:
------------------------- -------------------------
TECHNICAL CONTACT: PHONE:
--------------------- -------------------------
FAX: EMAIL:
----------------------------------- -------------------------
TYPE OF BUSINESS:
-----------------------------------------------------------
SYSTEM LOCATION (IF DIFFERENT):
---------------------------------------------
ADDRESS:
--------------------------------------------------------------------
CITY: STATE: ZIP:
----------------------- ----------------- -------
SITE CONTACT: PHONE:
-------------------------- -------------------------
FAX: EMAIL:
----------------------------------- -------------------------
SWITCH ROOM PHONE:
----------------------------------------------------------
SYSTEM INFORMATION
TYPE/MODEL OF NEC SYSTEM INSTALLED:
-----------------------------------------
BASIC SYSTEM CONFIGURATION:
STATIONS: LINES:
------------------------ -------------------------
SOFTWARE TYPE/VERSION: IN-SERVICE DATE:
---------------- ---------------
- --------------------------------------------------------------------------------
FOR NECAM OFFICIAL USE ONLY
SITE REGISTRATION #: LICENSE SERIAL #:
-------------- ----------------------
AUTHORIZED BY: DATE:
-------------------- ---------------------------------
<PAGE>
ACTIVE VOICE PRODUCTS APPENDIX
1. PRODUCTS/SOFTWARE
PRODUCTS/SOFTWARE include:
(a) NEAXMail-TM- AD-16
(b) NEAXMail-TM- AD-40
(c) NEAXMail-TM- AD-8
(d) NEAXMail-TM- C-70
(e) NEC ElectraMail-Registered Trademark-
(f) NEC ElectraMail-TM- AD-8
(g) Active Voice Repartee-Registered Trademark-
(h) PhoneMax-Registered Trademark-
(i) Lingo-TM-
2. PRICE
Prices applicable to the purchase of PRODUCTS shall be the prices set forth in
NECAM's then-current Price Bulletin.
3. CONTINUING AVAILABILITY OF PRODUCTS
NECAM agrees, at its option, to repair PRODUCTS no longer under warranty, or to
replace such PRODUCTS with functionally equivalent PRODUCTS, subject to
availability from Active Voice. PRODUCTS to be repaired or replaced under this
Section are to be returned to a location designated by NECAM.
4. TERRITORY
TERRITORY SHALL MEAN THE TERRITORY DESIGNATED IN THE KEY TELEPHONE PRODUCTS
APPENDIX AND/OR THE NEAX-Registered Trademark-2000 IVS PRODUCTS APPENDIX.
Repartee is a registered trademark of Active Voice Corporation.
ElectraMail is a registered trademark of NEC America, Inc.
NEAXMail is trademarked by NEC America, Inc.
PhoneMax is a registered trademark of Active Voice Corporation.
Lingo is a registered trademark of Active Voice Corporation
<PAGE>
CTI SOFTWARE PRODUCTS APPENDIX
1. PRODUCTS
PRODUCTS include:
1) Phonekits-TM-
2) PhoneLine-Registered Trademark-
3) Support Express-TM-
4) PhoneMax-TM-
2. TERRITORY
TERRITORY SHALL MEAN THE TERRITORY DESIGNATED IN THE KEY TELEPHONE PRODUCTS
APPENDIX AND/OR THE NEAX-Registered Trademark-2000 IVS PRODUCTS APPENDIX.
<PAGE>
SOFTWARE WARRANTY
THE FOLLOWING WARRANTIES SHALL APPLY:
Active Voice and CallWare products are all warranted for 14 months from the date
of shipment to the end-user.
All SpanLink Communications, Inc. global products are warranted for 14 months
from the date of acceptance.
Algo Communications products are warranted for 18 months from the date of
shipment or 12 months from installation, whichever is longer.
CCOM products are warranted 90 days from the date of shipment to the end-user.
PRODUCT WARRANTY:
(a) LIMITED WARRANTY: NECAM warrants that the Software described in this
Appendix shall perform, operate, and function as set forth in
appropriate Documentation and that Software will function in
accordance with the appropriate specification(s) for the period
described above.
(b) WARRANTY EXCLUSIONS: The above limited warranty does not apply to any
Product which (i) has been materially altered, except by the
manufacturer or under manufacturer's direction, or (ii) has not been
installed, operated, repaired or maintained in accordance with any
installation, handling, maintenance or operating instruction supplied
by manufacturer, (iii) has been subject to unusual physical or
electrical stress, negligence or accident, or (iv) is used with
hardware or software other than those provided for in the
specifications provided.
(c) NO OTHER WARRANTY: EXCEPT FOR THE EXPRESS WARRANTY SET FORTH ABOVE,
LICENSOR GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED,
BY STATUTE OR OTHERWISE REGARDING THE PRODUCTS, THEIR FITNESS FOR ANY
PARTICULAR PURPOSE, THEIR QUALITY, THEIR MERCHANTABILITY OR OTHERWISE.
(d) LIMITATION OF LIABILITY: Manufacturer's liability, and NECAM's remedy,
under the foregoing warranty shall be to correct the non-conformity
or, if the non-conformity is not correctable, to replace the Product
or fully refund any amounts paid for such Product.
NOTWITHSTANDING THE FOREGOING, IN NO EVENT SHALL EITHER PARTY BE
LIABLE TO THE OTHER OR ANY THIRD PARTY FOR LOST PROFITS, OR FOR ANY
SPECIAL, CONSEQUENTIAL INCIDENTAL OR INDIRECT DAMAGES FOR BREACH OF
WARRANTY.
(e) STANDARD LIMITED WARRANTY TO DISTRIBUTORS, RESELLERS AND END-USERS:
NECAM shall pass on to each of its distributors, resellers, end-users
or other customers, NECAM's standard limited warranty with each
Product.
<PAGE>
SUPPORT POLICY
TO BE ISSUED AT A LATER DATE IN ACCORDANCE WITH SECTION 1(c) OF THE ASSOCIATE
AGREEMENT
PRICING
DISTRIBUTOR NET PRICING SHALL APPLY TO ALL PRODUCTS
<TABLE>
<CAPTION>
NEC Stock # Description NET Price
- ----------------------------------------------------------------------------
<S> <C> <C>
PHONEMAX
0223030 PhoneMax 2.0 CD - 1 User $ 109.00
0223031 PhoneMax 2.0 CD - 10 Users $ 840.00
0223032 PhoneMax 2.0 CD - 24 Users $ 1,870.00
0223033 PhoneMax 2.0 CD - 50 Users $ 3,350.00
0223034 PhoneMax 2.0 CD - 100 Users $ 5,800.00
0223035 PhoneMax 2.0 CD - Upgrade $ 79.00
SUPPORT EXPRESS
0223431 Support Express, 1 User $ 1,856.90
0223449 Support Express, 1 Additional User $ 926.90
0223433 Support Express, 5 Users $ 4,336.90
0223435 Support Express, 5 Additional Users $ 3,096.90
0222005 Support Express, Site License $ 24,800.00
EVALUATION COPIES
0222019 Support Express, 30 day Working Eval. $ 6.17
OPTIONS
0223028 SE ExpLink to Remote Control $ 616.90
0223029 Support Express Telephony Link $ 616.90
HELP LINK
0222008 HelpLink Base License, 50 nodes $ 618.45
0222009 HelpLink 50 Additional User Licenses $ 589.00
0222010 HelpLink 100 Additional User Licenses $ 1,100.50
0222011 HelpLink 200 Additional User Licenses $ 2,015.00
0222012 HelpLink 400 Additional User Licenses $ 3,620.80
0222013 HelpLink 1000 Additional User Licenses $ 7,743.80
0222014 HelpLink 2000 Additional User Licenses $ 14,818.00
DEALER KIT
0223436 Support Express, 1 User Dealer Kit $ 995.00
PHONELINE
0223000 PhoneLine - 5 Users $ 700.00
0223001 PhoneLine - 10 Users $ 1,050.00
0223002 PhoneLine - 25 Users $ 1,925.00
0223003 PhoneLine - 50 Users $ 2,975.00
0223004 PhoneLine - 100 Users $ 3,725.00
0223005 PhoneLine - 250 Users $ 7,875.00
0223006 PhoneLine - 500 Users $ 13,375.00
0223007 PhoneLine - 1000 Users $ 21,125.00
</TABLE>
<PAGE>
NEC AMERICA SOFTWARE LICENSE AGREEMENTS
THE FOLLOWING LICENSE AGREEMENT SETS FORTH THE TERMS UNDER WHICH NECAM LICENSES
THE FOLLOWING PRODUCTS TO END-USER CUSTOMERS.
A. SUPPORT EXPRESS AND PHONEKITS
NECAM PERSONAL COMPUTER PROGRAM LICENSE AGREEMENT
PLEASE CAREFULLY READ THE FOLLOWING TERMS AND CONDITIONS BEFORE OPENING THIS
DISKETTE PACKAGE.
OPENING THE PACKAGE INDICATES THAT YOU HAVE ACCEPTED THESE TERMS AND CONDITIONS.
IF YOU DO NOT AGREE WITH THEM, YOU SHOULD IMMEDIATELY RETURN THE PACKAGE
UNOPENED. YOU WILL BE REIMBURSED OR CREDITED ACCORDING TO THE POLICY OF THE
AUTHORIZED NECAM DEALER OR NECAM REPRESENTATIVE FROM WHOM YOU OBTAINED THE
PACKAGE. UNDER NO CIRCUMSTANCES SHOULD YOU ACCEPT A PROGRAM DISKETTE PACKAGE
THAT HAS ALREADY BEEN OPENED.
NECAM provides this program and licenses its use to you, the licensee, pursuant
to the following terms. (From this point on, references to "you" means "the
licensee", references to "NECAM" means "NEC America, Inc.", and references to
the "program" means the program recorded on the diskette in this package and any
other programs or enhancements to programs which you hereafter may acquire from
NECAM unless such acquisition is subject to another written license agreement.)
You assume responsibility for the selection of the program to achieve your
intended results. Further you are responsible for the installation, use and
results obtained from the program.
LICENSE
Pursuant to this license agreement, you may:
1. Install and use one copy of the program on a single computer. If the
program includes functionality that enables your single computer to act as
a network server, any number of computers or workstations may access or
otherwise utilize the basic network services of that server.
2. Also store or install a copy of the program on a storage device, such as a
network server, used only to install or run the program on your other
computers over an internal network; however, you must acquire and dedicate
a license for each separate computer on which the program is installed or
run from the storage device. A license for the program may not be shared or
used concurrently on different computers.
You are granted a non-transferable and non-exclusive license to use the
program in machine readable object code form. Such a license shall include
the right to operate the program but shall not include a right of, and shall
be conditional on refraining from, copying (except for one backup copy),
reproducing, modifying, displaying, marketing, sub-licensing, giving, reverse
engineering, decompiling, transferring, or distributing the program, or any
part thereof, neither making the program available to any person, whether on
a time sharing basis or otherwise, or of creating a derivative of the program.
You acknowledge that you are using only a license to use the program and not
any title or ownership of the program or any part thereof.
<PAGE>
COPYRIGHT
THE PROGRAM IS COPYRIGHTED AND EXCEPT AS PERMITTED BY THIS AGREEMENT YOU MAY NOT
DUPLICATE THE PROGRAM OR DISCLOSE IT TO ANY OTHER PARTY IF YOU TRANSFER
POSSESSION OF ANY COPY OF THE PROGRAM OR DISCLOSE THE PROGRAM TO ANOTHER PARTY,
YOUR LICENSE IS AUTOMATICALLY TERMINATED.
TERM
This License Agreement is effective until terminated. You may terminate it
voluntarily at any time. Voluntary termination by you must be accompanied by
complete destruction of the licensed program and copies thereof. NECAM's
Licensor of this program may terminate this License without notice upon your
failure to abide by this Agreement.
FULL WARRANTY OF MEDIA
NECAM warrants to you that the diskette media is free from defects in materials
and workmanship and that it will replace any defective media at no charge, if
any such defect is discovered and the media is returned to NECAM within ninety
(90) days of its purchase. (Any such return should be made, postage paid to
NECAM at the address on this License Agreement, Attention: Software Warranty
Department, together with written notification of the defect).
DISCLAIMER OF SOFTWARE WARRANTIES AND LIABILITIES
NECAM SOFTWARE IS DISTRIBUTED AND LICENSED "AS IS". ALL WARRANTIES, EITHER
EXPRESS OR IMPLIED, ARE DISCLAIMED AS TO THE SOFTWARE AND ITS QUALITY,
PERFORMANCE, OR FITNESS FOR ANY PARTICULAR PURPOSE. YOU, THE CONSUMER, BEAR THE
ENTIRE RISK RELATING TO THE QUALITY OF THE SOFTWARE AND IF THE SOFTWARE PROVES
TO HAVE ANY DEFECTS, YOU ASSUME THE COST OF ANY NECESSARY SERVICING OR REPAIRS.
