<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
NHancement Technologies Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE> 2
NHANCEMENT TECHNOLOGIES INC.
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 12, 1999
To Our Stockholders:
PLEASE TAKE NOTICE that a Special Meeting (the "SPECIAL MEETING") of
Stockholders of NHancement Technologies Inc. (the "COMPANY"), will be held on
April 12, 1999 at 2:00 p.m. P.D.T. at the principal offices of the Company
located at 39420 Liberty Street, Suite 250, Fremont, California 94538, for the
following purposes:
1. To consider and vote upon a proposal to ratify and approve the issuance
of 2,441 shares of Series A Convertible Preferred Stock of the Company,
$0.01 par value per share, and all shares of Common Stock, $0.01 par
value per share, issuable upon conversion thereof, pursuant to a
Securities Purchase Agreement entered into between the Company and
certain purchasers.
2. To consider and vote upon a proposal to approve the issuance of an
additional 17,500 shares of Series A Convertible Preferred Stock of the
Company, $0.01 par value per share, and all shares of Common Stock,
$0.01 par value per share, issuable upon conversion thereof, on
substantially the same terms and conditions as set forth in the
Securities Purchase Agreement.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Stockholders of record at the close of business on March 15, 1999 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. Any stockholder attending the Special Meeting may vote in person, even
if such stockholder previously signed and returned a proxy.
By Order of the Board of Directors
Douglas S. Zorn
President and Chief Executive Officer
Fremont, California
March 25, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 3
NHANCEMENT TECHNOLOGIES INC.
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
APRIL 12, 1999
The accompanying proxy is solicited by the Board of Directors of NHancement
Technologies Inc., a Delaware corporation ("NHANCEMENT" or the "COMPANY"), for
use at the Company's Special Meeting of Stockholders (the "SPECIAL MEETING") to
be held April 12, 1999, or any adjournment thereof, for the purposes set forth
in the accompanying Notice of Special Meeting. The date of this Proxy Statement
is March 25, 1999, the approximate date on which this Proxy Statement and the
accompanying form of proxy were first sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting stockholders by mail through its regular employees, the Company will
request banks and brokers, and other custodians, nominees and fiduciaries, to
solicit their customers who have stock of the Company registered in the names of
such persons and will reimburse them for their reasonable, out-of-pocket costs.
The Company may use the services of its officers, directors, and others to
solicit proxies, personally or by telephone, without additional compensation.
Only stockholders of record as of the close of business on March 15, 1999
(the "RECORD DATE"), will be entitled to vote at the Special Meeting and any
adjournment thereof. As of that date, according to the Company's transfer agent,
there were 5,717,228 shares of Common Stock of the Company, par value $0.01 per
share ("COMMON STOCK"), issued and outstanding and 2,441 shares of Series A
Convertible Preferred Stock, par value $0.01 per share ("PREFERRED STOCK"),
issued and outstanding (convertible as of the Record Date (including accrued
dividends) into 288,511 shares of Common Stock). Stockholders may vote in person
or by proxy. Each holder of shares of Common Stock available for voting is
entitled to one (1) vote for each share of stock held on the proposals presented
in this Proxy Statement. The holders of Preferred Stock shall vote with the
holders of Common Stock as a single class, with each share of Preferred Stock
entitled to the number of votes that he or she would have if such shares were
converted into Common Stock as of the Record Date. The Company's By-Laws provide
that one-third of all of the shares of the stock entitled to vote, whether
present in person or represented by proxy, shall constitute a quorum for the
transaction of business at the meeting. The votes of the Preferred Stock
currently outstanding will not be counted for purposes of determining a quorum.
Abstentions and broker non-votes will be counted in determining the number of
shares present for purposes of establishing a quorum for the transaction of
business, but will not be voted in favor of the proposals and will have the same
effect as a vote against the proposals.
Approval of the transactions described in Proposal I and Proposal II set
forth in this Proxy Statement (collectively, the "PROPOSALS") will require the
affirmative vote of a majority of the shares of the Company's Common Stock
present or represented at the Special Meeting. The votes of the Preferred Stock
currently outstanding will not be counted for purposes of determining approval
of the Proposals. Esmond T. Goei, Douglas S. Zorn, James S. Gillespie, Gary L.
Nemetz and Santanu Das, former or current directors and/or principal
stockholders of the Company, have entered into agreements with the purchasers
under that certain Securities Purchase Agreement described in Proposal I
pursuant to which such stockholders have agreed to vote an aggregate of
1,091,481 shares of the Company's Common Stock held by such persons as of the
Record Date in favor of Proposal I. All shares of Common Stock held by such
directors and principal stockholders were acquired by such persons prior to the
initial closing under the Securities Purchase Agreement on April 13, 1998. In
addition, The Endeavour Capital Fund S.A. and AMRO INTERNATIONAL S.A.
(collectively, the "INVESTORS"), as the holders in the aggregate of 406,234
shares of Common Stock, have also indicated their intention to vote all shares
over which they exercise voting control in favor of Proposal 1. The
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<PAGE> 4
Investors are the sole purchasers under the Securities Purchase Agreement
described in Proposal I set forth in this Proxy Statement. The 406,234 shares of
Common Stock held by the Investors as of the Record Date were received upon
conversion of certain of the shares of Preferred Stock purchased at the initial
closing under the Securities Purchase Agreement on April 13, 1998. Accordingly,
stockholders holding in the aggregate securities representing 26.2% of the
voting power of the Company's securities have already agreed to vote in favor of
Proposal I.
All valid proxies received prior to the meeting will be voted. All shares
represented by a proxy will be voted, and where a stockholder specifies by means
of the proxy a choice with respect to any matter to be acted upon, the shares
will be voted in accordance with the specification so made. If no choice is
indicated on the proxy, the shares will be voted in favor of the proposal. The
Company may, if necessary, seek to adjourn or postpone the meeting to another
time and/or place in order to solicit additional proxies in favor of the
proposal. In the event of any such postponement of adjournment, the persons
appointed as the named proxies will vote previously received proxies in the
manner specified above. A stockholder giving a proxy has the power to revoke his
or her proxy, at any time prior to the time it is voted, by delivering to the
Secretary of the Company a written instrument revoking the proxy or a duly
executed proxy with a later date, or by attending the meeting and voting in
person.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Preferred Stock as of March 15,
1999, by (a) each person known to the Company to own beneficially more than 5%
of the Company's Common Stock and Preferred Stock, (b) each of the Company's
directors, (c) the Company's Chief Executive Officer and the four other most
highly compensated executive officers of the Company for the fiscal year ended
September 30, 1998, whose salary and incentive compensation for the fiscal year
ended September 30, 1998 exceeded $100,000, and (d) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- ----------------------------
BENEFICIALLY OWNERSHIP BENEFICIALLY OWNERSHIP
NAMES AND ADDRESSES OWNED(1) %(1) OWNED(1) %(1)
------------------- ------------ --------- --------------- ---------
<S> <C> <C> <C> <C>
James S. Gillespie........................... 821,917(2) 14.3% -- --
198 Country Club Drive
Incline Village, Nevada 89451
Esmond T. Goei............................... 368,703(3) 6.2% -- --
650 Castro Street, #120-203
Mountain View, CA 94041
Douglas S. Zorn.............................. 410,881(4) 6.9% -- --
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Robert L. Schmier............................ 131,917(5) 2.3% -- --
Schmier & Feurring Properties, Inc.
777 Glades Road, Suite 310
Boca Raton, FL 33434
N. Bruce Walko............................... 6,917(6) * -- --
5107 Timberview Terrace
Orlando, FL 32818
The Endeavour Capital Fund S.A............... 293,011(7) 4.9% 2,441 100.0%
c/o Endeavour Management Inc.
14/14 Divrei Chaim St
Jerusalem 94479 Israel
AMRO INTERNATIONAL S.A....................... 401,734(8) 7.0% -- --
50 ULTRA FINANCE
Gross Munster Platz 26
Zurich LH 8022
Switzerland
Directors and Executive Officers............. 1,740,335(9) 27.6% -- --
as a Group (8 persons)
</TABLE>
- ---------------
* Less than 1%
(1) Based on 5,717,228 shares of Common Stock and 2,441 shares of Preferred
Stock issued and outstanding as of March 15, 1999.
(2) Includes a warrant to purchase 27,500 shares of Common Stock, and options
that are presently exercisable or that will become exercisable within 60
days to purchase 6,917 shares of Common Stock at an exercise price of
$1.125 per share.
(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, 58,333 shares of Common Stock at $3.875
per share, and warrants to purchase 51,519 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, 69,444 shares of Common Stock at $3.875
per share, and warrants to purchase 61,375 shares of Common Stock.
3
<PAGE> 6
(5) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 6,917 shares of Common Stock at an
exercise price of $1.125 per share.
(6) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 6,917 shares of Common Stock at an
exercise price of $1.125 per share.
(7) Includes 4,500 shares of Common Stock received upon conversion of Preferred
Stock and 288,511 shares of Common Stock receivable upon conversion of the
Preferred Stock (including accrued dividends) held by The Endeavour Capital
Fund S.A. assuming conversion as of March 15, 1999.
(8) Represents the number of shares of Common Stock received upon conversion of
Preferred Stock (including accrued dividends) held by AMRO INTERNATIONAL
S.A.
(9) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 457,903 shares of Common Stock and
warrants to purchase 140,394 shares of Common Stock.
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<PAGE> 7
PROPOSAL I
TO RATIFY AND APPROVE THE ISSUANCE OF 2,441 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
AND ALL THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
Securities Purchase Agreement
On April 13, 1998, the Company entered into a Securities Purchase Agreement
with the Investors pursuant to which the Company agreed to issue up to an
aggregate of Thirty Thousand (30,000) shares of Series A Convertible Preferred
Stock at a price of One Hundred Dollars ($100) per share. The Securities
Purchase Agreement, as amended June 15, 1998 (the "SECURITIES PURCHASE
AGREEMENT"), provided for the issuance of Series A Convertible Preferred Stock
to the Investors in the following amounts and at the following times: 12,500
shares upon the execution of the Securities Purchase Agreement; 7,500 shares two
(2) business days after the date the Company obtains stockholder approval of the
issuance of such shares (the "FIRST ADDITIONAL TRANCHE"); 5,000 shares upon the
date which is thirty (30) calendar days after the closing date of the First
Additional Tranche (the "SECOND ADDITIONAL TRANCHE"); and 5,000 shares upon the
date which is thirty (30) calendar days after the closing date of the Second
Additional Tranche. In accordance with the above, Twelve Thousand Five Hundred
(12,500) shares of Series A Convertible Preferred Stock were issued to the
Investors on April 13, 1998.