NECAM MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SOME STATES MAY NOT ALLOW
THE EXCLUSION OF IMPLIED WARRANTIES, SO THAT THE ABOVE EXCLUSION MAY NOT APPLY
TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE
OTHER RIGHTS WHICH VARY FROM STATE TO STATE.
LIABILITY
NECAM'S SOLE OBLIGATION TO YOU SHALL BE THE REPAIR OR REPLACEMENT OF A
NON-CONFORMING PROGRAM. SHOULD THIS REMEDY FAIL OF ITS PURPOSES, NECAM SHALL
HAVE THE OPTION TO REFUND THE LICENSE FEE.
IN NO EVENT SHALL NECAM, ITS LICENSORS, AND/OR ITS DISTRIBUTORS BE RESPONSIBLE
FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOST PROFITS EVEN IF NECAM HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SOME STATES MAY NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT
APPLY TO YOU.
This agreement supersedes all prior written or oral agreements, if any, and is
not assignable. It may be amended only expressly in writing signed by both
parties.
<PAGE>
YOUR RIGHTS AND NECAM'S RESPONSIBILITIES AS COVERED IN THIS PROGRAM LICENSE
AGREEMENT BECOME EFFECTIVE ONLY WHEN THE "TO BE RETURNED" SECTION OF THE PROGRAM
LICENSE AGREEMENT REGISTRATION CARD (ENCLOSED WITH THE SOFTWARE), FULLY FILLED
IN AND SIGNED BY YOU, HAS BEEN RECEIVED BY NECAM WITHIN FOURTEEN (14) DAYS OF
ITS PURCHASE.
THE REGISTRATION CARD MAY PRESENT ADDITIONAL TERMS AND CONDITIONS. IT IS YOUR
RESPONSIBILITY TO READ ANY SUCH ADDITIONAL TERMS AND CONDITIONS (A COPY WILL BE
PROVIDED TO YOU BY YOUR DEALER) AND TO DETERMINE THAT THEY ARE ACCEPTABLE TO YOU
BEFORE YOU OPEN THIS PACKAGE.
NO SUPPORT OF THIS PROGRAM OF ANY KIND CAN OR WILL BE AVAILABLE UNTIL THE RETURN
SECTION OF THE PROGRAM LICENSE AGREEMENT REGISTRATION CARD HAS BEEN RECEIVED BY
NECAM.
<PAGE>
THE FOLLOWING LICENSE AGREEMENT SHALL APPLY TO:
B. PHONELINE
NECAM PERSONAL COMPUTER PROGRAM LICENSE AGREEMENT
PLEASE CAREFULLY READ THE FOLLOWING TERMS AND CONDITIONS BEFORE OPENING THIS
DISKETTE PACKAGE.
OPENING THE PACKAGE INDICATES THAT YOU HAVE ACCEPTED THESE TERMS AND CONDITIONS.
IF YOU DO NOT AGREE WITH THEM, YOU SHOULD IMMEDIATELY RETURN THE PACKAGE
UNOPENED. YOU WILL BE REIMBURSED OR CREDITED ACCORDING TO THE POLICY OF THE
AUTHORIZED NECAM DEALER OR NECAM REPRESENTATIVE FROM WHOM YOU OBTAINED THE
PACKAGE. UNDER NO CIRCUMSTANCES SHOULD YOU ACCEPT A PROGRAM DISKETTE PACKAGE
THAT HAS ALREADY BEEN OPENED.
NECAM provides this program and licenses its use to you, the licensee, pursuant
to the following terms. (From this point on, references to "you" means "the
licensee", references to "NECAM" means "NEC America, Inc.", and references to
the "program" means the program recorded on the diskette in this package and any
other programs or enhancements to programs which you hereafter may acquire from
NECAM unless such acquisition is subject to another written license agreement.)
You assume responsibility for the selection of the program to achieve your
intended results. Further you are responsible for the installation, use and
results obtained from the program.
LICENSE
Pursuant to this license agreement, you may:
3. Install and use one copy of the program per user.
4. Also store or install a copy of the program on a storage device, such as a
network server, used only to install or run the program on your other
computers over an internal network; however, you must acquire and dedicate
a license for each separate computer on which the program is installed or
run from the storage device. A license for the program may not be shared or
used concurrently on different computers.
You are granted a non-transferable and non-exclusive license to use the program
in machine readable object code form. Such a license shall include the right to
operate the program but shall not include a right of, and shall be conditional
on refraining from, copying (except for one backup copy), reproducing,
modifying, displaying, marketing, sub-licensing, giving, reverse engineering,
decompiling, transferring, or distributing the program, or any part thereof,
neither making the program available to any person, whether on a time sharing
basis or otherwise, or of creating a derivative of the program. You acknowledge
that you are using only a license to use the program and not any title or
ownership of the program or any part thereof.
COPYRIGHT
THE PROGRAM IS COPYRIGHTED AND EXCEPT AS PERMITTED BY THIS AGREEMENT YOU MAY NOT
DUPLICATE THE PROGRAM OR DISCLOSE IT TO ANY OTHER PARTY IF YOU TRANSFER
POSSESSION OF ANY COPY OF THE PROGRAM OR DISCLOSE THE PROGRAM TO ANOTHER PARTY,
YOUR LICENSE IS AUTOMATICALLY TERMINATED.
<PAGE>
TERM
This License Agreement is effective until terminated. You may terminate it
voluntarily at any time. Voluntary termination by you must be accompanied by
complete destruction of the licensed program and copies thereof. NECAM's
Licensor of this program may terminate this License without notice upon your
failure to abide by this Agreement.
FULL WARRANTY OF MEDIA
NECAM warrants to you that the diskette media is free from defects in materials
and workmanship and that it will replace any defective media at no charge, if
any such defect is discovered and the media is returned to NECAM within ninety
(90) days of its purchase. (Any such return should be made, postage paid to
NECAM at the address on this License Agreement, Attention: Software Warranty
Department, together with written notification of the defect).
DISCLAIMER OF SOFTWARE WARRANTIES AND LIABILITIES
NECAM SOFTWARE IS DISTRIBUTED AND LICENSED "AS IS". ALL WARRANTIES, EITHER
EXPRESS OR IMPLIED, ARE DISCLAIMED AS TO THE SOFTWARE AND ITS QUALITY,
PERFORMANCE, OR FITNESS FOR ANY PARTICULAR PURPOSE. YOU, THE CONSUMER, BEAR THE
ENTIRE RISK RELATING TO THE QUALITY OF THE SOFTWARE AND IF THE SOFTWARE PROVES
TO HAVE ANY DEFECTS, YOU ASSUME THE COST OF ANY NECESSARY SERVICING OR REPAIRS.
NECAM MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SOME STATES MAY NOT ALLOW
THE EXCLUSION OF IMPLIED WARRANTIES, SO THAT THE ABOVE EXCLUSION MAY NOT APPLY
TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE
OTHER RIGHTS WHICH VARY FROM STATE TO STATE.
LIABILITY
NECAM'S SOLE OBLIGATION TO YOU SHALL BE THE REPAIR OR REPLACEMENT OF A
NON-CONFORMING PROGRAM. SHOULD THIS REMEDY FAIL OF ITS PURPOSES, NECAM SHALL
HAVE THE OPTION TO REFUND THE LICENSE FEE.
IN NO EVENT SHALL NECAM, ITS LICENSORS, AND/OR ITS DISTRIBUTORS BE RESPONSIBLE
FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOST PROFITS EVEN IF NECAM HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SOME STATES MAY NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT
APPLY TO YOU.
This agreement supersedes all prior written or oral agreements, if any, and is
not assignable. It may be amended only expressly in writing signed by both
parties.
YOUR RIGHTS AND NECAM'S RESPONSIBILITIES AS COVERED IN THIS PROGRAM LICENSE
AGREEMENT BECOME EFFECTIVE ONLY WHEN THE "TO BE RETURNED" SECTION OF THE PROGRAM
LICENSE AGREEMENT REGISTRATION CARD (ENCLOSED WITH THE SOFTWARE), FULLY FILLED
IN AND SIGNED BY YOU, HAS BEEN RECEIVED BY NECAM WITHIN FOURTEEN (14) DAYS OF
ITS PURCHASE.
THE REGISTRATION CARD MAY PRESENT ADDITIONAL TERMS AND CONDITIONS. IT IS YOUR
RESPONSIBILITY TO READ ANY SUCH ADDITIONAL TERMS AND CONDITIONS (A COPY WILL BE
PROVIDED TO YOU BY YOUR DEALER) AND TO DETERMINE THAT THEY ARE ACCEPTABLE TO YOU
BEFORE YOU OPEN THIS PACKAGE.
NO SUPPORT OF THIS PROGRAM OF ANY KIND CAN OR WILL BE AVAILABLE UNTIL THE RETURN
SECTION OF THE PROGRAM LICENSE AGREEMENT REGISTRATION CARD HAS BEEN RECEIVED BY
NECAM.
<PAGE>
EXHIBIT C
CUSTOMER SOFTWARE LICENSE AGREEMENT
This Customer Software License Agreement is between ______________________,
______________ an authorized NEC America, Inc., Associate or Authorized Reseller
(hereinafter "LICENSOR") and __________________, (hereinafter "LICENSEE").
1. DEFINITIONS
1.01 "CPU" means a central processing unit in the System or SubSystem as
described by the Software License Attachment.
1.02 "Computer Program" means any instruction or instructions in object-code
format for controlling the operation of a CPU.
1.03 "Licensed Product" means:
a: The Computer Program furnished hereunder to the LICENSEE as set
forth Schedule A attached.
b: The Computer Program manuals, documentation and any other material
for the licensed Computer Program.
THE TERM "LICENSED PRODUCT" DOES NOT MEAN OR INCLUDE THE SOURCE-CODE FORMAT FOR
THE COMPUTER PROGRAM SET FORTH ON SCHEDULE A.
2. GRANT OF RIGHTS
2.01 LICENSOR hereby grants the LICENSEE, and the LICENSEE hereby accepts, a
personal, non-transferable and non-exclusive right to use the LICENSED PRODUCT
on one (1) CPU at a time, or a single system where multiple CPU's are provided
in the configuration set forth on Schedule A, solely for its internal business
purposes. The LICENSEE understands that the Licensed Product furnished to the
LICENSEE is furnished solely for use in conjunction with the related hardware
PRODUCTS sold by LICENSOR to LICENSEE. The LICENSEE has no right to use the
Licensed Product so furnished on any CPU other than that such CPU or for any
purpose not specified herein.
2.02 No right, title or interest to the intellectual property in the Licensed
Product is hereby transferred to the LICENSEE, except as expressly granted
herein.
2.03 The LICENSEE shall not copy the Licensed Product except as necessary for
archival/back-up purposes. When the LICENSEE makes any copy of the Licensed
Products, such copy must include the copyright notice appearing on the Licensed
Product furnished to the LICENSEE.
2.04 The LICENSEE shall not transfer possession of the Licensed Product, nor
any rights conferred herein to any third party, except to a third party who
acquires title to the LICENSEE'S related hardware PRODUCTS, provided such
transferee has executed and provided to NEC America, Inc., a signed copy of
this Agreement and has tendered to NEC America, Inc., the then current license
transfer fee.
2.05 LICENSEE hereby assures LICENSOR that LICENSEE does not intend to, and
will not knowingly, without prior written consent, if required, of the Office of
Export Administration of the United States Department of Commerce, Washington
D.C. 20230, transmit, directly or indirectly the Licensed Product to Iran, Iraq,
Syria, the People's Republic of China or any Group Q,S,Y or Z country specified
in Supplement No. 1 to Section 770 of the Export Administration Regulations
issued by the United States Department of Commerce or to any other country to
which such transmission is restricted by such Regulations.
2.06 LICENSEE hereby agrees that it shall not reverse compile, disassemble,
alter, add to, delete from, or otherwise modify the LICENSED PRODUCT, except to
the extent that such modification capability is an intended feature of the
LICENSED PRODUCT.
3. LIMITED WARRANTY AND REMEDIES
3.01 For a period of fourteen (14) months from date of shipping at the
LICENSEE'S site specified in Schedule A, LICENSOR warrants that the Licensed
Product will conform to published performance specifications applicable as of
the date of this agreement and will be free from defects in workmanship, under
normal use and service, when correctly installed and maintained.