On September 24, 1998, the Company, in an effort to limit further dilutive
issuances under the Securities Purchase Agreement, entered into a Payment and
Termination Agreement (the "TERMINATION AGREEMENT") with the Investors which,
among other things, provided for the termination of the Company's and the
Investors' respective obligations to sell and purchase additional shares of
Series A Convertible Preferred Stock pursuant to the terms of the Securities
Purchase Agreement in consideration of an aggregate cash payment by the Company
to the Investors of $135,000. A copy of the Securities Purchase Agreement and a
copy of the Termination Agreement are attached as Annex A to this Proxy
Statement.
The Series A Convertible Preferred Stock ("PREFERRED STOCK") is convertible
into shares of Common Stock at the lesser of (i) the average closing bid price
of the Common Stock for the five trading days ending on the signing of the
Securities Purchase Agreement or (ii) 75% of the five-day average closing bid
price at the time of each requested conversion. At any time prior to conversion,
the Company has the option under the Certificate of Designations, as amended
(the "CERTIFICATE OF DESIGNATIONS"), relating to such Preferred Stock, to redeem
the outstanding Preferred Stock, in whole or part, at a redemption price of
$118.00 per share if the Market Price (as defined in the Certificate of
Designations) of the Company's Common Stock falls below $2.00 per share. A copy
of the Certificate of Designations is attached as Annex B to this Proxy
Statement.
The Company's Board of Directors has declared a dividend on its Preferred
Stock at a rate of five percent per annum. Such dividends are cumulative, accrue
from the date of issuance and are payable within sixty (60) days following the
end of each fiscal year of the Company. Such dividends are also payable by the
Company in cash upon conversion of the Preferred Stock. If the Company is
prohibited by law from making such payment in cash, it may make a payment
thereof in cash to the extent permitted by law and pay the balance in shares of
Common Stock. With respect to those shares of Preferred Stock converted prior to
the date hereof, the Company has permitted the Investors to convert the accrued
dividends on such Preferred shares into additional shares of Common Stock. The
Company may chose to permit the conversion of accrued dividends on the Preferred
Stock into shares of Common Stock from time to time in the future. Currently,
the Board of Directors of the Company does not anticipate declaring any
dividends with respect to the Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of shares of Preferred Stock, (which have not otherwise been
converted to Common Stock) will be entitled to be paid out of the assets of the
Company available for distribution to all stockholders $100.00 per share,
adjusted for stock splits, combinations or other recapitalizations of the
Preferred Stock, plus an amount equal to all declared and unpaid dividends,
prior to any amounts being paid to the holders of Common Stock.
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Each share of Preferred Stock is entitled to that number of votes equal to
the largest number of whole shares of Common Stock into which such Preferred
Stock may be converted as of the close of business on the record date fixed for
any meeting of the stockholders of the Company. In general, the holders of
Preferred Stock and Common Stock vote together as single class on all matters.
However, the approval of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the Preferred Stock outstanding at the time of any vote,
voting as a single, separate class, must be obtained before the Company may (i)
purchase, redeem or acquire any of its Common Stock or other equity security
(other than the redemption of Preferred Stock pursuant to the Company's
Certificate of Designations, repurchases of shares from directors, officers,
employees or consultants of the Company, or of any subsidiary of the Company
pursuant to agreements under which the Company has the option, but not the
obligation, to repurchase such shares); (ii) authorize or issue, or obligate
itself to issue, any equity securities senior to the Preferred Stock as to
dividend or liquidation preferences; or (iii) amend the Company's Certificate of
Incorporation to reduce the dividend rate on the Preferred Stock or exchange the
seniority rights of the holders of such Preferred Stock as to the payment of
dividends, (iv) reduce the amount payable to the holders of the Preferred Stock
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company, (v) change the relative seniority of the liquidation preferences of the
holders of such Preferred Stock, or (vi) cancel or modify the conversion rights
provided for in the Company's Certificate of Designations with respect to the
Preferred Stock. The votes of the Preferred Stock currently outstanding will not
be counted for purposes of determining approval of the Proposal.
Under the terms of the Securities Purchase Agreement, the Company is
subject to certain cash penalties if it is unable to deliver to the Investors
the Common Stock receivable upon conversion of the Preferred Stock in a timely
fashion (i.e., from $100 to $200 per day for any day beyond the specified
delivery date). Similarly, in the event the Company is unable to issue the
shares of Common Stock receivable upon conversion of the Preferred Stock as a
result of the provisions of the Company's Certificate of Incorporation or
applicable securities market regulations, the Company may also be required,
among other things, to redeem such unconverted Preferred Stock at a price based
on a percentage or multiple of the highest closing bid price for the Company's
Common Stock during the period commencing upon such a redemption request and
ending upon the actual redemption date.
Pursuant to the terms of the Registration Right Agreement (the
"REGISTRATION RIGHTS AGREEMENT") entered into concurrently with the Securities
Purchase Agreement by and among the Company and the Investors, the Company was
required to prepare and file a registration statement with the Securities and
Exchange Commission (the "SEC") covering the shares of Common Stock receivable
upon conversion of the Preferred Stock within twenty-one (21) calendar days
after the initial closing of the Securities Purchase Agreement. In this regard,
the Company is subject to cash penalties if it fails to file a registration
statement in proper form with the SEC within the time period specified in the
Registration Rights Agreement or is unable to have such registration statement
declared effective within the time periods specified in the Registration Rights
Agreement. Such cash penalties are based on a percentage (either 2% or 3%) of
the purchase price of the Preferred Stock for periods during which the Company
fails to satisfy the above criteria. The Company failed to file the registration
statement prior to the expiration of the above twenty-one (21) day period. As a
result, the Company is subject to the penalties provided in the Registration
Rights Agreement. To date, the Investors have not asserted any claims pursuant
to the applicable penalty provisions of the Registration Rights Agreement,
although there can be no assurance that such rights will not be asserted at a
later date. A copy of the Registration Rights Agreement is attached as Annex C
to this Proxy Statement.
Reasons for the Issuance
The funds received at the initial closing of the Preferred Stock sale
pursuant to the Securities Purchase Agreement were used to fund a portion of the
acquisition on or about June 22, 1998 of all of the issued and outstanding
capital stock of Infotel Technologies Pte Ltd, a company organized under the
laws of Singapore ("INFOTEL"), which is a provider of radar system integration,
turnkey project management services and test instrumentation. The Company
explored alternative financing proposals immediately prior to entering into the
Securities Purchase Agreement (including other private equity and/or debt
financings) and determined that
6
<PAGE> 9
the potential cost of funds under such alternatives were less favorable to the
Company than the likely cost of funds under the Securities Purchase Agreement.
The basic terms of the agreement relating to the Infotel acquisition
required an initial cash payment of approximately $3.7 million, and the issuance
of 433,024 shares of the Company's Common Stock, which number of shares may
increase based on certain price protections afforded the former Infotel
shareholders. Additionally, the former Infotel shareholders are entitled to
receive up to a maximum of S$3,200,000 (approximately $1,860,000 at current
exchange rates) in additional contingent cash payments if Infotel exceeds
certain minimum profit levels totaling S$1,600,000 (approximately $930,000)
during the two-year period ending June 30, 1999. Based on Infotel's 1998
performance and forecasts for 1999, the Company currently anticipates that the
former Infotel shareholders will be entitled to receive the full S$3,200,000.
The Company is currently discussing with the former Infotel shareholders the
possibility of issuing additional shares of Common Stock of the Company to such
individuals in lieu of paying the above contingent payments.
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 former Infotel shareholders is subject to adjustment and likewise
50% is subject to adjustment on the second anniversary if the per share price is
less than $5.00. Should the Company's Common Stock price be below $5.00 per
share on either of these dates, the Infotel shareholders would be entitled to
receive that number of shares equal to the lesser of (i) one-half the initial
shares valued at $5.00 per share divided by the fair market value per share
minus one-half of the initial shares or (ii) one-half the initial shares valued
at $5.00 per share divided by $2.75 (subject to adjustment for stock splits and
the like). At the current price per share of the Company's Common Stock, these
calculations would result in an aggregate of approximately 354,000 additional
shares being issued to the former Infotel shareholders. As of March 16, 1999,
the Company was obligated to issue 177,000 of such additional shares to the
former Infotel shareholders.
The funds received by the Company at the initial closing under the
Securities Purchase Agreement were insufficient to complete the Infotel
acquisition. In an effort to obtain the additional funds necessary to close the
transaction by June 24, 1998 (and thereby avoid the payment of a non-refundable
break-up fee), the Company entered into a bridge loan financing that closed at
separate closings held on June 12, 1998 and June 15, 1998, pursuant to which the
Company borrowed funds in the aggregate amount of $1,400,000 from the Investors
and certain members of the Company's management.
Funds loaned to the Company by the Investors totaled $750,000. Notes
payable to the Investors provided for interest at the rate of ten percent (10%)
per annum and 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 or ninety (90) days from the date of the loan. These
promissory notes (plus accrued interest) were paid in full by the Company with
internal cash resources and cancelled on September 24, 1998 pursuant to the
terms of the Termination Agreement.
Funds loaned to the Company by members of management totaled $650,000. Of
this amount, $125,000, $225,000 and $300,000 were loaned to NHancement by Esmond
T. Goei, then Chairman of the Board and Chief Executive Officer of the Company,
Douglas S. Zorn, Executive Vice President and Chief Financial Officer of the
Company, and James S. Gillespie, formerly the President of Voice Plus, Inc.,
respectively. The notes payable to management provided for interest at the rate
of ten percent (10%) per annum and for repayment within 90 days from the date of
the loan. The promissory notes (plus accrued interest) were paid in full by the
Company with internal cash resources and cancelled on November 5, 1998.
Stockholder ratification and approval of the issuance of the Preferred
Stock and related actions contemplated pursuant to the Securities Purchase
Agreement are not required under the Delaware General Corporation Law, the
Company's Certificate of Incorporation, or the Company's Bylaws. However, as
discussed below, the Company is seeking stockholder approval in order to satisfy
certain listing requirements under The Nasdaq Marketplace Rules for continued
inclusion of the Company in The Nasdaq Stock Market SmallCap System.