3.02 LICENSOR'S liability for any LICENSED PRODUCT which is shown to be
defective during its warranty period is limited to:
a: replacing the LICENSED PRODUCT or part thereof with a functionally
equivalent LICENSED PRODUCT or part,
b: repairing the LICENSED PRODUCT, or
c: issuing credit for the LICENSED PRODUCT
The choice of which of the above warranty remedies to utilize concerning any
particular LICENSED PRODUCT shall be LICENSOR'S.
3.03 In the event that any LICENSED PRODUCT is shown to be defective during
the warranty period, the LICENSEE shall:
a: notify LICENSOR or any other authorized NECAM Associate or
Authorized Reseller providing service to LICENSEE Promptly in
writing of any claims,
b: provide LICENSOR or such other authorized NECAM Associate or
Authorized Reseller and/or NEC America, Inc., with an opportunity
to inspect and test the LICENSED PRODUCTS claimed to be defective,
and
c: (if repair or replacement of the LICENSED PRODUCT is selected)
return the LICENSED PRODUCT to LICENSOR or such other authorized
NEC Associate, or Authorized Reseller or NEC America, Inc., in
accordance with instructions provided.
3.04 The above warranty excludes coverage for LICENSE PRODUCTS which were
installed, repaired or maintained by an unauthorized service provider or which
were subjected to misuse, abuse, improper installation or application, improper
maintenance or repair, alteration, accident or negligence in use, improper
temperature, humidity or other environmental condition (including, but not
limited to, lighting or water damage), storage, transportation or handling.
3.05 THE LICENSED PRODUCT WARRANTY CONTAINED IN THIS AGREEMENT IS IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING (BUT NOT LIMITED TO) ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
INCLUDING BUT NOT LIMITED TO PREVENTION, DETECTION OR DETERRENCE OF TOLL FRAUD,
COMPUTER VIRUSES OR OTHER UNAUTHORIZED OR IMPROPER USE OF THE SOFTWARE PRODUCTS.
3.06 LICENSOR's liability for any LICENSED PRODUCT malfunction, shall be
limited to performing one of the remedies specified herein, provided that the
malfunctioning LICENSED PRODUCT is covered by the applicable warranty. LICENSOR
and LICENSEE hereby agree that if such limitation is declared invalid by a court
of competent jurisdiction, then LICENSOR'S liability shall be limited solely to
a U.S. dollar amount equal to the cost of the malfunctioning LICENSED PRODUCT to
the LICENSEE. These remedies shall be exclusive and shall be the LICENSEE'S
sole remedies against LICENSOR or NEC America, Inc., or any of its affiliates,
Associates, or Authorized Reseller or suppliers for LICENSED PRODUCT
malfunction.
4. INFRINGEMENT
4.01 LICENSOR represents and warrants that no patent, copyright, trade secret,
trademark, trade name or other proprietary rights has been or will be infringed
by the LICENSEE's use of the LICENSED PRODUCT pursuant to this license.
4.02 If such infringement is alleged or does occur, LICENSEE shall be defended
against any and all claims arising from such allegations of findings of
infringement. LICENSOR shall, at its expense and sole decision, as the sole
remedy to which LICENSEE shall be entitled:
a: procure for LICENSEE the right to use the LICENSED PRODUCT, or
b: replace such LICENSED PRODUCT with a comparable, non-infringing
product, or
c: modify such LICENSED PRODUCT to be non-infringing, or
d: terminate the LICENSE for the LICENSED PRODUCT and refund the
LICENSE fee for such LICENSED PRODUCT or LICENSEE.
5. TERM AND TERMINATION
5.01 This Agreement shall take effect on the date LICENSED PRODUCT is shipped
by NECAM, and shall remain in effect until terminated as provided below.
5.02 If the LICENSEE should breach any of its obligations under this
Agreement, LICENSOR may (in addition to any other remedies available at law or
in equity) terminate this Agreement upon written notice to LICENSEE.
5.03 Upon termination of this Agreement, the LICENSEE shall immediately
discontinue the use of the LICENSED PRODUCT and shall return all copies of the
LICENSED PRODUCT to LICENSOR.
6. MISCELLANEOUS
6.01 This Agreement, including the addenda listed below, sets forth the
entire agreement and understanding between the parties, neither party shall
be bound by any conditions, definitions, warranties, understandings or
representations with respect to such subject matter other than as expressly
provided herein or as duly set forth on or subsequent to the date hereof in
writing and signed by a proper and duly authorized representative of the
party to be bound thereby.
The following Addenda/Exhibits are a part of this Agreement:
Addenda/Exhibits Licensor Licensor
Initials Initials
Schedule A
- --------------------- -------- ---------
Schedule B
- --------------------- -------- ---------
- --------------------- -------- ---------
6.02 IN NO EVENT SHALL LICENSOR OR NEC AMERICA, INC., OR ANY OF ITS
AFFILIATES, ASSOCIATES, AUTHORIZED RESELLERS OR SUPPLIERS BE LIABLE FOR
CONSEQUENTIAL, SPECIAL, INCIDENTAL OR SIMILAR DAMAGES, SUCH AS (BUT NOT LIMITED
TO) "DOWNTIME", EXCESS COSTS OR LOST BUSINESS REVENUES RESULTING FROM A LICENSED
PRODUCT MALFUNCTION FROM UNAUTHORIZED OR IMPROPER USE OF LICENSED PRODUCT
INCLUDING BUT NOT LIMITED TO TOLL FRAUD OR COMPUTER VIRUSES OR FROM LOSS OF USE
OF LICENSED PRODUCT DUE TO INFRINGEMENT CLAIMS.
7. STATISTICAL INFORMATION
7.01 NECAM requests that the LICENSEE complete the Statistical Information
contained within that section on Schedule A to this agreement. This information
may be used by NECAM for marketing purposes.
WHEREFORE, THE PARTIES HERETO HAVE EXECUTED THIS AGREEMENT THROUGH THEIR
AUTHORIZED REPRESENTATIVES.
LICENSOR: LICENSEE:
------------------------- -------------------------
BY: BY:
------------------------- -------------------------
NAME: NAME:
------------------------- -------------------------
TITLE: TITLE:
------------------------- -------------------------
<PAGE>
NEC AMERICA, INC.
SCHEDULE A
SOFTWARE LICENSE ATTACHMENT
SYSTEM ADD-ONS AND SUPPORT SERVICES
(One Attachment Per Software Product)
Product Name:
-----------------------------------------------------------
Feature Package:
-----------------------------------------------------------
Product Capacity:
-----------------------------------------------------------
Other:
-----------------------------------------------------------
Licensed From:
-----------------------------------------------------------
(NECAM Associate)
-----------------------------------------------------------
City St Zip
---------------------- ----------- ---------------
Licensed To:
-----------------------------------------------------------
-----------------------------------------------------------
City St Zip
---------------------- ----------- ---------------
Location of Product:
-----------------------------------------------------------
(if different)
-----------------------------------------------------------
City St Zip
---------------------- ----------- ---------------
Sales Contact:
-----------------------------------------------------------
-----------------------------------------------------------
City St Zip
---------------------- ----------- ---------------
Phone No.
--------------------------------------------------
Fax No.
----------------------------------------------------
Email:
-----------------------------------------------------
Tech Contact:
-----------------------------------------------------------
-----------------------------------------------------------
City St Zip
---------------------- ----------- ---------------
Phone No.
--------------------------------------------------
Fax No.
----------------------------------------------------
Email:
-----------------------------------------------------
Switchroom Phone No.
---------------------------------------
Licensee Signature:
-----------------------------------------------------------
Print Name:
-----------------------------------------------------------
Title:
-----------------------------------------------------------
Date:
-----------------------------------------------------------
License Serial No:
-----------------------------------------------------------
ACD II, III, or IV
-------------------------------------------------------------
Package or Module ACD
----------------------------------------------------------
Redundancy or Non-redundancy
---------------------------------------------------
ACD IV-100 Pkg.
----------------------------------------------------------------
ACD IV-200 Pkg.
----------------------------------------------------------------
ACD IV-100 Module
--------------------------------------------------------------
ACD IV-200 Module
--------------------------------------------------------------
ACD IV-300 Module
--------------------------------------------------------------
ACD IV-400 Module
--------------------------------------------------------------
ACD IV-500 Module
--------------------------------------------------------------
This schedule lists the system add-ons and support services that are covered
under this Software License Agreement and are not standard with the system.
The extra items listed on this schedule are included in the new system
installation and are therefore covered by this license agreement.
DEVELOPER TOOLS
If software developer tools (toolkits) were included with the system and are
covered under this Software License Agreement.
SPARE PARTS
If spare parts and/or peripheral equipment were included with the system and
are covered under this Software License Agreement.
CUSTOMIZATION CHARGES
The system hardware or system software customization charges were applied to
the system and are covered under this Software License Agreement.
OTHER DELIVERABLES
The other deliverables were included in the system installation and are
covered under this or another Software License Agreement.
ENGINEERING CONSULTING SERVICES
The engineering consulting or support services were implemented with the new
system and is covered under this Software License Agreement.
ON-SITE TECHNICAL SUPPORT
NECAM agrees to arrange to provide on-site technical support in accordance
with the rates.
SCHEDULE B
(CUSTOMER) HEREBY ACKNOWLEDGES THAT THE USE AND OPERATION OF ANY
INTENTIONAL RADIATOR EQUIPMENT REQUIRING A PART15.311 FCC LABEL AND SUBJECT
TO UTAM CLEARING FEES, THE OPERATION OF WHICH MAKES USE OF ANY PART OF THE
UNLICENSED PERSONAL COMMUNICATIONS SERVICES ("UPCS") FREQUENCY SPECTRUM ("UPCS
RADIATING PART"), IS SUBJECT FCC RULES AND REGULATIONS AND UTAM REQUIREMENTS
AND INSTRUCTIONS WITH RESPECT TO INTERFERENCE TO LICENSED FIXED MICROWAVE
FACILITIES AND TO THE RELOCATION OF ANY SUCH UPCS RADIATING PART. (CUSTOMER)
AGREES THAT (ITS) USE OR OPERATION OF ANY UPCS RADIATING PART SHALL COMPLY
WITH ALL RULES, REGULATIONS, REQUIREMENTS AND INSTRUCTIONS.
NECAM SHALL NOT BE RESPONSIBLE FOR THE FAILURE OF ANY NEAX WIRELESS PRODUCT
TO CONFORM TO PUBLISHED SPECIFICATIONS, WHICH FAILURE IS ATTRIBUTABLE TO
ENVIRONMENTAL OR STRUCTURAL CAUSES BEYOND NECAM'S CONTROL. EACH AGREEMENT
BETWEEN ASSOCIATE OR AUTHORIZED RESELLER AND AN END-USER SHALL INCLUDE AN
ANALOGOUS DISCLAIMER IN A FORM SATISFACTORY TO NECAM.
NEC Stock No. 200900
Revision 4/98
NEC CUSTOMER SERVICE COPY
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, is entered into as of SEPTEMBER 24, 1998
between VOICEPLUS INC. ("Borrower"), having a place of business at 39420 LIBERT
STREET, SUITE 250, FREMONT, CA 94538 and AEROFUND FINANCIAL having a place of
business at 2787 Moorpark Avenue, San Jose, California, 95128 ("Lender").
RECITALS
A. The Borrower has requested that Lender provide financial
accommodations to Borrower as more fully set forth herein and in the Loan
Documents.
B. The Borrower has requested that the Guarantor guaranty the
Obligations.
C. This Agreement is entered into and will be performed in the State
of California.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Parties hereby agree as follows:
AGREEMENT
D. Certain Definitions and Index to Definitions.
1. ACCOUNTING TERMS. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with generally accepted accounting
principles and practices consistently applied.
2. DEFINITIONS. The following terms shall have the following
respective meanings:
a. "ACCOUNT DEBTOR" - the obligor on an Account.
b. "ACCOUNTS" - means all currently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods or the rendition of services
by Borrower, irrespective of whether earned by performance, and any and all
credit insurance, guaranties, or security therefor.
c. "ADMINISTRATIVE FEE" - 0% (ZERO PERCENT) of the Net Face
Amount of each Account created by Borrower.
d. "ADVANCES" - advances made by Lender to Borrower under Section
2.1 hereof.
e. "AGREEMENT" - means this Loan and Security Agreement and any
extensions, riders, supplements, notes, amendments, or modifications to or in
connection with this Loan and Security Agreement.
f. "AUDIT FEE" - $750.
g. "AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" - means the Maximum
Amount less the average Obligations that were outstanding during the immediately
preceding month.
h. "BORROWER" - see Preamble.
i. "BORROWER'S ACCOUNT" - any general deposit account of
Borrower.