7
<PAGE> 10
PROPOSAL II
In addition to the shares of Preferred Stock described in Proposal I, the
Company is seeking approval for the issuance of an additional 17,500 shares (the
"Additional Shares") of its authorized but unissued Preferred Stock. It is
presently contemplated that up to all of such shares will be privately placed by
the Company with "accredited investors" as that term is defined in Rule 501(a)
of Regulation D promulgated under the Securities Act of 1933, as amended. Such
investors may include the Initial Investors under the Securities Purchase
Agreement and members or the Company's Board of Directors and/or management. The
Additional Shares shall have the rights, preferences and privileges set forth in
the Company's Certificate of Designation attached as Annex B to this Proxy
Statement and shall be offered on substantially the same terms and conditions as
set forth in the Securities Purchase Agreement attached as Annex A (see,
"Securities Purchase Agreement"). All proceeds from the sale of such Additional
Shares shall be utilized by the Company for working capital purposes. Receipt of
approximately $750,000 in proceeds from the sale of certain of the Additional
Shares is also a fundamental element of the Company's compliance plan to correct
deficiencies in its compliance with certain listing requirements of The Nasdaq
Stock Market SmallCap System (see, "Requirements for Continued Nasdaq Listing").
Stockholder approval of the issuance of the Additional Shares is not
required under the Delaware General Corporation Law, the Company's Certificate
of Incorporation, or the Company's Bylaws. However, as discussed below, the
Company is seeking stockholder approval in order to satisfy certain listing
requirements under The Nasdaq Marketplace Rules for continued inclusion of the
Company in The Nasdaq Stock Market SmallCap System.
NASDAQ STOCKHOLDER APPROVAL REQUIREMENT
The Company's Common Stock is traded on the over-the-counter market and is
quoted on The Nasdaq Stock Market SmallCap System. In order to qualify for
inclusion in The Nasdaq Stock Market SmallCap System, it is necessary that the
Company satisfy certain financial and other criteria set forth in The Nasdaq
Marketplace Rules (the "RULES"). In addition, in order to maintain such
inclusion under the Rules, the Company must, among other things, follow certain
corporate governance procedures, including obtaining stockholder approval in
connection with certain corporate transactions.
Rule 4310(c)(25)(H) of the Rules requires stockholder approval of the
issuance of securities by an issuer under various circumstances. In particular,
Subsection (i)d. of paragraph (H) requires stockholder approval prior to the
issuance of securities in the following situations:
"d. In connection with a transaction other than a public offering
involving:
1. the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors or substantial shareholders of the Company equals
20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
2. the sale or issuance by the company of common stock (or
securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock."
Pursuant to the terms of Securities Purchase Agreement, the Preferred Stock
is convertible into shares of Common Stock at the lesser of (i) the average
closing bid price of the Common Stock for the five (5) trading days ending on
the signing of the Securities Purchase Agreement or (ii) 75% of the five-day
closing bid price at the time of each requested conversion. As a result, the
shares of Common Stock to be issued upon conversion of the Preferred Stock will
be issued, if at all, for less than the greater of book or market value of such
shares. Pursuant to the terms of the Securities Purchase Agreement, the Company
issued 12,500 shares of Preferred Stock on April 13, 1998 at the initial closing
of the Preferred Stock financing. As of such date, such shares on an
as-converted basis represented less than 20% of the Company's issued and
outstanding Common Stock and accordingly did not require stockholder approval
under the applicable Rules. Since
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<PAGE> 11
April 13, 1998, the Investors have converted an aggregate of 10,059 shares of
Preferred Stock (plus accrued dividends) into an aggregate of 901,159 shares of
Common Stock representing 18.4% of the Common Stock outstanding as of the date
of issuance of the Preferred Stock. However, assuming the conversion of the
remaining 2,441 shares of Preferred Stock (the "UNCONVERTED SHARES") currently
outstanding, the Company will have issued in excess of 20% (i.e., 24.2% assuming
conversion as of the Record date of all 2,441 outstanding shares of Preferred
Stock) of the number of shares of Common Stock outstanding immediately prior to
the issuance of the Preferred Stock. Assuming, in the alternative, that all of
the 17,500 Additional Shares described in Proposal II are issued and converted
(and none of the Unconverted Shares are converted) as of the Record Date on
substantially the same terms and conditions set forth in the Securities Purchase
Agreement, the Company will have issued shares of Common Stock upon conversion
of the Additional Shares representing 36.3% of the number of shares of Common
Stock outstanding immediately prior to the issuance of the Additional Shares.
Accordingly, in order to comply with Rule 4310(c)(25)(H)(i)d of the Rules, it
will be necessary for the Company to obtain (i) stockholder ratification and
approval of the issuance of the Unconverted Shares (and the shares of Common
Stock issuable upon conversion thereof) pursuant to the Securities Purchase
Agreement as described in Proposal I and (ii) stockholder approval of the
issuance of the Additional Shares (and the shares of Common Stock issuable upon
conversion thereof) on the terms and conditions described in Proposal II.
REQUIREMENTS FOR CONTINUED NASDAQ LISTING
Although the Common Stock was approved for quotation on The Nasdaq Stock
Market SmallCap System in connection with the Company's IPO, the Company was
notified by Nasdaq in April, 1998 that the Company failed to meet the continued
listing requirements of Rule 4310(c)(2) of the Rules which requires that an
issuer maintain (i) net tangible assets of $2,000,000; (ii) market
capitalization of $35,000,000; or (iii) net income of $500,000 in the most
recently completed fiscal year or in two of the last three most recently
completed fiscal years. This deficiency was remedied by the Company in April
1998 as a result of the initial closing in April 1998 of the Preferred Stock
financing described in Proposal I. However, the Company also has failed to
satisfy the requirements of this Rule for the months of October, November and
December, 1998 and January, 1999. On or about February 3, 1999, the Company
submitted to Nasdaq a proposed plan for compliance with the net tangible assets
continued listing requirement under the Rules.
On or about February 23, 1999, the Company was advised by Nasdaq that the
Company's securities would be delisted from The Nasdaq Stock Market, effective
with the close of business on February 24, 1999. The Company has requested a
hearing under applicable Nasdaq rules to review the Nasdaq staff's delisting
finding. Pending such hearing which is scheduled for April 29, 1999, the
Company's securities will continue to be listed on The Nasdaq Stock Market
SmallCap System. If as a result of such hearing the Company is delisted, the
Company intends to seek the listing on The Nasdaq SmallCap Market as soon as it
meets the applicable listing qualifications which will require, among other
things, (i) net tangible assets of $4,000,000, (ii) market capitalization of
$50,000,000, (iii) net income of $750,000 in the most recently completed fiscal
year, or in two of the most recently completed fiscal years, and (iv) a common
stock price of at least $4.00 per share. There can be no assurance that the
Company will meet such listing requirements in any future period.
The continued listing criteria under the Rules also require, among other
things, that the minimum bid price per share of the Company's Common Stock be at
least $1.00. If the Company is unable to meet this criteria for a period of
thirty (30) consecutive business days, the Company, upon notice from Nasdaq,
shall have a period of ninety (90) calendar days to achieve compliance with the
above criteria. Compliance can be achieved by meeting the applicable criteria
for a minimum of ten (10) consecutive business days during such ninety (90) day
compliance period. From time to time since September 22, 1998, the minimum bid
price for the Company's Common Stock has been below $1.00 per share.
If the Company's Common Stock is delisted from The Nasdaq Stock Market
SmallCap 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.
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<PAGE> 12
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 Stock Market SmallCap System and its becoming subject to the
rules on penny stock 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.
IMPACT OF PREFERRED STOCK ISSUANCE
The Company's Common Stock is traded on the over-the-counter market and is
quoted on The Nasdaq Stock Market's SmallCap System. The closing bid price for
the Company's Common Stock as reported by Nasdaq on the Record Date was $.9375
per share. Assuming the conversion of all 2,441 shares of Preferred Stock
currently outstanding pursuant to the Securities Purchase Agreement (plus
accrued dividends) as of the Record Date, the holders of Preferred Stock would
be entitled to receive an aggregate of 288,511 shares of the Company's Common
Stock upon conversion of the Preferred Stock. Such shares plus the aggregate of
901,159 shares received by the Investors upon prior conversions of Preferred
Stock would represent approximately 19.8% of the Company's outstanding Common
Stock immediately after such conversion. The 25% discount applicable to the
issuance of the Preferred Stock pursuant to the Securities Purchase Agreement
has been reflected in the Company's financial statements as a deemed dividend on
Preferred Stock. As a result of the issuance of 12,500 shares of Preferred Stock
pursuant to the Securities Purchase Agreement, such dividend characterization
resulted in a $416,700 increase in the loss applicable to Common Stock in
computing the Company's net loss per share for the nine months ended September
30, 1998.
Assuming, in addition to the conversion of the Preferred Stock described in
Proposal I, that all of the 17,500 Additional Shares described in Proposal II
are issued and converted as of the Record Date, the Company will have issued
shares of Common Stock upon conversion of its Preferred Stock representing 40.4%
of the number of shares of Common Stock outstanding immediately after
conversion.
Although the issuance of the shares of Preferred Stock pursuant to the
Proposals will have a dilutive effect on the Company's current stockholders, the
Board of Directors believes that stockholder approval of each of the Proposals
is in the best interest of the Company.
IMPACT OF A VOTE AGAINST ISSUANCE
In the event that the Company is unable to issue the shares of Common Stock
receivable upon conversion of the Preferred Stock described in Proposal I, as a
result of, among other things, the Rules, the Company may be required, at the
option of the holders of Preferred Stock, to undertake the following: (i) issue
shares of Common Stock at a conversion purchase price equal to the average of
the closing bid price per share of the Company's Common Stock for any five (5)
consecutive trading days (subject to certain equitable adjustments for certain
events occurring during such period) during the sixty (60) trading days
immediately preceding the date of notice of conversion; or (ii) redeem such
unconverted Preferred Stock at a price based on a percentage or multiple of the
highest closing bid price for the Company's Common Stock during the period
commencing upon such a redemption request and ending upon the actual redemption
date. Assuming the Company is required to issue additional shares of Common
Stock pursuant to (i) above with respect to all of the currently outstanding
shares of Preferred Stock (i.e., 2,441 shares) and, assuming further, that the
conversion purchase price is computed based on the average closing bid price of
the Company's Common Stock for the five (5) consecutive trading days immediately
preceding the Record Date, the Company would be obligated to issue 216,296
shares of Common Stock to the holders of Preferred Stock. Assuming that the
Company is required
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<PAGE> 13
to redeem the currently outstanding Preferred Stock pursuant to (ii) above, and
assuming a concurrent redemption date and payment date as of the Record Date,
the Company would be obligated to redeem the currently outstanding Preferred
Stock for an aggregate redemption price of $217,615.15. In light of the
foregoing, the Board of Directors may, in consideration of its fiduciary duties,
determine to proceed with the issuance of shares of the Company's Common Stock
upon conversion of the outstanding Preferred Stock or another financing on
similar terms if the Board of Directors deems such action to be in the Company's
best interest. In such a case the Company may no longer qualify for inclusion on
The Nasdaq Stock Market SmallCap System. Similarly, if the issuance of the
Additional Shares described in Proposal II is not approved, the Company may be
unable to satisfy the net tangible asset requirements under the Rules and
accordingly may no longer qualify for continued inclusion on the Nasdaq Stock
Market SmallCap System.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL OF
THE ISSUANCE OF 2,441 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK (AND ALL
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF) PURSUANT TO THE TERMS
OF THE SECURITIES PURCHASE AGREEMENT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF AN
ADDITIONAL 17,500 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK (AND ALL SHARES
OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF) ON SUBSTANTIALLY THE SAME
TERMS AND CONDITIONS AS SET FORTH IN THE SECURITIES PURCHASE AGREEMENT.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
The Company's consolidated financial statements include the accounts of the
Company and its two operating segments: Voice Plus, Inc. ("VPI" or "Voice Plus")
now named NHancement Technologies North America, Inc. and Infotel Technologies
(Pte) Ltd ("Infotel").
During 1998, the Company changed its fiscal year end from December 31 to
September 30. As a result of this change the Company's 1998 fiscal year ended on
September 30, 1998 and its 1999 fiscal year began on October 1, 1998.
The following contains forward-looking statements regarding future events
or the future financial performance of the Company that involve risks and
uncertainties. Certain statements included herein, 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
"Year 2000 Compliance" and other statements 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. 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 SmallCap Market System listing is in jeopardy. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth herein.
GENERAL
This discussion should be read in conjunction with the Company's Unaudited
Consolidated Financial Statements and Notes to Unaudited Consolidated Financial
Statements for the Three Months ended December 31, 1998 and Company's
Consolidated Financial Statements and Notes to Consolidated Financial Statements
for the Nine Months ended September 30, 1998 included herein.
In this discussion, the Company explains its results of operations for the
three month periods ended December 31, 1998, as compared to the corresponding
period in 1997, and discusses its financial condition. The discussion of
financial condition includes: (1) changes in the voice processing and
telecommunications industry and how the Company expects these changes to
influence future results of operations; and (2) liquidity and capital resources,
including discussions of capital financing activities, and uncertainties that
could affect future results.
On November 20, 1998, the Company informed Nasdaq that, due to continued
losses, 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.
The Company continues not to meet these requirements and recently received
correspondence from Nasdaq stating that Nasdaq plans to delist the Company's
Common Stock. The Company is in discussions with Nasdaq regarding continued
listing of its Common Stock, but there can be no assurance that the Company's
Common Stock will not be delisted. Further, there can be no assurance that if
the Company's stock is delisted that the Company will in the future meet the
listing requirements for the Nasdaq SmallCap Market System. Continued losses
from operations will have a material adverse effect on the financial condition
of the Company. However, the Company believes that the changes management
implemented in January 1999 and the corresponding cost reduction measures
expected to be implemented primarily through a 10%
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<PAGE> 15
headcount reduction and certain operating expense cutbacks in travel, outside
services, discretionary sales costs, corporate overhead, and administrative
costs will return the Company to profitability during fiscal 1999, despite first
quarter sales that were well below recent historical run rate, and a one time
restructuring charge related to severance benefits to be incurred in the second
fiscal quarter of 1999. As a mitigating factor, sales in the second fiscal
quarter of 1999 are expected to equal or exceed historical run rates. Currently
management 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.
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings for
the three-month periods ended December 31, 1998 and 1997. The Company then
explains why revenues and expenses varied from 1998 to 1997.
The following table shows results of operations, as a percentage of net
sales, for the three-month periods ended December 31, 1998 and 1997.
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
------------------
1997 1998
------- -------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 72.1% 68.4%
Gross profit................................................ 27.9% 31.6%
Selling, general and administrative expenses................ 63.1% 70.0%
Loss on impairment and amortization of excess of cost over
net assets acquired....................................... (210.0)% 3.4%
Loss from operations........................................ (245.1)% (41.8)%
Other income (expense)...................................... 1.3% (1.7)%
Loss from continuing operations before income taxes......... (243.8)% (43.4)%
Income tax benefit.......................................... 4.6% 0.0%
Loss from continuing operations............................. (239.2)% (43.4)%
Discontinued operations..................................... 0.2% --
Net loss.................................................... (239.0)% (43.4)%
</TABLE>
The Company's primary focus in the three months ended December 31, 1998 was
as an integrator and distributor of voice processing and telecommunications
systems. These operations were conducted through the Company's VPI and Infotel
subsidiaries. VPI's net sales for the first quarter of 1999 as a stand-alone
business decreased 31% from $2.0 million for the three months ended December 31,
1997 to $1.4 million for the three months ended December 31, 1998. The decrease
in VPI net revenues between 1998 and 1997 was due primarily to a slow down in
voice processing systems and parts sales. However VPI's order backlog at
December 31, 1998 increased to $1.6 million from $1.0 million the previous
quarter. Consequently, management believes that VPI sales for the second fiscal
quarter will return to near historical levels. VPI's revenues continue to be
almost exclusively derived from the sale of Centigram products, and any adverse
change in the Company's distributor relationship with Centigram and Baypoint
Innovations, the successor in interest to the Centigram CPE business, would have
a material adverse impact upon the Company's voice processing business.
VPI was acquired by the Company in February 1997. Based on the estimated
future undiscounted operating cash flows of its related business, the Company
periodically evaluates the carrying value of goodwill for VPI and its other
subsidiaries. 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
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<PAGE> 16
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 amount of goodwill over its estimated fair
value. As a result of these changes, the remaining balance of the VPI goodwill
was reduced to $750,000 and the useful life was reduced to three years.
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 its 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 the
first quarter of 1999.
The Company's Infotel subsidiary located in Singapore, was acquired on June
22, 1998. Therefore no sales or income were recorded for the three months ended
December 31, 1997. On a stand-alone pro forma basis, net sales for the first
quarter decreased slightly from $2.1 million in 1997 to $2.0 million for the
same period in 1998. Although Singapore is forecasting zero growth for its
economy for 1999, management expects the operations of Infotel to continue to be
profitable due to its blue chip customer base and position in the local
Singapore communications markets.
Gross margins in the three months ended December 31, 1998 improved to 31.6%
from 27.9% in the same period in 1997. VPI's gross margin on a stand-alone basis
decreased slightly in the three months ended December 31, 1998 as compared to
the same period of 1997 from 29.7% to 28.2%. Gross margins in both 1998 and 1997
were below historical levels as fixed costs were absorbed over a smaller revenue
base. VPI's product costs as a percentage of revenues decreased during the three
months ended December 31, 1998 to 40.1% versus 50.9% in the same quarter in
1997. This decrease was due primarily to low system sales for the quarter ended
December 31, 1998 which resulted in higher maintenance and support revenue with
no offsetting product cost. Infotel's gross margin on a stand-alone basis
improved to 34.1% of sales versus 28.4% of sales for the quarter ended December
31, 1997. This was primarily due to commission revenue of $0.2 million in the
first quarter of fiscal 1999, with no offsetting cost, while no commission
revenues were recorded in the same three month period of 1997. Infotel earns
commissions when its vendors (Motorola and Rhode & Schwart) sell directly to its
end-user customers.
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net sales increased to 70.0% for the three months ended December
31, 1998 versus 63.1% for the same period in 1997. VPI on a stand-alone basis
increased to 58.9% for the first fiscal quarter of 1999 compared to 42.6% for
the same three month period in 1997, due primarily to (i) a 10.6% increase in
salary expenses as a percentage of revenue associated with the hiring of
additional sales and marketing personnel during the first fiscal quarter quarter
of 1999; (ii) a 2.6% increase in travel costs as a percentage of revenue
associated with training sales and operations personnel on new NT based
communication products currently marketed by VPI; and (iii) a 3.0% increase in
general and administrative expenses related to increases in short term facility
rents and depreciation expense related to systems upgrades to support the
Company's growth plans. On a stand-alone basis, Infotel's SG&A as a percent of
revenues decreased to 20.5% for the three months ended December 31, 1998
compared to 21.4% for the three months ended December 31, 1997. The reduction in
Infotel's SG&A was due primarily to delays in hiring personnel, and lower travel
and training costs. Corporate overhead costs increased for the three months
ended December 31, 1998 due to the following services: (i) increased outside
services costs as a result of an aborted financing; (ii) increased costs for
audit and legal related to the additional reporting requirements of a public
company, including a special proxy statement; and (iii) relocation fees related
to the former CEO.
At December 31, 1998 the Company provided a 100% reserve 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. The federal net operating loss carryforwards
are subject to an annual limit of approximately $250,000.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complimentary businesses and products has been
an element of the Company's business strategy, the Company's ability to engage
in acquisitions is subject to severe limitations given the Company's current
financial condition. To engage in such activity, the Company will need to obtain
additional debt or equity financing, neither of which may be available or, if
available, available on terms acceptable to the Company. 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).
During the three months ended December 31, 1998, net cash provided by
operating activities was $0.5 million, consisting primarily of the collection of
accounts receivable offset by cash used to fund the net operating loss. Net cash
used by investing and financing activities totaled $1.6 million consisting of
(i) purchases of property and equipment for the Company's internal computer
system, and (ii) payment of the notes payable to management. At December 31,
1998, the Company's working capital deficit was ($0.8) million and cash and cash
equivalents totaled $0.6 million. The current ratio decreased slightly from 1.1
to 1 at September 30, 1998 to 0.9 to 1.0 at December 31, 1998. Management
believes that available cash reserves coupled with additional available credit
and the implementation of cost reductions will provide adequate funds for future
operations, although no assurance can be given that current efforts will be
successful.
During 1998, the Company obtained 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 1999, the Company's
lender increased the credit line from $1.0 million to $2.0 million and
restrictions were eased on the receivables eligible for inclusion in the
Company's borrowing base. 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 Infotel's
overdraft protection, letters of credit, letters of guarantee, foreign exchange
and revolving credit. The Company hopes to complete this facility early in
calendar 1999.
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.