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<PAGE>
j. "BORROWER'S BOOKS" - means all of Borrower's books and records
including ledgers, records indicating, summarizing, or evidencing Borrower's
properties or assets or liabilities, all information relating to Borrower's
business operations or financial condition, and all computer programs, disc or
tape files, printouts, runs, or other computer prepared information, and the
equipment containing such information.
k. "BORROWING BASE" - 80% (EIGHTY PERCENT) percent of the Net
Face Amount of Borrower's Eligible Accounts.
l. "BORROWING BASE CERTIFICATE" - a request for an Advance, in
the form annexed hereto. (Exhibit D.2.L)
m. "BUSINESS DAY" - means any day which is not a Saturday,
Sunday, or other day on which national banks are authorized or required to
close.
n. "CLEARANCE DAYS" - 3 (THREE) Business Days.
o. "CLEARANCE DAY PAYMENTS" - payments received by Lender, in
whatever form and from whatever source, in reduction of the Obligations.
p. "CLOSING DATE" - means the date on which this Agreement is
accepted by Lender.
q. "COLLATERAL" - any collateral now or hereafter described in
any form UCC-1 filed against Borrower naming Lender as the secured party, and
all of Borrower's right, title and interest in and to the following property,
now owned and hereafter acquired:
(1) All accounts, interests in goods represented by
accounts, returned, reclaimed or repossessed goods with respect thereto and
rights as an unpaid vendor, contract rights, chattel paper, general
intangibles, including, but not limited to, tax and duty refunds, registered
and unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses
in action and other claims, and existing and future leasehold interests in
equipment, and fixtures, documents, instruments, letters of credit, deposit
accounts, certificates of deposit, securities, bankers' acceptances or
guaranties, credits, and all other interests in Borrower's property now or
hereafter held in any capacity by Lender or any entity which at any time
participates in Lender's financing of Borrower, and all agreements or other
property securing or relating to any of the items listed above; and
(2) All goods, including, but not limited to the following:
(a) All Inventory;
(b) All Equipment;
(c) All consumer goods, farm products, crops growing or
to be grown, timber to be cut, minerals or the like (including, but not limited
to, oil and gas), wherever located and of whatever kind, nature or description;
and
(3) All real or other personal property in or upon which
Lender has or may hereafter have a security interest, lien or right of setoff;
and
(4) All Borrower's Books; and
(5) All products and proceeds of the foregoing, in whatever
form and wherever located, including, but not limited to, all insurance
proceeds, all claims against third parties for loss or destruction of or damage
to any of the foregoing, and all income from the lease or rental of any of the
foregoing.
r. "COMMITMENT FEE" - an amount equal to 1.0% (one PERCENT) of
the maximum amount.
s. "DEBTOR (ACCOUNT DEBTOR) SET-UP FEE - $0.00 (ZERO DOLLARS).
-2-
<PAGE>
t. "DEFAULT RATE" - 20% (TWENTY PERCENT) per annum in excess of
the Interest Rate.
u. "EARLY TERMINATION PREMIUM" - the greater of:
(1) the total interest and fees for the immediately
preceding six (6) months; or
(2) $20,000 (TWENTY THOUSAND) Dollars.
v. "ELIGIBLE ACCOUNT" - an Account, excluding the following:
(1) Accounts which remain uncollected more than 90 days from
invoice date ("Delinquent Accounts");
(2) Accounts due from an Account Debtor that has suffered a
business failure or the termination of its existence, or as to which a
dissolution, insolvency or bankruptcy proceeding has been commenced, any
assignment for the benefit of creditors has been made, or a trustee, receiver or
conservator has been appointed for all or any part of the property of such
Account Debtor;
(3) Accounts due from an Account Debtor affiliated with
Borrower in any manner, including, without limitation, as stockholder, owner,
officer, director, agent or employee;
(4) Accounts with respect to which payment is or may be
conditional;
(5) Accounts with respect to which the Account Debtor is not
a resident of the United States, and which are not either (i) covered by credit
insurance in form and amount, and by an insurer, satisfactory to Lender, or (ii)
supported by one or more letters of credit that are assignable by their terms
and have been delivered to Lender in an amount, of a tenor, and issued by a
financial institution, acceptable to Lender;
(6) Accounts due from an Account Debtor who is any national,
federal or state government, including, without limitation, any instrumentality,
division, agency, body or department thereof, except where such account debtor
has agreed to make payment directly to the Lender;
(7) Accounts commonly known as "bill and hold" or a similar
arrangement;
(8) Accounts due from an Account Debtor as to which 25
percent or more of the aggregate dollar amount of all outstanding Accounts owing
from such Account Debtor are Delinquent Accounts;
(9) That portion of Accounts due from an Account Debtor
which is in excess of 50 percent of Borrower's aggregate dollar amount of all
outstanding Accounts Receivable;
(10) Accounts as to which Borrower is or may become liable
to the Account Debtor for any reason;
(11) Accounts which are not free of all liens, encumbrances,
charges, rights and interest of any kind, except in favor of Lender;
(12) Accounts which are supported or represented by a
promissory note, post-dated check or letter of credit unless such instrument is
actually delivered to Lender;
(13) Accounts with respect to which the Account Debtor is
located in New Jersey, Minnesota, or any other state denying creditors access to
its courts in the absence of a Notice of Business Activities Report or other
similar filing, unless Borrower has either qualified as a foreign corporation
authorized to transact business in such state or has filed a Notice of Business
Activities Report or similar filing with the applicable state agency for the
then current year;
(14) Accounts that are payable in other than United States
Dollars;
(15) Accounts that represent progress payments or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
-3-
<PAGE>
(16) Accounts which are unsuitable as collateral, as
determined by Lender in the exercise of its reasonable sole discretion
w. "EQUIPMENT" - means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts,
dies, jigs, goods (other than consumer goods, farm products, or Inventory),
wherever located, and any interest of Borrower in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located.
x. "EVENT OF DEFAULT" - See Section 11.
y. "FEIN" - means Federal Employer Identification Number.
z. "GAAP" - means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
aa. "GUARANTOR(S)" - DOUG ZORN
bb. "INTEREST RATE" -2.75% computed on a monthly basis..
cc. "INVENTORY" - means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located, and any documents of title representing any of the
above.
dd. "LOAN DOCUMENTS" - means this Agreement, any other note or
notes executed by Borrower and payable to Lender, and any other agreement
entered into in connection with this Agreement.
ee. "MAINTENANCE FEE" - an amount equal to 0.0% (ZERO PERCENT) of
the average outstanding balance of the Accounts for the preceding month
ff. "MAXIMUM AMOUNT" - $1,000,000.
gg. "MAXIMUM AMOUNT INCREASE FEE" - 0% of any increase in the
maximum amount
hh. "MINIMUM MONTHLY CHARGE" - $12,000 (TWELVE THOUSAND DOLLARS)
ii. "MONETARY COLLATERAL" - cash, checks or other proceeds of
Collateral in tangible form.
jj. "NEGOTIABLE COLLATERAL" - means all of Borrower's present and
future letters of credit, notes, drafts, instruments, certificated and
uncertificated securities (including the shares of stock of subsidiaries of
Borrower), documents, personal property leases (wherein Borrower is the lessor),
chattel paper, and Borrower's Books relating to any of the foregoing.
kk. "NET FACE AMOUNT" - with respect to an Account the gross face
amount of such Account less all trade discounts or other deductions to which the
Account Debtor is entitled.
ll. "OBLIGATIONS" - all present and future obligations owing by
Borrower to Lender whether or not for the payment of money, whether or not
evidenced by any note or other instrument, whether direct or indirect, absolute
or contingent, due or to become due, joint or several, primary or secondary,
liquidated or unliquidated, secured or unsecured, original or renewed or
extended, whether arising before, during or after the commencement of any
bankruptcy case in which Borrower is a debtor, and all principal, interest,
fees, charges, expenses, attorneys' fees and accountants' fees chargeable to
Borrower or incurred by Lender in connection with this Agreement and/or the
transaction(s) related thereto;
mm. "OVERAVAILABILITY FEE" - 18% (EIGHTEEN PERCENT) per annum
multiplied by the amount by which the average outstanding balance of the
Obligations exceeds the Borrowing Base.
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<PAGE>
nn. "PERMITTED LIENS" - means:
(1) liens and security interests held by Lender,
(2) liens for unpaid taxes that are not yet due and payable;
(3) liens and security interests set forth on the schedule
attached hereto;
(4) mechanics', materialmen's, warehousemen's, or similar
liens.
oo. "PRIME RATE" - the Prime Rate as reflected in The Wall
Street Journal (Western Edition). If such rate is shown as a range, then the
Prime Rate shall be the highest value in such range.
pp. "RENEWAL DATE" - the date which is SIX MONTHS from the
Closing Date.
qq. "TERMINATION DATE" - the earlier of the expiration of
this Agreement by its terms or the date on which the Lender elects to terminate
this Agreement pursuant to the terms herein.
rr. "WIRE FEE" - $10 (TEN DOLLARS).
E. CREDIT FACILITIES.
1. Subject to the terms and conditions of this Agreement, from
the date on which this Agreement becomes effective until the Termination Date
Lender, upon the request of Borrower, shall from time to time make Advances to
Borrower.
2. Each request from Borrower for an Advance shall be accompanied
by Borrowing Base Certificate, completed and signed by Borrower.
3. GENERAL. All advances by Lender may be made by transferring
funds to Borrower's Account.
4. AUTHORIZATION FOR ADVANCES. Lender is authorized to make
Advances: (1) upon telephonic, facsimile or other instructions received from
anyone purporting to be an officer, employee or representative of Borrower; or
(2) at the sole discretion of Lender, and notwithstanding any other provision in
this Agreement, if necessary to meet any Obligations, including but not limited
to any interest not paid when due.
5. CONDITIONS OF LENDER'S OBLIGATIONS. All conditions of Lender's
obligations to make Advances are imposed solely and exclusively for the benefit
of Lender and may be freely waived or modified in whole or in part by Lender at
any time.
6. LIMITATIONS ON CREDIT FACILITIES. Notwithstanding anything to
the contrary contained herein, Lender shall not be obligated to make an Advance
if, before or as a result thereof the Obligations shall exceed either the
Borrowing Base or the Maximum Amount.
F. PAYMENTS BY BORROWER.
1. IN GENERAL.
a. No checks, drafts or other instruments received by Lender
purportedly in satisfaction of any of the Obligations shall constitute payment
thereof unless and until such instruments have actually been collected.
b. Borrower shall have the right to make payments at any
time in reduction of the Obligations, in whole or in part, without premium or
penalty; provided, however, that Lender may apply any payments received by
Borrower to any of the Obligations, or portion thereof, in any manner and in any
order as Lender may determine in its sole discretion, notwithstanding contrary
instructions received from the payor.
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c. Borrower shall promptly make payments, without demand or
notice, in reduction of the Obligations in the amount by which the Obligations
exceeds the lesser of the Borrowing Base or the Maximum Amount.
2. INTEREST AND FEE PAYMENTS.
a. INTEREST.
(1) The interest on the Obligations shall be computed
at the Interest Rate, shall be due on the first day of each month following the
accrual thereof, and shall be computed on the basis of a 360-day year for actual
days elapsed. For any month in which the interest paid by Borrower to Lender
hereunder is less than the Minimum Monthly Charge, the difference shall be added
to Obligations as of the first day of the following month, until the date on
which all Obligations have been fully repaid (whether or not this Agreement has
heretofore been terminated).
(2) Lender is authorized to debit Borrower's Account on
the first business day of each month for interest accrued hereunder on the daily
Obligations during the preceding month at the Interest Rate;
(3) Any interest not paid when due (whether by
acceleration or otherwise, and before as well as after judgment) shall accrue at
the Default Rate.
b. UNUSED LINE FEE. N/A.
c. ADMINISTRATIVE FEE. N/A.
d. COMMITMENT FEE. Borrower shall pay lender the Commitment
Fee immediately upon lender's acceptance of this agreement. Borrower shall also
pay lender the Commitment Fee for any increase in the maximum amount during the
term of this contract.
e. MAINTENANCE FEE. N/A
f. DEBTOR SET-UP FEE. Borrower shall pay lender the Debtor
Set-Up Fee immediately upon the set-up of each new debtor.
g. OVERAVAILABILITY FEE. Borrower shall pay the
Overavailability Fee to lender each month for the computed average balance of
the advanced amount which is in excess of the eligible amount.
h. WIRE FEE. Borrower shall pay Lender the Wire Fee for each
wire transfer of funds. Borrower shall receive two wires per week at no charge.