The Company is required to pay $1,390,400 to the former Infotel
shareholders pursuant to the purchase agreement regarding the acquisition of
Infotel, 30 days after the filing of the 10-KSB. The Company's 10-KSB was filed
on January 13, 1999, approximately 30 days prior to the date of this report. The
Company does not currently have the cash necessary for payment. The Company is
renegotiating with the shareholders to defer payment. There can be no assurance
that the shareholders will agree to any delay, and the outcome may have a
material adverse effect on the Company's financial position and results of
operations.
Based upon its present cost reduction plans, management believes that
operating cash flow, available cash and available credit are adequate to meet
the working capital cash needs of the Company and to meet anticipated capital
needs during the next 12 months. Although the Company intends to issue shares of
common stock as its primary method of financing acquisitions, it anticipates
that additional funds will be required to successfully implement its acquisition
program, and it will use various methods to finance acquisitions, including the
payment of cash, for this purpose.
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<PAGE> 18
RISK FACTORS
The following risk factors, in addition to the risks described elsewhere in
this proxy statement, may cause actual results to differ materially from those
in any forward-looking statements contained elsewhere in this report or made in
the future by the Company or its representatives. Such forward-looking
statements involve known risks, uncertainties and other factors which may cause
the actual results, performance or achievements to differ materially from those
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 propriety of continuing the Company's listing
on the Nasdaq Small Cap Market System. The Company has submitted a plan to
correct its listing deficiency with Nasdaq and has not yet received a reply
regarding continued listing of its Common Stock and there can be no assurance
that the Common Stock will remain listed.
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 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 three months ended December 31, 1998, the Company incurred a net
loss in the amount of $1.4 million on net revenues of $3.3 million. 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.
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<PAGE> 19
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 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
17
<PAGE> 20
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.
COMPETITION IN VPI'S VOICE PROCESSING AND CUSTOMER PREMISES EQUIPMENT
BUSINESSES.
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.
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<PAGE> 21
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.
YEAR 2000 COMPLIANCE
The Company has developed an implementation plan to correct any internal
computer systems that could be affected by the "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 end 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 and results of
operations.
The Company distributes products from third party product 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, VPI, distributes to determine which, if any,
are not capable of recognizing the year 2000. Communications were initiated with
all of the manufacturers of such products to determine the nature and extent of
any Year 2000 problems. Where potential Year 2000 computer problems contained in
the products used or distributed by the Company have been identified, the
manufacturers have stated that they have committed resources to resolve such
problems prior to year 2000. However, there can be no assurance that these
manufacturers will, in fact, timely complete the resolution of their Year 2000
problems or, even if timely completed, that those solutions will be acceptable
in the marketplace. The solution to be provided by some manufacturers will
involve a significant upgrade cost to the end user, which may give rise to
disputes and/or litigation between the end user and the manufacturer, which may
also involve the Company. The costs of such possible disputes or litigation
could be significant, thereby resulting in a material adverse effect on the
Company's business, financial condition and results of operations.
As for Asian operations, the Company has not completed 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 to timely resolve any such problems. The Company also has not been
able to determine whether the legal systems 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 in 1998 from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant. As for Asian operations, the Company
recently completed its review of the internal computer systems of Infotel and
discovered that Infotel's systems are not Year 2000 compliant. A plan has been
established to convert Infotel to the Company's internal business system during
spring 1999. The estimated cost of the new business systems for all locations
combined is $400,000; such systems are needed not only to remedy Year 2000
compliance problems but also to maintain proper controls for management of the
Company.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The following 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 herein
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 "Year 2000 Disclosure" and other statements 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 SmallCap
Market System listing is in jeopardy. 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 in 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 herein.
GENERAL
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"), a Delaware
corporation. On February 3, 1997, prior to the February 4, 1997 consummation of
the initial public offering ("IPO") of the Company's Common Stock, BFI merged
with a subsidiary of NHancement whereupon BFI, as the surviving corporation,
became a wholly owned subsidiary of NHancement. The BFI merger was accounted for
in a manner similar to a pooling-of-interests. Also, on February 3, 1997, the
Company acquired Voice Plus, Inc., 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(R) 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," which is headquartered in
Fremont, California. Voice Plus remains a wholly owned subsidiary of NHancement.
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<PAGE> 23
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 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, 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
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<PAGE> 24
implemented primarily through 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>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 1998
------------ ------------ ------------- -------------
(UNAUDITED)
<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
FACTOR 1000 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 and second
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
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<PAGE> 25
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.
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(R) 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.
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<PAGE> 26
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(R)
technology and products, as no significant FACTOR 1000(R) revenue was generated
in 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 FACTOR 1000(R) sublicensing revenues which were
extremely high as a result of the receipt of a $700,000 sublicense payment with
minimal related expense. No significant revenues from the commercial release of
the FACTOR 1000(R) system were recorded in 1997. The gross margin in 1997 is
associated almost exclusively with the Company's VPI subsidiary whose gross
margin, as a stand-alone business, increased slightly to 44.0% in 1997 compared
to 41.4% in 1996 due to larger system sales.
Company-wide research, selling and administrative ("RS&A") expenses as a
percentage of net revenues were abnormally high during 1996 as compared to 1997
for the following reasons: (i) during most of 1996, BFI continued development of
the FACTOR 1000(R) system, working closely with a few beta customers; (ii) most
of the operating costs in 1996 were expended on the efforts to find
complementary businesses to acquire that would provide a viable marketing
channel for the FACTOR 1000(R) system; and (iii) during 1996
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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 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 $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 million 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.
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.
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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 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 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, 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. On
January 6, 1999, Mr. Robert Schmier and Mr. N. Bruce Walko were appointed to
fill certain of the vacancies on the Company's Board of Directors. On January
13, 1999, Mr. Lawrence resigned from the Board.
ACCOUNTING STANDARDS
The Company was not affected by its adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which established a
different method of calculating earnings per share than was previously used in
accordance with Accounting Principal Board No. 15, "Earnings per Share," and
provides for the calculation of basic and diluted earnings per share. This
statement was effective for the Company's year ending December 31, 1997 and
required that all prior earnings be restated to reflect its retroactive
application.
During 1997, the Financial Accounting Standards Board released its
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130, which is effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in the entity's financial
statements. The objective of SFAS No. 130 is to report a measure of all changes
in the equity of an enterprise that result from transactions and other economic
events of the period. Comprehensive income is the total of net income and all
other non-owner changes in equity.
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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
this proxy statement, may cause actual results to differ materially from those
in any forward-looking statements contained herein or elsewhere in this proxy
statement or made in the future by the Company or its representatives.
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
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completed fiscal years. Nasdaq is currently reviewing the propriety 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
this or any future period.
If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny stock" rules, and as a result, an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock.
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.
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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 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
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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.
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.
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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.
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 the Company's 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
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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.
FINANCIAL STATEMENTS
The Company's consolidated financial statements for the nine months ended
September 30, 1998 and the year ended December 31, 1997 are shown on pages F-1
through F-26. The Company's financial statements (unaudited) for the three
months ended December 31, 1998 and 1997 are shown on pages F-27 - F-35. The
accounting firm of BDO Seidman, LLP, has been engaged as the Company's
independent certified public accountants for the past two years and its Report
of Independent Certified Public Accountants for the nine months ended September
30, 1998 and the year ended December 31, 1997 is shown on page F-2.
STATEMENT REGARDING INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS' REPRESENTATIVES
Representatives of BDO Seidman, LLP, the Company's principal accountants
for the current year and for the most recently completed fiscal year: (i) are
expected to be present at the Special Meeting; (ii) will have the opportunity to
make a statement if they desire to do so; and (iii) are expected to be available
to respond to appropriate questions.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business that the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
32
<PAGE> 35
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Stockholders who intend to present proposals at the Company's 1999 Annual
Meeting must send such proposals to the Company for receipt a reasonable time
before the Company begins to print and mail its proxy materials in order for
such proposals to be considered for inclusion in the proxy statement and form of
proxy relating to such meeting. All such proposals must additionally meet the
stockholder eligibility and other requirements of the Securities and Exchange
Commission.
By Order of the Board of Directors
Douglas S. Zorn
President
March 25, 1999
33
<PAGE> 36
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Report of Independent Auditors for Infotel Technologies
(Pte) Ltd. ............................................... F-3
Consolidated Financial Statements for the Nine Months Ended
September 30, 1998
Consolidated Balance Sheet as of September 30, 1998....... F-4
Consolidated Statements of Operations for the nine months
ended
September 30, 1998 and 1997 (unaudited) and year ended
December 31, 1997...................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the nine months ended September 30, 1998 and year
ended December 31, 1997................................ F-6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited) and year
ended December 31, 1997................................ F-7
Summary of Accounting Policies............................ F-8
Notes to Consolidated Financial Statements.......... F-13 - F-26
Consolidated Financial Statements for the Three Months Ended
December 31, 1998 (Unaudited)............................. F-27
Consolidated Balance Sheet as of December 31, 1998
(Unaudited)............................................ F-28
Consolidated Statements of Operations (Unaudited) for the
three months ended December 30, 1997 and 1998.......... F-29
Consolidated Statement of Stockholders' Equity and
Comprehensive Loss (Unaudited) for the three months
ended December 31, 1998................................ F-30
Consolidated Statements of Cash Flow (Unaudited) for the
three months ended December 31, 1997 and 1998.......... F-31
Notes to Consolidated Financial Statements.......... F-32 - F-35
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and the Stockholders of
NHancement Technologies Inc. and Subsidiaries
Fremont, California
We have audited the accompanying consolidated balance sheet of NHancement
Technologies Inc. and Subsidiaries as of 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-2
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Infotel Technologies (Pte) Ltd
We have audited the balance sheet of Infotel Technologies (Pte) Ltd (a
subsidiary of Nhancement Technologies Inc.) as of September 30, 1998, and the
related statements of operations and comprehensive income, shareholders' equity
and cash flows for the period from June 22, 1998 to September 30, 1998 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Infotel Technologies (Pte)
Ltd at September 30, 1998, and the results of its operations and its cash flows
for the period from June 22, 1998 to September 30, 1998, in conformity with
United States generally accepted accounting principles.