3. REPAYMENT OF OBLIGATIONS UPON TERMINATION. Upon the
Termination Date, the unpaid balance of the Obligations shall be due and payable
without demand or notice.
4. MINIMUM MONTHLY CHARGE. For any month in which the
Administrative Fee paid by Borrower to Lender hereunder is less than the Minimum
Monthly Charge, the difference shall be added to Obligations as of the first day
of the following month, until the date on which all Obligations have been fully
repaid (whether or not this Agreement has heretofore been terminated).
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5. APPLICATION OF COLLECTIONS. Lender shall, for the purpose of
the computation of interest due hereunder, add the Clearance Days to any
Clearance Day Payments, which is acknowledged by the parties to constitute an
integral aspect of the pricing of Lender's facility to Borrower, and shall apply
irrespective of the characterization of whether receipts are owned by Borrower
or Lender. Should any check or item of payment net be honored when presented for
payment, then Borrower shall be deemed not to have made such payment, and
interest shall be recalculated accordingly.
G. CONDITIONS PRECEDENT TO ALL ADVANCES
1. The representations and warranties combined in the Loan
Documents shall be true and correct in all respects on and as of the date of
such Advance,
2. No Event of Default or event which with the giving of notice
or passage of time would constitute an Event of Default shall have occurred and
be continuing on the date of such Advance;
3. No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the making of such Advance shall
have been issued and remain in force by any governmental authority against
Borrower or Lender.
H. TERMINATION; AUTOMATIC RENEWAL; EARLY TERMINATION.
1. This Agreement shall become effective upon the execution and
delivery hereof by Borrower and Lender and shall continue in full force and
effect for a term ending on the Renewal Date, and automatically shall be renewed
for successive years thereafter, unless sooner terminated pursuant to the terms
hereof.
2. Either party may terminate this Agreement effective on the
Renewal Date or on the anniversary hereof by giving the other party a written
notice of termination at least ninety days (90) prior to expiration by
registered or certified mail, return receipt requested. Contract will renew for
one (1) year from expiration date should notice not be given. The foregoing
notwithstanding, Lender shall have the right to terminate its obligations under
this Agreement immediately and without notice upon the occurrence and during the
continuation of an Event of Default
3. If Borrower has sent a notice of termination under Section H.2
hereof but has failed to pay all Obligations on the date set forth in said
notice, then Lender may, but shall not be required to, renew this Agreement for
on additional twelve month period
4. The provisions of this Agreement notwithstanding, Borrower
shall have the option, at any time upon ninety (90) days prior written notice to
Lender, to terminate this Agreement by paying to Leader, in cash the Obligations
and the Early Termination Premium.
5. If Lender terminates this Agreement upon the occurrence of an
Event of Default, in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result thereof, Borrower
shall pay to Lender upon the effective date of such termination, the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Lender as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing.
I. SECURITY INTEREST.
1. Borrower hereby grants to Lender a continuing security
interest in the Collateral to secure prompt repayment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents.
2. Borrower shall immediately upon the request of Lender, endorse
and deliver Negotiable Collateral to Lender.
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J. COLLECTION AND ADMINISTRATION OF ACCOUNTS.
1. COLLECTION.
2. MONETARY COLLATERAL. Borrower shall, at Borrower's expense and
in the manner requested by Lender from time to time, direct that Monetary
Collateral be (or, if received by Borrower, shall cause same to be) (a) sent to
a post office box designated by and/or in the name of Lender, or in the name of
Borrower, but as to which access is limited solely to Lender and/or (b) paid
delivered to Lender. In connection therewith, Borrower shall execute such post
office box and/or blocked bank account agreements as Lender shall specify.
3. ELECTRONIC PROCEEDS OF COLLATERAL. In the event Borrower
receives proceeds of Collateral in the form of wire transfer or other intangible
funds transfer mechanism, Borrower shall immediately pay such proceeds to
Lender.
4. POWER OF ATTORNEY. Borrower hereby appoints Lender and any
designee of Lender as Borrowers attorney-in-fact and authorizes Lender or such
designee, at Borrower's sole expense, to exercise at any times in Lender's or
such designee's discretion all or any of the following powers, which powers of
attorney, being coupled with an interest, are irrevocable until all of the
Obligations have been paid in full: (a) receive, take, endorse, assign, deliver,
accept and deposit, in the name of Lender or Borrower, any and all cash, checks,
commercial paper, drafts, remittances and other instruments and documents
relating to the Collateral or the proceeds thereof, (b) transmit to any Account
Debtor or any bailee notice of the interest of Lender in the Collateral or
request from any such entity, at any time, in the name of Borrower or Lender or
any designee of Lender, information concerning the Account and any amounts owing
with respect thereto, (c) notify any Account Debtor to make payment directly and
solely to Lender, or notify bailees as to the disposition of Collateral, (d)
take or bring, in the name of Lender or Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or
other realization upon any Collateral, (e) after an Event of-Default, change the
address for delivery of mail to Borrower and to receive and open mail addressed
to Borrower, (f) after an Event of Default, upon any terms and conditions,
extend the time of payment of, compromise, or settle for cash, credit, return of
merchandise, any and all Accounts and discharge or release any Account Debtor
without affecting any of the Obligations, (g) execute in the name of Borrower
and file against Borrower in favor of Lender financing statements or amendments
with respect to any or all of the Collateral, and (h) execute in the name of
Borrower and file on behalf of Borrower with such governmental authorities as
are appropriate such documents (including, without limitation, applications,
certificates, and tax returns) as may be required for purposes of having
Borrower qualified to transact business in a particular state or geographic
location.
5. RELEASE. Borrower hereby releases and exculpates Lender, its
officers, employees, agents, designees, attorneys, and accountants from any
liability arising from any acts under this Agreement or in furtherance thereof,
whether as attorney-in-fact or otherwise, whether of omission or commission, and
whether based upon any error of judgment or mistake of law or fact, except for
gross negligence or willful misconduct. In no event shall Lender have any
liability to Borrower for lost profits or other special or consequential
damages.
6. NO AMENDMENTS. After written notice by Lender to Borrower, and
automatically, without notice, after an Event of Default, Borrower shall not,
without the prior written consent of Lender in each instance, (a) grant any
extension of time for payment of any Account, (b) compromise or settle any
Account for less than the full amount thereof, (c) release in whole or in part
any Account Debtor, or (d) grant any credits, discounts, allowances, deductions,
return authorizations or the like with respect to any Account.
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7. DELIVERY OF COLLATERAL. At such times as Lender may request
and in the manner specified by Lender, Borrower shall deliver to Lender or
Lender's representative original invoices, agreements, proof of rendition of
services and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to any of the Collateral, together with customer
statements, schedules describing the Accounts and/or statements of account and
confirmatory assignments to Lender of the Accounts in form and substance
satisfactory to Lender and duly executed by Borrower. Without limiting the
provisions of any other section of this Agreement, Borrower will promptly notify
Lender, in writing, of Borrower's granting of credits, discounts, allowances,
deductions, return authorizations or the like with respect to any Accounts. In
no event shall any such schedule or confirmatory assignment (or the absence
thereof or omission of any Accounts therefrom) limit or in any way be construed
as a waiver, limitation, or modification of the Liens or rights of Lender or the
warranties, representations, and covenants of Borrower under this Agreement. Any
documents, schedules, invoices or other paper delivered to Lender by Borrower
may be destroyed or otherwise disposed of by Lender six (6) months after receipt
by Lender, unless Borrower requests their return in writing in advance and makes
prior arrangements for their return, at Borrower's expense.
K. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender as follows:
1. Borrower has good and indefeasible title to the Collateral,
free and clear of liens, claims, security interests, or encumbrances, except for
Permitted Liens.
2. The Eligible Accounts are and will remain bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account Debtors in the ordinary course of Borrower's business,
unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. At the time of the creation
of an Eligible Account Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
applicable Account Debtor regarding such Eligible Account.
3. The Inventory and Equipment are not stored with a bailee,
warehouseman, or similar party (without Lender's prior written consent) and are
located only at the locations identified on the attached exhibit.
4. Borrower now keeps, and hereafter at all times shall keep,
correct and accurate records itemizing and describing the kind, type, quality,
and quantity of the Inventory, and Borrower's cost therefor.
5. The chief executive office of Borrower is located at the
address indicated in the preamble to this Agreement and Borrower's FEIN is
84-1360852
6. There are no actions or proceedings pending by or against
Borrower before any court or administrative agency and Borrower does not have
knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for ongoing
collection matters in which Borrower is the plaintiff.
7. All financial statements relating to Borrower or any guarantor
of the Obligations that have been delivered by Borrower to Lender have been
prepared in accordance with GAAP and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
material adverse change in the financial condition of Borrower (or such
guarantor, as applicable) since the date of the latest financial statements
submitted to Lender on or before the Closing Date.
L. AFFIRMATIVE COVENANTS. Until fall payment of the Obligations and
termination of this Agreement, Borrower shall:
1. FINANCIAL STATEMENTS, REPORTS AND CERTIFICATIONS. Furnish to
Lender, in form and substance satisfactory to Lender:
a. ANNUAL FINANCIAL STATEMENTS. As soon as possible after
the end of each fiscal year of Borrower, and in any event within SIXTY (60)
days thereafter: (a) a complete copy of Borrower's financial statements,
including but not limited to (i) the management letter, if any, (ii) the
balance sheet as of the close of the fiscal year, and (iii) the income
statement for such year, together with a statement of cash flows, COMPILED by
accountants selected by Borrower and satisfactory to Lender, and (b) a
statement certified by the chief financial officer of Borrower that Borrower
is in compliance with all the terms, conditions, covenants and warranties of
this Agreement; and
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b. OTHER FINANCIAL STATEMENTS/TAX PAYMENTS AND STATEMENTS.
No later than 14 days after the close of each QUARTER (an "Accounting Period"),
Borrower's balance sheet as of the close of such Accounting Period and its
income statement for that portion of the then current fiscal year through the
end of such Accounting Period and Borrower's Tax Payments and appropriate
statements through the end of such Accounting Period certified by Borrower's
chief financial officer as being complete, correct, and fairly representing its
financial condition and results of operations.
2. INSPECTIONS. Permit Lender or any representatives thereof,
during usual business hours, without notice to Borrower, to periodically (a)
inspect Borrower's tangible assets and (b) inspect, audit, make copies of, and
make extracts from Borrower's Books, and pay Lender the Audit Fee. In addition
to the foregoing, Borrower hereby permits Lender at any time to access
electronically information concerning any accounts maintained by Borrower with
any bank or other financial institution so long as such access is in furtherance
of, or to monitor compliance with, the terms of this Agreement. Borrower is
obligated to pay lender the Audit Fee a maximum at twice per year, and in the
event of default.
3. EXPENSES.
a. GENERALLY. Pay all reasonable out-of-pocket expenses of Lender
(including, but not limited to, fees and disbursements of Lender's counsel)
incident to (whether by judicial proceedings or otherwise, and whether any
resulting dispute resolution procedure involving tort, contract or other
claims):
(1) the preparation, negotiation, execution, administration
and enforcement of the Loan Documents, any amendments, extensions and renewals
thereof, and any other documents prepared in connection with any transactions
between Borrower and Lender, whether or not executed;
(2) any expenses incurred by Lender (whether or not for the
benefit of Borrower) under this Agreement, including, without limitation, all
expenses for postage relating to the mailing of statements, invoices, and
verifications, and all expenses relating to any audits of all or any portion of
the Collateral;
(3) the protection of Lender's rights under the Loan
Documents;
(4) defending against any and all claims against Lender
relating to any of its acts of commission or omission directly or indirectly
relating to the Loan Documents;
(5) or in any way arising out of a bankruptcy proceeding
commenced by or against Borrower, including but not limited to expenses incurred
in enforcing or defending Lender's claims against Borrower or the Collateral,
defending any avoidance actions, and expenses related to the administration of
said proceeding;
4. TAXES AND EXPENSES REGARDING BORROWER'S ASSETS. Make timely
payment or deposit of all taxes, assessments or contributions required of
Borrower. If Borrower fails to make any such payment or deposit or furnish the
required proof, Lender may, in its sole discretion and without notice to
Borrower, (a) make payment of the same or any part thereof, or (b) set up such
reserves against the Obligations as Lender deems necessary to satisfy the
liability therefore, or both. Lender may conclusively rely on statements of the
amount owing or other official statements issued by the appropriate governmental
agency. Any payment made by Lender shall constitute neither (i) an agreement by
Lender to make similar payments in the future, nor (ii) a waiver by Lender of
any default under the Loan Documents. Lender need not inquire into, nor contest
the validity of, any expense, tax, security interest, encumbrance or lien, and
the receipt of the usual official notice requiring the payment thereof shall be
conclusive evidence that the same was validly due and owing.