/s/ Ernst & Young
ERNST & YOUNG
Singapore
October 20, 1998
F-3
<PAGE> 39
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
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
===========
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-4
<PAGE> 40
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
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-5
<PAGE> 41
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CUMULATIVE
PAR VALUE PAR VALUE ADDITIONAL TRANSLATION
------------------ ------------------- PAID-IN ACCUMULATED GAIN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
------ --------- --------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997.... -- -- 612,800 $ 6,100 $ 5,363,900 $ (9,010,000) $ -- $(3,640,000)
------ --------- --------- ------- ----------- ------------ --------- -----------
Common stock issued for
Voice Plus, Inc.
acquisition (Note 2)...... -- -- 1,312,500 13,100 4,666,900 -- -- 4,680,000
Sale of common stock in an
initial public offering,
net of stock issuance
costs of $1,660,200 (Note
12)....................... -- -- 2,045,000 20,500 6,499,300 -- -- 6,519,800
Conversion of debt and
accrued interest into
common stock (Note 12).... -- -- 258,200 2,600 1,030,000 -- -- 1,032,600
Issuance of common stock
options for payment of
outside service fees...... -- -- -- -- 3,800 -- -- 3,800
Common stock issued for
Advantis acquisition
(Note 2).................. -- -- 208,500 2,100 456,700 -- -- 458,800
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 of stock issuance
costs of $265,300 (Note
5)........................ 12,500 984,700 -- -- -- -- -- 984,700
Deemed dividend on preferred
stock convertible at a
discount (Note 5)......... -- -- -- -- 416,700 (416,700) -- --
Dividends on preferred stock
converted into common
shares (Note 5)........... -- -- 8,400 100 11,400 (11,500) -- --
Dividends payable on
preferred stock (Note
5)........................ -- -- -- -- -- (7,500) -- (7,500)
Preferred shares converted
into common stock (Note
5)........................ (9,300) (732,500) 700,835 7,000 725,500 -- -- --
Issuance of common stock
options for payment of
outside service fees...... -- -- -- -- 10,600 -- -- 10,600
Common stock issued for
Infotel acquisition (Note
2)........................ -- -- 433,000 4,300 1,836,100 -- -- 1,840,400
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-6
<PAGE> 42
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
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 offering
costs................................................... -- -- 984,700
----------- ----------- -----------
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-7
<PAGE> 43
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
Company), was incorporated in October 1996 as a holding company and successor to
the business of BioFactors, Inc. ("BFI" or "BioFactors"), a Delaware
corporation. On February 3, 1997, prior to the February 4, 1997 consummation of
the initial public offering ("IPO") of the Company's common stock (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-8
<PAGE> 44
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(R) product, which measures human sensorimotor skills
to determine an individual's performance readiness and fitness to perform, given
the resources required to develop a market for the product and the need to
dedicate its financial resources required to develop a market for the product
and the need to dedicate its financial resources to its other core businesses.
The remaining assets and liabilities associated with the FACTOR 1000(R) product
at 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(R) product. The Company's
FACTOR 1000(R) system is based upon the Critical Tracking Task (CTT) software,
which is exclusively licensed from Systems Technology Inc. (STI) in Hawthorne,
California. The license agreement with STI is effective through November 2008
and grants the Company the right to issue sublicenses during the term of the
agreement. Under the terms of a sublicense agreement entered into with
SportsTrac, Inc., a company whose chief executive officer is a minority
stockholder and former executive officer of the Company, the Company has granted
an exclusive world-wide sublicense for sports and on-field-athletic-performance
related users of the FACTOR 1000(R) 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 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.
F-9
<PAGE> 45
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 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
F-10
<PAGE> 46
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
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.
F-11
<PAGE> 47
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
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-12
<PAGE> 48
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
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
F-13
<PAGE> 49
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("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 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.
F-14
<PAGE> 50
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
==========
Consists principally of the following(1):
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 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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 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>
F-15
<PAGE> 51
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-16
<PAGE> 52
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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
F-17
<PAGE> 53
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-18
<PAGE> 54
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED 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.
F-19
<PAGE> 55
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
In connection with certain debt financing and the IPO, the Company has
granted various warrants to purchase common stock. The following schedule
summarizes the activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
WARRANT PRICE REMAINING
PER SHARE OUTSTANDING CONTRACTUAL LIFE
---------------- ----------- ----------------
<S> <C> <C> <C>
January 1, 1997............................ $5.18 617,100 3.0 years
Warrants issued to Underwriter in
connection with Initial Public
Offering................................. $4.80 230,000
December 31, 1997.......................... $5.08 847,100 2.6 years
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(R) system if the
employee's employment relationship is affected thereby and (ii) by third parties
who may be indirectly affected by the Company's services or products. Product
and service liability insurance is expensive, to the extent it is available at
all. As of 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(R) product is based on licensed technology.
Accordingly, the Company is required to pay a royalty of up to 8.5% of sales of
the related product. Beginning January 1997, the license agreement also provides
for a minimum aggregate payment over each three-year period of $150,000. In
addition, the Company's license permits the sublicense of the CTT technology and
requires that the Company make payments to its licensor on such sublicensing
arrangements as follows: (i) a royalty payment of 8.5% on up to $250,000 of the
initial sublicense fee and 50% of any sublicense fee in excess of $250,000; and
(ii) a royalty payment equal to 50% of the sublicense fee, which amount must be
at least 4.25% of the sublicensee's gross contract revenue. The Company's
ability to sell its product is dependent on the continuation of this license.
See business section of summary of accounting policies regarding the Company's
March 1998 formalization of a plan to exit from the business related to its
FACTOR 1000(R) product. The Company has not currently met their minimum
aggregate payment. If the Company does not make the payment they will loose
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
F-20
<PAGE> 56
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 covenants 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. 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
F-21
<PAGE> 57
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<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>
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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 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.
F-22
<PAGE> 58
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
9 MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
NET INCOME (LOSS) -- NUMERATOR
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
F-23
<PAGE> 59
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
VPI INFOTEL OTHER(2) TOTAL(4)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
September 30, 1998(1)
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>
- ---------------
(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>
VPI INFOTEL OTHER(2) TOTAL
----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
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.
F-24
<PAGE> 60
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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
F-25
<PAGE> 61
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 additional 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-26
<PAGE> 62
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair presentation of the information shown. These unaudited
financial statements should be read in conjunction with the audited financial
statements for the nine months ended September 30, 1998. The results for the
three months ended December 31, 1998 are not necessarily indicative of the
results of operations for a full year.
F-27
<PAGE> 63
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
CURRENT
Cash and cash equivalents................................. $ 612,700
Restricted cash........................................... 1,080,000
Accounts receivable, less allowance for doubtful accounts
of $268,100............................................ 2,763,700
Inventory................................................. 1,564,000
Current portion of notes receivable from related
parties................................................ 207,900
Prepaid expenses and other................................ 214,600
------------
TOTAL CURRENT ASSETS........................................ 6,442,900
------------
PROPERTY AND EQUIPMENT...................................... 2,181,200
Less accumulated depreciation............................. (761,100)
------------
PROPERTY AND EQUIPMENT, net................................. 1,420,100
------------
Excess of cost over net assets acquired of Voice Plus, Inc.,
net of accumulated amortization of $62,500 (Note 1)....... 687,500
Excess of cost over net assets acquired of Infotel, net of
accumulated amortization of $95,600 (Note 1).............. 1,832,400
Long-term portion of notes receivable from related
parties................................................... 195,400
Other assets................................................ 29,400
------------
$ 10,607,700
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit........................................... $ 222,300
Accounts payable.......................................... 2,004,100
Accrued liabilities....................................... 1,539,100
Deferred revenue.......................................... 1,633,100
Income tax payable........................................ 182,900
Notes payable to stockholders............................. 1,577,900
Capital lease obligations, current portion................ 56,400
------------
TOTAL CURRENT LIABILITIES................................... 7,215,800
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION........... 130,700
------------
TOTAL LIABILITIES........................................... 7,346,500
------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value, 2,000,000
shares authorized, 2,441 shares issued and
outstanding............................................ 192,300
Common stock, $0.01 par value, 20,000,000 shares
authorized, 5,771,135 shares issued and outstanding.... 57,700
Additional paid-in capital................................ 21,084,500
Accumulated deficit....................................... (17,929,600)
Cumulative translation loss............................... (143,700)
------------
TOTAL STOCKHOLDERS' EQUITY.................................. 3,261,200
------------
$ 10,607,700
============
</TABLE>
F-28
<PAGE> 64
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET REVENUES................................................ $ 2,017,000 $ 3,261,900
Cost of sales............................................... 1,453,900 2,231,300
----------- -----------
GROSS PROFIT................................................ 563,100 1,030,600
----------- -----------
OPERATING EXPENSES
Selling, general and administrative....................... 1,271,800 2,282,100
Amortization of excess of cost over net assets acquired,
including impairment loss of $4,084,300 in 1997........ 4,235,100 110,500
----------- -----------
TOTAL OPERATING EXPENSES.................................... 5,506,900 2,392,600
----------- -----------
LOSS FROM OPERATIONS........................................ (4,943,800) (1,362,000)
OTHER INCOME (EXPENSE)
Interest income........................................... 33,600 8,400
Interest expense.......................................... (6,600) (65,200)
Other..................................................... -- 2,700
----------- -----------
Total other income (expense)................................ 27,000 (54,100)
Loss from continuing operations before income taxes......... (4,916,800) (1,416,100)
Income tax benefit.......................................... (92,500) --
----------- -----------
Loss from continuing operations............................. (4,824,300) (1,416,100)
----------- -----------
DISCONTINUED OPERATIONS
Income from operations of Advantis........................ 3,100 --
----------- -----------
NET LOSS.................................................... $(4,821,200) $(1,416,100)
Preferred dividends......................................... -- (3,400)
----------- -----------
Net loss available to common shareholders................... $(4,821,200) $(1,419,500)
----------- -----------
Basic and diluted net loss per common share (Note 7)........ $ (1.13) $ (0.25)
=========== ===========
</TABLE>
F-29
<PAGE> 65
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
PAR VALUE PAR VALUE ADDITIONAL CUMULATIVE
----------------- ------------------- PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL
------ -------- --------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1998.... 3,200 $252,200 5,579,235 $55,800 $21,020,900 $(16,510,100) $(174,900) $ 4,643,900
Dividends on preferred stock
converted to common shares... -- -- 4,700 100 1,900 (2,000) -- --
Dividends payable on preferred
stock........................ -- -- -- -- -- (1,400) -- (1,400)
Preferred shares converted into
common stock................. (759) (59,900) 187,200 1,800 58,100 -- -- --
Issuance of common stock
options for payment of
outside service fees......... -- -- -- -- 3,600 -- -- 3,600
Comprehensive loss:
Net loss....................... -- -- -- -- -- (1,416,100) -- (1,416,100)
Cumulative translation income
(loss)....................... -- -- -- -- -- -- 31,200 31,200
----- -------- --------- ------- ----------- ------------ --------- -----------
Total comprehensive income
(loss)....................... -- -- -- -- -- (1,416,100) 31,200 (1,384,900)
----- -------- --------- ------- ----------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1998..... 2,441 $192,300 5,771,135 $57,700 $21,084,500 $(17,929,600) $(143,700) $ 3,261,200
===== ======== ========= ======= =========== ============ ========= ===========
</TABLE>
F-30
<PAGE> 66
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(4,821,200) $(1,416,100)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and other amortization....................... 50,700 96,200
Amortization of excess cost over net assets acquired,
including impairment loss.............................. 4,239,300 110,500
Compensation related to grant of stock options and common
stock.................................................. -- 3,600
Other..................................................... 8,800 (5,300)
Changes in operating assets and liabilities:
Accounts receivable....................................... (330,000) 1,815,600
Inventory................................................. 114,800 (222,900)
Prepaid expenses and other................................ 96,700 27,500
Other assets.............................................. 294,200 217,400
Income tax payable........................................ (172,000) (8,500)
Accounts payable and other current liabilities............ (49,500) (127,300)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... (568,200) 490,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash........................................... -- (711,000)
Deferred acquisition costs................................ (135,600) --
Note receivable from related party........................ (1,100) --
Purchase of property and equipment........................ (70,700) (171,600)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (207,400) (882,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under line of credit........................ -- (8,600)
Principal payments on capital leases...................... -- (25,600)
Principal payment on notes payable........................ -- (669,600)
Principal payment on long-term debt due to stockholders... (187,500) --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES....................... (187,500) (703,800)
----------- -----------
Effect of exchange rate changes on cash..................... -- 31,200
----------- -----------
Net decrease in cash and cash equivalents................... (963,100) (1,064,500)
----------- -----------
Cash and cash equivalents, beginning of period.............. 2,326,300 1,677,200
----------- -----------
Cash and cash equivalents, end of period.................... $ 1,363,200 $ 612,700
=========== ===========
SUPPLEMENTAL DATA:
Interest paid............................................. $ 67,000 $ 84,900
Income taxes paid......................................... -- $ 1,600
</TABLE>
F-31
<PAGE> 67
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions of $99,300 were financed by capital lease
obligations.