5. LOCATION OF COLLATERAL. Give Lender written notice immediately
upon forming an intention to change the location of its chief place of business
or any of the Collateral.
6. CHANGE IN NAME. Give Lender written notice immediately upon
forming an intention to change its name or form of business organization.
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7. INSURANCE. At all times maintain, with financially sound and
reputable insurers, casualty insurance with respect to the Collateral and other
assets. All such insurance policies shall be in such form, substance, amounts
and coverage as may be satisfactory to Lender and shall provide for thirty (30)
days prior written notice to Lender of cancellation or reduction of coverage.
Borrower hereby irrevocably appoints Lender and any designee of Lender as
attorney-in-fact for Borrower to obtain at Borrower's expense, and, after an
Event of Default, to adjust or settle any claim or other matter under or arising
pursuant to such insurance or to amend or cancel such insurance. Borrower shall
deliver to Lender evidence of such insurance and a Lender's loss payable
endorsement naming Lender as loss payee as to all existing and future insurance
policies relating to the Collateral. Borrower shall deliver to Lender, in kind,
all instruments representing proceeds of insurance received by Borrower. Lender
may apply any and all insurance proceeds received at any time to the cost of
repairs to or replacement of any portion of the Collateral and/or, at Lender's
option, to the payment of or as security for any of the Obligations, whether or
not due, in any order or manner as Lender determines.
8. TAX RETURNS. Deliver to Lender copies of each of Borrower's
federal income tax returns, and any amendments thereto, within thirty (30) days
of the filing thereof with the Internal Revenue Service.
M. NEGATIVE COVENANTS. Until full payment of the Obligations and
termination of this Agreement, Borrower will not:
1. Create, incur, assume, or permit to exist, directly or
indirectly, any lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens;
2. Enter into any acquisition, merger, consolidation,
reorganization, or recapitalization, or reclassify its capital stock, or
liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its business, property, or assets, whether now owned or hereafter acquired, or
acquire by purchase or otherwise all or substantially all of the properties,
assets, stock, or other evidence of beneficial ownership of any entity.
3. Enter into any transaction not in the ordinary and usual
course of Borrower's business, including the sale, lease, or other disposition
of, moving, relocation, or transfer, whether by sale or otherwise, of any of
Borrower's properties, assets (other than sales of Inventory to buyers in the
ordinary course of Borrower's business as currently conducted).
4. Change Borrower's name, FEIN, business structure, or identity,
or add any new fictitious name.
5. Suspend or go out of a substantial portion of its business.
6. Without thirty (30) days prior written notification to Lender,
relocate its chief executive office to a new location and so long as, at the
time of such written notification, Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected Lender's security
interests and also provides to Lender a landlord's waiver in form and substance
satisfactory to Lender. The Inventory and Equipment shall not at any time now or
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent.
N. EVENTS OF DEFAULT. Each of the following events or conditions shall
constitute an "Event of Default":
1. Borrower defaults in the payment of any Obligations when due,
whether at maturity, upon acceleration, or otherwise;
2. Borrower is in default with respect to the Loan Documents;
3. Borrower or any Guarantor (i) fails to pay any Indebtedness
for borrowed funds when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), or (ii) fails to perform or observe any
term, covenant, or condition of any agreement relating to any such Indebtedness,
if the effect of such failure to perform or observe is the acceleration of the
maturity of such Indebtedness, whether or not such failure is waived by the
obligee of such Indebtedness; or any such Indebtedness is declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof;
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4. An order for relief is entered against Borrower or any
Guarantor by any United States Bankruptcy Court; or Borrower or any Guarantor
does not generally pay its debts as they become due (within the meaning of 11
U.S.C. 303(h) as at any time amended, or any successor statute thereto); or
Borrower or any Guarantor makes an assignment for the benefit of creditors; or
Borrower any Guarantor applies for or consents to the appointment of a
custodian, receiver, trustee, or similar officer for it or for all or any
substantial part of its property, or such custodian, receiver, trustee, or
similar officer is appointed without the application or consent of Borrower or
any Guarantor; or Borrower or any Guarantor institutes (by petition,
application, answer, consent, or otherwise) any bankruptcy, insolvency,
reorganization, moratorium, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding relating to it under the laws of any
jurisdiction; or any such proceeding shall be instituted (by petition,
application, or otherwise) against Borrower or any Guarantor; or any judgment,
writ, warrant of attachment, execution, or similar process shall be issued or
levied against a substantial portion of the property of Borrower or any
Guarantor;
5. An adverse change occurs with respect to the financial
condition or operations of Borrower which results in a material impairment of
the prospect of repayment of Borrower's Indebtedness;
6. A sale, hypothecation or other disposition is made of twenty
percent or more of the beneficial interest in any class of voting stock of
Borrower;
7. Borrower fails to generate or provide accounts to Lender for a
30 day period.
8. Any provision of this Agreement or any of the Loan Documents
ceases, for any reason, to be valid and binding on Borrower;
9. Any Guarantor fails to perform or observe any of such
Guarantor's obligations under any Guaranty, or shall notify Lender of its
intention to rescind, modify, terminate or revoke the Guaranty with respect to
future transactions, or the Guaranty shall cease to be in full force and effect
for any reason whatever.
0. REMEDIES. Upon the occurrence of any Event of Default,
automatically, at Lender's option:
1. Lender's obligation to make any Advance available to Borrower
shall terminate;
2. All Obligations shall, without presentment, demand, protest,
or notice of any kind, all of which are hereby expressly waived, be forthwith
due and payable;
3. All Obligations shall accrue interest at the Default Rate; and
Lender may, immediately and without expiration of any period of grace, enforce
payment of all Obligations and exercise any and all other remedies granted to it
under the Loan Documents, at law, in equity, or otherwise, including but not
limited to the placement of Lender's agents or employees on Borrower's premises
to take all actions necessary to preserve the value of the Collateral.
P. NO LIEN TERMINATION WITHOUT RELEASE. In recognition of Lender's
right to have all its attorneys' fees and other expenses incurred in connection
with this Agreement secured by the Collateral, notwithstanding payment in full
of all Obligations by Borrower, Lender shall not be required to record any
terminations or satisfactions of any of its liens on the Collateral unless and
until Borrower and all Guarantors have executed and delivered to Lender general
releases which conform to California Civil Code Section 1541-2.
Q. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement,
PROVIDED that, this Agreement shall not become effective until all counterparts
hereof have been executed by all parties hereto.
R. SURVIVAL. All representations, warranties and agreements herein
contained shall be effective so long any portion of this Agreement remains
executory.
S. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement is held to be invalid, illegal or unenforceable in
any respect, then such provision shall be ineffective only to the extent of such
prohibition or invalidity, and the validity, legality, and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
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T. AMENDMENT. This Agreement shall not be changed, modified, amended,
or terminated except by a writing duly executed by all parties hereto.
U. WAIVER. No failure to exercise and no delay in exercising any
right, power, or remedy hereunder shall impair any right, power, or remedy which
Lender may have, nor shall any such delay be construed to be a waiver of any of
such rights, powers, or remedies, or any acquiescence in any breach or default
hereunder; nor shall any waiver of any breach or default of Borrower hereunder
be deemed a waiver of any default or breach subsequently occurring. All rights
and remedies granted to Lender hereunder shall remain in full force and effect
notwithstanding any single or partial exercise of, or any discontinuance of
action begun to enforce, any such right or remedy. The rights and remedies
specified herein are cumulative and not exclusive of each other or of any rights
or remedies which Lender would otherwise have. Any waiver, permit, consent or
approval by Lender of any breach or default hereunder must be in writing and
shall be effective only to the extent set forth in such writing and only as to
that specific instance.
V. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
W. CHOICE OF LAW. This Agreement and all transactions contemplated
hereunder and/or evidenced hereby shall be governed by, construed under, and
enforced in accordance with the laws of the State of California.
X. STATUTE OF LIMITATIONS. Borrower waives the pleading of any statute
of limitations with respect to any and all actions in connection herewith.
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Y. WAIVER OF TRIAL BY JURY. IN RECOGNITION OF THE HIGHER COSTS AND
DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING
HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
For: VOICEPLUS INC
By: /s/ Douglas S. Zorn
---------------------------------
Printed Name:
-----------------------
Title:
------------------------------
AEROFUND FINANCIAL
By: /s/ Steve Troy
---------------------------------
Title: President
------------------------------
-14-
<PAGE>
Exhibit "A"
ACKNOWLEDGMENT OF CALIFORNIA CHOICE OF LAW AND SANTA CLARA COUNTY VENUE
The parties expressly acknowledge their agreement that:
(1) California, as the state of the origin of the funding of this
lending on accounts and the state in which the lending on accounts is to be
consummated, is the place of performance of, the situs of, and the state with
the most significant relationship with this agreement for lending on accounts
and its subject matter; and that
(2) California is the governing law applicable to this contract and
its interpretation as provided in this entire Loan and Security Agreement.
(3) Santa Clara County, as the county of the origin of the funding of
this lending on accounts and the county in which the lending on accounts is to
be consummated, is the place of performance of, the situs of, and the county
with the most significant relationship with this agreement for lending on
accounts and its subject matter will be venue of choice applicable to this
contract and its interpretation as provided in this entire Loan and Security
Agreement.
Agreed,
Borrower, VOICEPLUS INC Lender: Aero Fund Financial
By: /s/ Douglas S. Zorn /s/ Steve Troy
-------------------------- --------------------------------
Printed Name: Steve Troy
---------------- --------------------------------
Title: President
----------------------- --------------------------------
Date: October 9, 1998
------------------------ --------------------------------
-17-
<PAGE>
DATED THIS 30th DAY OF SEPTEMBER, 1998
**************************************
FROM
LEE GIM TEIK @ LEE LAI HOO
MAN YIEW MING
NG KOK WAH
TO
NHANCEMENT TECHNOLOGIES INC.
*****************************
GUARANTEE
*****************************
Prepared By :
SKRINE & CO.
ADVOCATES & SOLICITORS
UNIT NO. 50-8-1, 8TH FLOOR
WISMA UOA DAMANSARA
50 JALAN DUNGUN
DAMANSARA HEIGHTS
50490 KUALA LUMPUR
FILE NO. KCK/KCH/1972077.4
V:\KCH\1972077.4\SHARES\J&SGUA-4.DOC
30th SEPTEMBER 1998
<PAGE>
GUARANTEE
To : NHANCEMENT TECHNOLOGIES INC.
39420 Liberty Street
Fremont
California 94538
United States of America
Dear Sirs,
ADVANTIS NETWORK & SYSTEM SDN BHD
1. IN CONSIDERATION of your agreeing to forbear any action against us in
respect of the agreement for the sale of shares in ADVANTIS NETWORK & SYSTEM
SDN. BHD. (Company No. 264705-A), a company incorporated in Malaysia and having
its registered office at Unit No. 50-8-1, 8th Floor, Wisma UOA Damansara, 50
Jalan Dungun, Damansara Heights, 50490 Kuala Lumpur ("BORROWER") dated the 20th
day of June, 1997 and made between yourselves ("LENDER") and ourselves and three
(3) other individuals namely Lee Ai Leng, Nordin Bin Mohamad Desa and Abdul
Rahman Bin Mohamed Hussain, and to continue to make available to the Borrower
the loan of US$300,000 ("LOAN") pursuant to an Agreement dated the 7th day of
July, 1997 ("AGREEMENT", which term shall include any and all subsequent
amendments and/or modifications thereto, including the repayment schedule set
out in Schedule I hereto) made between the Lender and the Borrower and to three
(3) Promissory Notes issued by the Borrower to the Lender with respect to the
Loan ("PROMISSORY NOTES"), We the parties whose names and addresses are set out
in Schedule II hereto (severally "GUARANTOR" and collectively "GUARANTORS")
HEREBY JOINTLY AND SEVERALLY UNCONDITIONALLY AND IRREVOCABLY GUARANTEE to the
Lender as and for our own debt and as primary obligors in the Agreed Proportions
set out in Schedule II hereto the due and punctual payment by the Borrower of
all amounts due from the Borrower under the Agreement and each of the Promissory
Notes in accordance with the terms thereof in the currency and in the manner in
which the same are payable thereunder.
PROVIDED THAT the total amount recoverable from the Guarantors severally shall
not exceed US$300,000 together with a further sum for all interest, costs and
expenses payable under the Agreement or the Promissory Notes as shall have
accrued or shall accrue and be due to the Lender at any time before or at any
time after the date of such demand as stated above.