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. A preacquisition note of $306,200 due to the
Company was assumed in conjunction with the acquisition.
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, and the
three months ended December 31, 1998 of $4.6 million, $1.5 million, and $1.4
million. 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. Negative working capital at December 31, 1998 was approximately
$773,000. 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, and is currently
implementing the plan. Under the plan, headcount is expected to decrease by 10%.
Furthermore, cost reductions will be implemented in corporate overhead, travel,
discretionary sales expenses, outside services and general and administrative
expenses. Additionally, the Company increased 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 assurance 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 $0.6 million,
will provide sufficient cash flow for future operations.
The Company's current net tangible assets of $741,300, fail to meet the
requirements for listing on the Nasdaq SmallCap Market system. To stay listed
the Company is required to 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 our plan to
determine the propriety of continuing the Company's listing on the Nasdaq Small
Cap Market System. The Company does not currently meet these requirements, nor
can there be any assurance that the Company will in fact meet these requirements
in any future period.
The Company is required to pay $1,390,400 to the former Infotel
shareholders pursuant to the purchase agreement regarding the acquisition of
Infotel, 30 days after the filing of the 10-KSB which was filed in January 1999.
The Company does not currently have the cash necessary for payment. The Company
is renogatiating with the shareholders to defer payment. There can be no
assurance that the shareholders will agree to any delay, and the outcome may
have a material adverse effect on the Company's financial position and results
of operations.
2. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company. The business
of NHancement is conducted by its operating company subsidiaries: Voice Plus,
Inc.("VPI" or "Voice Plus), whose name was recently changed to NHancement
Technologies North America, Inc. and Infotel Technologies (Pte) Ltd ("Infotel").
Voice Plus, a California corporation headquartered in Fremont, California, is a
systems integrator and national distributor of voice processing and multimedia
messaging equipment. Infotel, a Singapore corporation acquired on June 22, 1998
is (1) a systems integrator of (i) infrastructure communications equipment, (ii)
turnkey project management services, and (iii) radar systems; and (2) a provider
of test measuring systems. Accordingly, the consolidated financial statements
include the results of operations from NHancement and its Voice Plus subsidiary
for both periods presented and those of Infotel for the three months ended
December 31, 1998. Furthermore, the results of operations of Advantis Network &
Systems Sdn Bhd, which
F-32
<PAGE> 68
was acquired on December 15, 1997, are classified as discontinued as this
subsidiary was sold on September 30, 1998.
3. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The accompanying consolidated financial statements as of December 31, 1998
and for the three months ended December 31, 1998 and 1997 are unaudited. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been omitted. These consolidated financial statements should be
read in conjunction with the audited financial statements and accompanying notes
for the year ended September 30, 1998 presented in the Company's latest annual
report on Form 10-KSB.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
The consolidated financial statements presented herein reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations for the
periods presented.
4. STOCK OPTIONS
During the three months ended December 31, 1998, the Company granted
options to purchase approximately 136,500 shares of the Company's Common Stock
to employees, and options to purchase 20,000 shares of Common Stock to an
outside director, with an exercise price of $1.1563 per share.
5. FINANCING ACTIVITIES
In October 1998, the Company obtained 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 additional year. In January 1999, the Company's available line of credit was
increased to $2 million and restrictions were eased on the receivables eligible
for inclusion in the Company's borrowing base.
In June 1998, funds were loaned to the Company by certain management
stockholders totaling $650,000. Of this amount, $125,000, $225,000 and $300,000
were loaned to NHancement by Esmond T. Goei, Former Chairman of the Board and
Chief Executive Officer of the Company, Douglas S. Zorn, current President and
Chief Executive Officer of the Company, and James S. Gillespie, currently a
member of the Board of Directors of the Company, respectively. The total
principal and interest originally due September 30, 1998, was repaid on November
5, 1998 without penalty.
6. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of the Company and Infotel for the three months ended December 31,
1997, as if the acquisition had occurred at the beginning of the period, after
giving effect to certain adjustments, including the amortization of excess of
costs over net assets acquired and interest expense on notes payable to related
parties. The following unaudited pro forma summary does not necessarily reflect
the results of operations as they would have been had the Infotel acquisition
occurred at the beginning of the period presented and is not necessarily
indicative of the results of operations for any future period. These proforma
results exclude the income from discontinued operations.
F-33
<PAGE> 69
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
THREE MONTHS ENDED
DECEMBER 31,
1997
------------------
<S> <C>
Net revenues................................................ $ 4,166,200
Net loss.................................................... $(4,595,200)
Net loss per common share................................... $ (0.98)
Weighted average common and common equivalent shares
outstanding............................................... 4,661,500
</TABLE>
7. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128, Earnings
Per Share. The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET LOSS -- NUMERATOR
Net income (loss)......................................... $(4,821,200) $(1,416,100)
Preferred stock dividends................................. (3,400)
----------- -----------
Basic and diluted net loss applicable to common stock..... $(4,821,200) $(1,419,100)
=========== ===========
COMMON SHARES -- DENOMINATOR
Basic weighted average common shares outstanding.......... 4,264,700 5,739,400
Options and warrants...................................... -- --
----------- -----------
Diluted weighted average common shares outstanding........ 4,264,700 5,739,400
=========== ===========
</TABLE>
Options and warrants to purchase 1,359,625 shares of Common Stock and
Preferred Stock convertible into 337,100 shares of Common Stock were outstanding
during the three months ended December 31, 1998 and options and warrants to
purchase 1,154,100 shares at December 31, 1997 were outstanding but were not
included in the computation of diluted loss per common share because the effect
would be antidilutive.
8. SEGMENT REPORTING
NHancement's reportable operating segments include Voice Plus and Infotel.
Infotel is based in Singapore and derives substantially all of its revenue from
sales in Asia.
Financial information for these segments includes the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------
VPI INFOTEL OTHER(1) TOTAL
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales to external customers........ $1,396,900 $1,865,000 -- $ 3,261,900
Loss from continuing operations........ (543,200) 189,000 $(1,061,900) (1,416,100)
Total assets........................... 3,596,700 5,853,900 1,291,200 10,741,800
</TABLE>
- ---------------
(1) Other includes corporate expenses. Management's reports include goodwill for
Infotel in total assets.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
VPI(1) INFOTEL OTHER(2) TOTAL
----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales to external customers............. $ 2,016,000 -- $ 1,000 $ 2,017,000
Loss from continuing operations............. (4,247,900) -- (576,400) (4,824,300)
Total assets................................ 3,584,100 -- 3,713,200 7,297,300
</TABLE>
- ---------------
(1) VPI loss includes an impairment loss of $4,084,300 and amortization of the
excess of costs over net assets acquired of $150,900.
(2) Other includes corporate expenses. Management reports include goodwill for
Infotel in total assets.
F-34
<PAGE> 70
9. SUBSEQUENT EVENTS
On January 6, 1999, Mr. James S. Gillespie was reappointed as a director of
the Company, subsequently at the same meeting, Messrs. Boyle, Das and Nemetz
resigned from the Board, and on January 13, 1999, Thomas J. Lawrence resigned as
a director. 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. 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 5, 1999, (iii) Mr. Goei will 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 President and CEO.
On February 2, 1999 the Board approved the appointment of Mr. Gillespie as
a consultant to the Company. Messers. Robers J. Schmier and N. Bruce Walko were
also elected to the Board of Directors to fill the vacancies created by the
resignations of Messers. Boyle, Das and Nemetz. Subsequently at the same meeting
the Board of Directors reduced the number of Board members from seven (7) to
five (5). As of the date of this filing, there is still one (1) vacancy on the
Board of Directors. Mr. Walko is serving as the Chairman of the Board.
F-35
<PAGE> 71
ANNEX A
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance set
forth below, is entered into by and between NHANCEMENT TECHNOLOGIES, INC., a
Delaware corporation, with headquarters located at 39420 Liberty Street, Suite
250, Fremont, CA 94538 (the "Company"), and each entity named on a signature
page hereto (each, a "Buyer").