2. The Guarantors hereby acknowledge that the amount due by the Borrower
to the Lender under the Agreement and the Promissory Notes in respect of the
Loan and interest thereunder as at 31 August 1998 stood at US$326,500.
3. The Guarantors hereby agree that upon default by the Borrower in the
payment of any sum falling due under the Agreement or the Promissory Notes, the
Guarantors shall forthwith pay the same on demand by the Lender within 14 days
of receipt of the said demand. The Guarantors hereby expressly waive all other
formalities of any kind, as well as any requirement that
<PAGE>
the Lender exhaust any right to take any action against the Borrower and hereby
consent to any extension of time for payment or other indulgence or concession
granted to the Borrower.
4. Notwithstanding Clause 3 hereof and anything herein to the contrary,
in the event of a default by the Borrower in the payment of any sum falling due
under the Agreement or the Promissory Notes, which default is remedied and
payment of the sum then falling due is made within forty-five (45) days of the
due date of that payment, the Lender shall not proceed to call upon this
Guarantee. In the event payment of the sum then falling due is not made within
forty-five (45) days of the due date of that payment, the Guarantors shall make
good that payment pursuant to this Guarantee, and that no further extension of
time shall be permitted. The Guarantors hereby agree, accept and acknowledge
that an event of default by the Borrower in the payment of any sum falling due
under the Agreement or the Promissory Notes shall be capable of remedy on only
three (3) occasions. On the occurrence of a fourth event of default by the
Borrower in the payment of any sum falling due under the Agreement or the
Promissory Notes, the entire balance of the Loan then outstanding, together with
interest thereon, shall forthwith become immediately due and payable.
5. The Guarantors hereby undertake that until full and final repayment of
all sums payable under the Agreement and the Promissory Notes, no lien or other
security for or on account of the granting by the Guarantors of this Guarantee
shall be taken except with the prior written consent of the Lender nor shall the
Guarantors or any of them take any action against the Borrower or any of its
property for or on account of any payments made by the Guarantors under this
Guarantee and the Guarantors shall not, after a written demand has been made
under this Guarantee, claim from the Borrower any sums which may be owing to the
Guarantors or any of them or have the benefit of any set-off or counterclaim or
proof against any dividend, composition or payment by the Borrower until all
sums owing to the Lender under the Agreement and the Promissory Notes have been
paid in full.
6. None of the Guarantors' liability to the Lender shall be discharged,
diminished or affected by the granting of any time or indulgence to the Borrower
or by the effecting of any compromise with or any agreement not to sue the
Borrower or by the variation of any terms of the Agreement or by the Lender's
failure to institute or pursue any legal proceedings against the Borrower and no
waiver by the Lender of any breach of the Guarantors' obligations hereunder
shall operate as a waiver of any future or continuing breach.
7. The Guarantors hereby agree that they shall not be discharged or
released from this Guarantee by any arrangement made after this Guarantee or any
dealing between the Borrower and the Lender without the knowledge or consent of
the Guarantors or by any variation or alteration in the Agreement without the
knowledge or consent of the Guarantors.
8. In order to give full effect to the provisions of this Guarantee the
Guarantors hereby waive all rights inconsistent with such provisions and which
they might otherwise as sureties be entitled to claim and enforce and the
Guarantors declare that the Lender shall be at liberty to act as though the
Guarantors are primary obligors to the Lender for all sums guaranteed by the
Guarantors hereunder.
<PAGE>
9. Any admission or acknowledgment in writing by the Borrower or by any
person authorised by the Borrower of the amount of indebtedness of the Borrower
to the Lender and any judgment recovered by the Lender against the Borrower in
respect of such indebtedness shall be binding and conclusive on and against the
Guarantors in all courts of law and elsewhere. A certificate by an officer of
the Lender as to the money and liabilities for the time being due from the
Borrower under the Agreement or the Promissory Notes shall be conclusive
evidence in any legal proceedings against the Guarantors or their respective
successors in title and personal representatives save for manifest errors.
10. All monies received by the Lender from or on account of the Borrower
or from any other person or estate or from the realisation of any security or
otherwise for the purpose of being applied in reduction of the monies in Clause
1 above mentioned shall be treated for all purposes as payments in gross and not
as appropriated or attributed to any specific part or item of the said monies
even if appropriated thereto by the person otherwise entitled so to appropriate.
All securities now or at any time held by the Lender shall be treated as
securities for the said general balance and other amount owing. None of the
Guarantors will make any claim on such securities or any part thereof or any
interest therein unless and until the Guarantors have paid all monies due from
the Guarantors under this Guarantee and the Lender shall have received the full
amount of such general balance and other amounts if any.
11. Should the Borrower become bankrupt or insolvent or being an
incorporated company shall be wound up, the Lender may prove in the bankruptcy,
insolvency or winding up of the Borrower for the whole amount outstanding
against the Borrower and no money or dividend so received by the Lender shall be
treated as received in respect of this Guarantee or otherwise in relation to the
Guarantors but the full amount hereby guaranteed shall be payable by the
Guarantors until the Lender shall have received from all sources one hundred
cents in the United States Dollar on the ultimate balance outstanding against
the Borrower. After the Lender has received such ultimate balance in full any
claim on the part of the Guarantors to any excess or any securities remaining in
the hands of the Lender shall be a matter of adjustment between the Lender the
Guarantors and any other person or persons laying claim thereto.
12. This Guarantee shall be without prejudice to and shall not be affected
nor shall any of the Guarantors be released or exonerated by any of the matters
following:-
(a) the granting to the Borrower or any of the Guarantors of any time or
indulgence;
(b) any dealing with exchanging release or modification or abstention from
perfecting or enforcing any securities or other guarantees or rights
it may now or at any time hereafter or from time to time have from or
against the Borrower or any other person;
(c) compounding or entering into any compromise with the Borrower or any
of the Guarantors.
13. This Guarantee shall not be determined or in any way prejudiced by:-
(a) any change in the constitution of the Borrower whether by
amalgamation, reconstruction or otherwise but shall enure and be
available for all intents and
<PAGE>
purposes as if the resulting company or concern had been the one whose
obligations were originally guaranteed; or
(b) any absorption of or by the Lender or any amalgamation thereof or
therewith but shall enure and be available for past and subsequent
advances and all other purposes for and by the absorbing or
amalgamated company or concern.
14. The Guarantors hereby agree that the Lender may enforce this Guarantee
against the Guarantors severally at any time. This Guarantee shall not be
determinable by the Guarantors or their respective successors in title or
personal representatives except on the terms of the Guarantors making full
payment of the amount owing by the Borrower to the Lender under the Agreement
and the Promissory Notes. Notwithstanding the foregoing, the Lender may at its
discretion release any one or more of the Guarantors from their obligations
under this Guarantee, but such a release shall not operate to release the
remaining Guarantors from their obligations under this Guarantee.
15. The Guarantors agree that any sum or sums of money which may not be
recoverable from the Guarantors on the ground that the grant of the Loan to the
Borrower in any particular instance is affected in part or in whole by
invalidity or unenforceability for whatever reason shall nevertheless be
recoverable from the Guarantors as principal debtors.
16. As a separate and independent stipulation, the Guarantors agree to,
and hereby do, deposit with Messrs. Skrine & Co. of Unit No. 50-8-1, 8th Floor,
Wisma UOA Damansara, 50 Jalan Dungun, Damansara Heights, 50490 Kuala Lumpur
("LENDER'S SOLICITORS"), as custodian, their respective original certificates
for the Common Stock of the Lender held by them with the transfer portion on the
reverse of the afore-mentioned certificates duly signed by them respectively.
The Guarantors hereby agree that in the event of a default in the Agreement or
the Promissory Notes the Lender's Solicitors shall be entitled forthwith to
forward the original certificates for the Common Stock of the Lender to the
Lender to be credited at the then fair market value of the Common Stock against
the settlement of any and all amounts owing by the Guarantors pursuant to the
Agreement, the Promissory Notes and this Guarantee in the Agreed Proportions.
17. As a further separate and independent stipulation, the Guarantors
hereby agree, covenant and undertake jointly and severally in the Agreed
Proportions to keep the Lender indemnified against all damages, losses, claims,
expenses and costs whatsoever suffered or incurred by the Lender as a result of
the Lender continuing to make available and extend the Loan to the Borrower.
18. All amounts payable by the Guarantors pursuant to this Guarantee shall
be made in the legal currency of the United States of America.
19. In this Guarantee words in the singular include the plural and words
in the plural include the singular.
<PAGE>
20. Any term condition or provision of this Guarantee which is illegal
prohibited or unenforceable shall not invalidate the remaining provisions herein
which shall remain in full force and effect.
21. This Guarantee shall be governed by and construed in accordance with
the laws of California and the Guarantors agree to submit to the non-exclusive
jurisdiction of the Courts of the United States of America. Nothing in this
clause shall limit the right of the Lender to institute legal proceedings
against the Guarantors in any Court of competent jurisdiction nor shall the
taking of any proceedings in one or more jurisdiction preclude the taking of
proceedings in any other jurisdiction whether concurrently or not.
22. No assurance, security or payment which may be avoided under Section
293 or 294 of the Malaysian Companies Act 1965 or by any provisions of the
Malaysian Bankruptcy Act, 1967 and no release, settlement or discharge which may
have been given on the faith of any such assurance, security or payment shall
prejudice or affect the Lender's right to recover from the Guarantors to the
full extent of this Guarantee as if such assurance, security, payment, release,
settlement or discharge (as the case may be) had never been granted, given or
made.
23. All costs (legal or otherwise and where legal both judicial and extra
judicial and as between solicitor and client) charges and expenses incurred or
to be incurred hereunder by the Lender including any expenditure incurred or to
be incurred in the enforcement and/or in the giving of any notice or in the
making of any demand under pursuant to or in respect of this Guarantee or any
monies secured by this Guarantee and all other monies whatsoever paid or to be
paid by the Lender in respect of the said costs charges expenses and expenditure
or otherwise howsoever and all or any other sums and monies paid or to be
expended by the Lender hereunder shall be payable by the Guarantors to the
Lender on demand and shall bear interest thereon calculated at the rate
applicable to the Loan and such interest shall on demand be paid to the Lender
by the Guarantors.
24. This Guarantee shall enure for the benefit of the Lender and its
successors in title and be binding upon the Guarantors jointly and severally in
the Agreed Proportions and their respective heirs, successors in title and
personal representatives.
25.1 Any notice, demand or request required or permitted to be given or
made under this Guarantee to the Lender or to the Guarantors shall be in
writing and addressed, in the case of the Lender, to the addresses specified
below and in the case of the Guarantors, to the addresses set out in the
Schedule hereto and in either case, to such other address as may be notified
in writing by either party to the other from time to time:-
FOR THE LENDER:
NHANCEMENT TECHNOLOGIES INC.
39420 Liberty Street
Fremont
California 94538
United States of America
Facsimile No.: 00 - 1 - 510 - 793 6994
<PAGE>
25.2 Any such notice, demand or request shall be sent by prepaid registered
air-mail or delivered personally or sent by telefax addressed to the recipient
and shall be conclusively deemed to be received:-
(a) in the case of delivery in person, at the time of delivery;
(b) in the case of prepaid registered air-mail, 14 days after the date of
posting;
(c) in the case of telefax, upon receipt by the sender of the answer-back
code of the recipient at the end of the transmission.
26. The Guarantors agree that any demand for payment served by the Lender
to any one of the Guarantors in the manner set out in Clause 25 above shall be
deemed to be duly served on all the Guarantors.
27. This Guarantee may be executed in one or more counterparts each of
which shall be deemed to be original but all of which together shall constitute
one and the same instrument.
Dated this 30th day of September 1998.
[THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
<PAGE>
SIGNED by LEE GIM TEIK @ LEE LAI HOO )
on the 30th day of SEPTEMBER, 1998 ) /s/ LEE GIM TEIK @ LEE LAI HOO
in the presence of:- )
/s/ Andrew Khoo
..................................
Name of Witness: ANDREW KHOO
I C No.: 651031-10-5841
SIGNED by MAN YIEW MING )
on the 30th day of SEPTEMBER, 1998 ) /s/ MAN YIEW MING
in the presence of:- )
/s/ Andrew Khoo
..................................
Name of Witness: ANDREW KHOO
I C No.: 651031-10-5841
SIGNED by NG KOK WAH )
on the 30th day of SEPTEMBER, 1998 ) /s/ NG KOK WAH
in the presence of:- )
/s/ Andrew Khoo
..................................
Name of Witness: ANDREW KHOO
I C No.: 651031-10-5841
<PAGE>
SCHEDULE I
REPAYMENT SCHEDULE
Loan Amount @ August 31, 1998 inclusive of interest $326,500.00
<TABLE>
<CAPTION>
REPAYMENT DATE REPAYMENT AMOUNT
- --------------- ----------------
<S> <C>
January 1, 1999 $12,101.97
February 1, 1999 $12,101.97
March 1, 1999 $12,101.97
April 1, 1999 $12,101.97
May 1, 1999 $12,101.97
June 1, 1999 $12,101.97
July 1, 1999 $12,101.97
August 1, 1999 $12,101.97
September 1, 1999 $12,101.97
October 1. 1999 $12,101.97
November 1, 1999 $12,101.97
December 1, 1999 $12,101.97
January 1, 2000 $12,101.97
February 1. 2000 $12,101.97
March 1, 2000 $12,101.97
April 1, 2000 $12,101.97
May 1, 2000 $12,101.97
June 1, 2000 $12,101.97
July 1, 2000 $12,101.97
August 1, 2000 $12,101.97
September 1, 2000 $12,101.97
October 1, 2000 $12,101.97
November 1, 2000 $12,101.97
December 1, 2000 $12,101.97
January 1. 2001 $12,101.97
February 1, 2001 $12,101.97
March 1, 2001 $12,101.97
April 1, 2001 $12,101.97
May 1, 2001 $12,101.97
June 1, 2001 $12,102.08
</TABLE>
<PAGE>
SCHEDULE II
THE GUARANTORS
<TABLE>
<CAPTION>
Name & Identity Card No. Address & Telefax No. Agreed Proportions
------------------------ --------------------- ------------------
<S> <C> <C>
1. LEE GIM TEIK @ 12 Jalan Pintar 85%
LEE LAI HOO 6 1/2 Mile, Jalan Cheras
(I C No. 0440157 (B)) 56100 Kuala Lumpur
Fax No : 603-432 8872
2. MAN YIEW MING 42 Jalan SR 8/15 9%
(I C No. A 0049929 (B)) Taman Putra Indah
43300 Serdang
Selangor
Fax No : 603-432 8872
3. NG KOK WAH 68, Jalan USJ 4/1G 6%
(I C No. 641104-10-6919) 47600 UEP Subang
Selangor
Fax No : 603-432 8872
</TABLE>
<PAGE>
Date: Sept. 30, 1998
-------------------
To:
Messrs. Skrine & Co.
Unit No. 50-8-1, 8th Floor
Wisma UOA Damansara
50 Jalan Dungun
Damansara Heights
50490 Kuala Lumpur
(ATTENTION: MR. ANDREW KHOO, FAX NO. 2543211)
Dear Sir,
ADVANTIS NETWORK & SYSTEM SDN. BHD. ("COMPANY")
I refer to your letter dated 24 September 1998.
I hereby accept the terms contained in the afore-mentioned letter and agree to
[delete which options are not applicable]:-
(a) repay to NHancement in United States Dollars the full amount of the
existing loan of United States Dollars Three Hundred Thousand
(US$300,000.00) made by NHancement to the Company and secured by promissory
notes payable on demand, together with all interest accrued to date
(collectively "the Loan", and which at 31 August 1998 stood at
US$326,500.00), in full and final settlement of any and all damages to be
assesed against me for breaches of representations and warranties set out
in your letter of 24 September 1998. I agree to forward to you payment of
the Loan so as to arrive at your office no later than noon on 30 September
1998. I understand that if I fully satisfy the Loan, NHancement will
forward to me all shares in the Company currently owned by NHancement
without any representation or warranty as to the state of affairs of the
Company;
or
(b) execute the joint and several guarantee ("Guarantee"), two (2) copies of
which have been forwarded to me, to guarantee the repayment of the Loan
in United States Dollars by the Company over a period of two and
one-half (2 1/2) years in thirty (30) instalments in accordance with the
repayment schedule attached to your letter of 24 September 1998, with
each repayment due on the first day of the month commencing 1 January
1999. The Guarantee shall be secured by the deposit with you by me of
the original certificate(s) for the Common Stock of NHancement. I agree
to return to you the two (2) copies of the Guarantee duly executed and
witnessed, together with the original certificate(s) for the Common
Stock of NHancement with the transfer portion on the reverse duly signed
by the person whose name appears on the certificate, so as to arrive at
your office no later than noon on 30 September 1998. I further agree to
take all such other action and execute all such other documents that may
be forwarded to me in relation to this matter. I understand that if all
the former shareholders of the Company execute the Guarantee and deliver
it to you together with their respective signed original certificate(s)
for the Common Stock of NHancement as security for the Guarantee,
NHancement will accept the same in full and final settlement of any and
all damages to be assessed against us for the breaches of
representations and warranties set out in your letter of 24 September
1998, subject always to the fulfilment of the terms and conditions of
the Guarantee. NHancement will also
<PAGE>
forward to us in our respective proportions all the shares in the Company
currently owned by NHancement without any representation or warranty as to
the state of affairs of the Company.
Yours Faithfully,
/s/ LEE GIM TEIK
............................
Name: LEE GIM TEIK
<PAGE>
Date: 30/9/98
-------------------
To:
Messrs. Skrine & Co.
Unit NO. 50-8-1, 8th Floor
Wisma UOA Damansara
50 Jalan Dungun
Darnansara Heights
50490 Kuala Lumpur
(ATTENTION: MR. ANDREW KHOO, FAX NO. 2543211)
Dear Sir,
ADVANTIS NETWORK & SYSTEM SDN. BHD. ("COMPANY")
I refer to your letter dated 24 September 1998.
I hereby accept the terms contained in the afore-mentioned letter and agree to
[delete which options are not applicable]:-
(a) repay to NHancement in United States Dollars the full amount of the
existing loan of United States Dollars Three Hundred Thousand
(US$300,000.00) made by NHancement to the Company and secured by promissory
notes payable on demand, together with all interest accrued to date
(collectively "the Loan", and which at 31 August 1998 stood at
US$326,500.00), in full and final settlement of any and all damages to be
assesed against me for breaches of representations and warranties set out
in your letter of 24 September 1998. I agree to forward to you payment of
the Loan so as to arrive at your office no later than noon on 30 September
1998. I understand that if I fully satisfy the Loan, NHancement will
forward to me all shares in the Company currently owned by NHancement
without any representation or warranty as to the state of affairs of the
Company;
or
(b) execute the joint and several guarantee ("Guarantee"), two (2) copies of
which have been forwarded to me, to guarantee the repayment of the Loan
in United States Dollars by the Company over a period of two and
one-half (2 1/2) years in thirty (30) instalments in accordance with the
repayment schedule attached to your letter of 24 September 1998, with
each repayment due on the first day of the month commencing 1 January
1999. The Guarantee shall be secured by the deposit with you by me of
the original certificate(s) for the Common Stock of NHancement. I agree
to return to you the two (2) copies of the Guarantee duly executed and
witnessed, together with the original certificate(s) for the Common
Stock of NHancement with the transfer portion on the reverse duly signed
by the person whose name appears on the certificate, so as to arrive at
your office no later than noon on 30 September 1998. I further agree to
take all such other action and execute all such other documents that may
be forwarded to me in relation to this matter. I understand that if all
the former shareholders of the Company execute the Guarantee and deliver
it to you together with their respective signed original certificate(s)
for the Common Stock of NHancement as security for the Guarantee,
NHancement will accept the same in full and final settlement of any and
all damages to be assessed against us for the breaches of
representations and warranties set out in your letter of 24 September
1998, subject always to the fulfilment of the terms and conditions of
the Guarantee. NHancement will also
<PAGE>
forward to us in our respective proportions all the shares in the Company
currently owned by NHancement without any representation or warranty as to
the state of affairs of the Company.
Yours Faithfully,
/s/ MAN YIEW MING
............................
Name: MAN YIEW MING
<PAGE>
Date: 30/9/98
-------------------
To:
Messrs. Skrine & Co.
Unit No. 50-8-1, 8th Floor
Wisma UOA Damansara
50 Jalan Dungun
Damansara Heights
50490 Kuala Lumpur
(ATTENTION: MR. ANDREW KHOO, FAX NO. 2543211)
Dear Sir,
ADVANTIS NETWORK & SYSTEM SAN. BHD. ("COMPANY")
I refer to your letter dated 24 September 1998.
I hereby accept the terms contained in the afore-mentioned letter and agree to
[delete which options are not applicable]:-
(a) repay to NHancement in United States Dollars the full amount of the
existing loan of United States Dollars Three Hundred Thousand
(US$300,000.00) made by NHancement to the Company and secured by promissory
notes payable on demand, together with all interest accrued to date
(collectively "the Loan", and which at 31 August 1998 stood at
US$326,500.00), in full and final settlement of any and all damages to be
assesed against me for breaches of representations and warranties set out
in your letter of 24 September 1998. I agree to forward to you payment of
the Loan so as to arrive at your office no later than noon on 30 September
1998. I understand that if I fully satisfy the Loan, NHancement will
forward to me all shares in the Company currently owned by NHancement
without any representation or warranty as to the state of affairs of the
Company;
or
(b) execute the joint and several guarantee ("Guarantee"), two (2) copies of
which have been forwarded to me, to guarantee the repayment of the Loan
in United States Dollars by the Company over a period of two and
one-half (2 1/2) years in thirty (30) instalments in accordance with the
repayment schedule attached to your letter of 24 September 1998, with
each repayment due on the first day of the month commencing 1 January
1999. The Guarantee shall be secured by the deposit with you by me of
the original certificate(s) for the Common Stock of NHancement. I agree
to return to you the two (2) copies of the Guarantee duly executed and
witnessed, together with the original certificate(s) for the Common
Stock of NHancement with the transfer portion on the reverse duly signed
by the person whose name appears on the certificate, so as to arrive at
your office no later than noon on 30 September 1998. 1 further agree to
take all such other action and execute all such other documents that may
be forwarded to me in relation to this matter. I understand that if all
the former shareholders of the Company execute the Guarantee and deliver
it to you together with their respective signed original certificate(s)
for the Common Stock of NHancement as security for the Guarantee,
NHancement will accept the same in full and final settlement of any and
all damages to be assessed against us for the breaches of
representations and warranties set out in your letter of 24 September
1998, subject always to the fulfilment of the terms and conditions of
the Guarantee. NHancement will also
<PAGE>
forward to us in our respective proportions all the shares in the Company
currently owned by NHancement without any representation or warranty as to
the state of affairs of the Company.
Yours Faithfully,
/s/ NG KOK WAH
............................
Name: NG KOK WAH
<PAGE>
Subsidiaries of
NHancement Technologies Inc.
1. Voice Plus, Inc.
39420 Liberty Street, Suite 250
Fremont, CA 93548
2. Infotel (Pte) Ltd.
19 Tai Seng Drive #06-00
Singapore 535222
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 2,326 1,677
<SECURITIES> 0 0
<RECEIVABLES> 1,917 4,825
<ALLOWANCES> 50 246
<INVENTORY> 438 1,341
<CURRENT-ASSETS> 5,427 8,521
<PP&E> 780 1,910
<DEPRECIATION> 201 665
<TOTAL-ASSETS> 11,738 12,871
<CURRENT-LIABILITIES> 2,839 8,159
<BONDS> 0 0
0 0
0 252
<COMMON> 42 57
<OTHER-SE> 8,794 4,336
<TOTAL-LIABILITY-AND-EQUITY> 11,738 12,871
<SALES> 6,721 9,442
<TOTAL-REVENUES> 6,721 9,442
<CGS> 3,513 5,863
<TOTAL-COSTS> 3,513 5,863
<OTHER-EXPENSES> 0 40
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 71 139
<INCOME-PRETAX> 323 (1,452)
<INCOME-TAX> 93 71
<INCOME-CONTINUING> 230 (1,523)
<DISCONTINUED> 0 (950)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 230 (2,473)
<EPS-PRIMARY> .06 (0.61)
<EPS-DILUTED> .06 (0.61)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,363
<SECURITIES> 0
<RECEIVABLES> 3,520
<ALLOWANCES> 515
<INVENTORY> 536
<CURRENT-ASSETS> 5,415
<PP&E> 1,311
<DEPRECIATION> 609
<TOTAL-ASSETS> 8,905
<CURRENT-LIABILITIES> 4,272
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 18,021
<TOTAL-LIABILITY-AND-EQUITY> 8,905
<SALES> 8,738
<TOTAL-REVENUES> 8,738
<CGS> 4,967
<TOTAL-COSTS> 4,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> (4,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,594)
<DISCONTINUED> 3,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,591)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