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, shares of Series A Convertible Preferred Stock,
$0.01 par value per share (the "Convertible Preferred Stock"), of the Company,
which which will be convertible into shares of Common Stock, $0.01 par value per
share, of the Company (the "Common Stock"), upon the terms and subject to the
conditions of such Convertible Preferred Stock, and subject to acceptance of
this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions. (i) The undersigned hereby agrees to
initially purchase from the Company shares of the Convertible Preferred Stock in
the amount set forth on the signature page of this Agreement (the "Initial
Preferred Stock"), out of a total offering of $3,000,000 of such Convertible
Preferred Stock, and having the terms and conditions set forth in the
Certificate of Designations, Preferences and Relative, Participating, Optional
and Other Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Preferred Stock of the Company attached hereto
as Annex I (the "Certificate of Designations"). The purchase price for the
Initial Preferred Stock shall be as set forth on the signature page hereto and
shall be payable in United States Dollars.
(ii) As used herein, the term "Preferred Stock" means the Initial Preferred
Stock and the Additional Preferred Stock (as defined below), unless the context
otherwise requires.
(iii) As used herein, the term "Securities" means the Preferred Stock and
the Common Stock issuable upon conversion of the Preferred Stock.
(iv) As used herein, the term "Purchase Price" means the purchase price for
the Initial Preferred Stock or the Additional Preferred Stock, as the case may
be.
(v) As used herein, the term "Initial Closing Date" means the date of the
closing of the purchase and sale of the Initial Preferred Stock, as provided
herein.
(vi) As used herein, the term "Additional Closing Date" means the date of
the closing of the purchase and sale of the relevant Additional Preferred Stock,
as provided herein.
(vii) As used herein, the term "Closing Date" means the relevant Initial
Closing Date or Additional Closing Date, as the case may be.
(viii) As used herein, the term "Market Price of the Common Stock" means
(x) the average closing bid price of the Common Stock for the five (5) trading
days ending on the trading day immediately before the date indicated in the
relevant provision hereof as reported by Bloomberg, LP or, if not so reported,
as reported
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<PAGE> 72
on the over-the-counter market or (y) if the Common Stock is listed on a stock
exchange, the closing price on such exchange on the date indicated in the
relevant provision hereof, as reported in The Wall Street Journal.
(ix) As used herein, the term "Effective Date" means the effective date of
the Registration Statement covering the Registrable Securities (as that term is
defined in the Registration Rights Agreement defined below).
b. Form of Payment; Delivery of Preferred Stock.
(i) The Buyer shall pay the Purchase Price for the relevant Preferred Stock
by delivering immediately available good funds in United States Dollars to the
escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions
attached hereto as Annex II (the "Joint Escrow Instructions") on the date prior
to the relevant Closing Date.
(ii) No later than the relevant Closing Date, but in any event promptly
following payment by the Buyer to the Escrow Agent of the relevant Purchase
Price, the Company shall deliver one or more certificates representing the
relevant Preferred Stock, duly executed by or on behalf of the Company
(collectively, the "Certificate"), to the Escrow Agent.
(iii) By signing this Agreement, each of the Buyer and the Company, subject
to acceptance by the Escrow Agent, agrees to all of the terms and conditions of,
and becomes a party to, the Joint Escrow Instructions, all of the provisions of
which are incorporated herein by this reference as if set forth in full.
c. Method of Payment. Payment into escrow of the Purchase Price shall be
made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: -
Not later than 5:00 p.m., New York time, on the date which is two (2) New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Escrow Agent by
facsimile, the Buyer shall deposit with the Escrow Agent the Purchase Price for
the Initial Preferred Stock in currently available funds. Time is of the essence
with respect to such payment, and failure by the Buyer to make such payment,
shall allow the Company to cancel this Agreement.
d. Escrow Property. The Purchase Price and the Certificate delivered to
the Escrow Agent as contemplated by Sections 1(b) and (c) hereof are referred to
as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant to the
Registration Statement (as that term is defined in the Registration Rights
Agreement defined below), the Buyer is purchasing the Preferred Stock and will
be acquiring the shares of Common Stock issuable upon conversion of the
Preferred Stock (the "Converted Shares") for its own account for investment only
or as agent for other "accredited investors" (as that term is used in paragraph
2(b) below) and not with a view towards the public sale or distribution thereof
and not with a view to or for sale in connection with any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in
A-2
<PAGE> 73
any way by the Company or any of its affiliates or selling agents), to protect
its own interests in connection with the transactions described in this
Agreement, and the related documents, and (iv) able to afford the entire loss of
its investment in the Securities.
c. All subsequent offers and sales of the Preferred Stock and the shares of
Common Stock representing the Converted Shares (such Common Stock sometimes
referred to as the "Shares") by the Buyer shall be made pursuant to registration
of the Shares under the 1933 Act or pursuant to an exemption from registration.
d. The Buyer understands that the Preferred Stock are being offered and
sold to it in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Preferred Stock.
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including Annex V hereto. The
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity to obtain and to review an unfiled draft of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as provided to the Buyer under cover of a copy of a letter, dated March 8,
1998 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities involves a
high degree of risk.
g. The Buyer understands that no United States federal or state agency or
any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
i. Notwithstanding the provisions hereof or of the Preferred Stock, in no
event (except if the Company is in default under any of the terms of the
Certificate of Designations or any of the Transaction Agreements, as defined
below and the Purchaser has asserted such default) shall the holder be entitled
to convert any Preferred Stock to the extent that, after such conversion, the
sum of (1) the number of shares of Common Stock beneficially owned by the Buyer
and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Preferred Stock), and (2) the number of shares of Common Stock issuable upon the
conversion of the Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by the Buyer
and its affiliates of more than 9.99% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided
in clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that, except as provided
in Annex V hereto:
a. Concerning the Preferred Stock and the Shares. The Preferred Stock has
been duly authorized, and when issued, will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder. There are no preemptive rights of any
stockholder of the Company, as such, to acquire the Preferred Stock or the
Shares.
b. Reporting Company Status. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly qualified as a foreign
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<PAGE> 74
corporation to do business and is in good standing in each jurisdiction where
the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or condition (financial or otherwise) of the Company. The Company has registered
its Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock is
listed and traded on The NASDAQ/SmallCap Market. The Company has received no
notice, either oral or written, with respect to the continued eligibility of the
Common Stock for such listing, and the Company has maintained all requirements
for the continuation of such listing.
c. Authorized Shares. The Company has sufficient authorized and unissued
Shares as may be reasonably necessary to effect the conversion of the Preferred
Stock. The Converted Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Preferred Stock in accordance with the
terms of the Certificate of Designations will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement and
Stock. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as Annex IV (the "Registration Rights Agreement"), and the
transactions contemplated thereby, have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company and
this Agreement is, and the Registration Rights Agreement, when executed and
delivered by the Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium, and other similar laws affecting the enforcement of creditors'
rights generally; and the Preferred Stock will be duly and validly authorized
and, when executed and delivered on behalf of the Company in accordance with
this Agreement, will be a valid and binding obligation of the Company in
accordance with its terms, subject to general principles of equity and to
bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Company, the issuance of the Securities,
and the consummation by the Company of the other transactions contemplated by
this Agreement, the Registration Rights Agreement, and the Preferred Stock do
not and will not conflict with or result in a breach by the Company of any of
the terms or provisions of, or constitute a default under (i) the articles of
incorporation or by-laws of the Company, each as currently in effect, (ii) any
indenture, mortgage, deed of trust, or other material agreement or instrument to
which the Company is a party or by which it or any of its properties or assets
are bound, including any listing agreement for the Common Stock except as herein
set forth, (iii) to its knowledge, any existing applicable law, rule, or
regulation or any applicable decree, judgment, or order of any court, United
States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, or (iv) the Company's listing agreement for its Common Stock, except
such conflict, breach or default which would not have a material adverse effect
on the Company or on the transactions contemplated herein.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC Filings. None of the Company's SEC Documents contained, at the time
they were filed, any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
made therein in light of the circumstances under which they were made, not
misleading. The Company has since January 1, 1997 timely filed all requisite
forms, reports and exhibits thereto with the SEC.
h. Absence of Certain Changes. Since January 1, 1998, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), or results of
operations of the Company, except as disclosed in the Company's SEC Documents.
Since January 1,
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1998, except as provided in the Company's SEC Documents, the Company has not (i)
incurred or become subject to any material liabilities (absolute or contingent)
except liabilities incurred in the ordinary course of business consistent with
past practices; (ii) discharged or satisfied any material lien or encumbrance or
paid any material obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business consistent with past
practices; (iii) declared or made any payment or distribution of cash or other
property to stockholders with respect to its capital stock, or purchased or
redeemed, or made any agreements to purchase or redeem, any shares of its
capital stock; (iv) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practices; (v) suffered any substantial losses or waived
any rights of material value, whether or not in the ordinary course of business,
or suffered the loss of any material amount of existing business; (vi) made any
changes in employee compensation, except in the ordinary course of business
consistent with past practices; or (vii) experienced any material problems with
labor or management in connection with the terms and conditions of their
employment.
i. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally or as disclosed in the
Company's SEC Documents) that has not been disclosed in writing to the Buyer
that (i) would reasonably be expected to have a material adverse effect on the
business or financial condition of the Company , (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement or any of the agreements
contemplated hereby (collectively, including this Agreement, the "Transaction
Agreements"), or (iii) would reasonably be expected to materially and adversely
affect the value of the rights granted to the Buyer in the Transaction
Agreements.
j. Absence of Litigation. Except as set forth in the Company's SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business or financial condition, or results of operation of the
Company and its subsidiaries taken as a whole or the transactions contemplated
by any of the Transaction Agreements or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, any of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Section 3(e)
hereof, no Event of Default (or its equivalent term), as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (or its equivalent term) (as so defined in such agreement), has occurred
and is continuing, which would have a material adverse effect on the Company's
financial condition or results of operations.
l. Prior Issues. During the twelve (12) months preceding the date hereof,
the Company has not issued any convertible securities. The presently outstanding
unconverted principal amount of each such issuance as at April 8, 1998 are set
forth in Annex V.
m. No Undisclosed Liabilities or Events. The Company has no liabilities or
obligations other than those disclosed in the Company's SEC Documents or those
incurred in the ordinary course of the Company's business since January 1, 1998,
and which individually or in the aggregate, do not or would not have a material
adverse effect on the properties, business, condition (financial or otherwise),
or results of operations of the Company. No event or circumstances has occurred
or exists with respect to the Company or its properties, business, condition
(financial or otherwise), or results of operations, which, under applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed.
There are no proposals currently under consideration or currently anticipated to
be under consideration by the Board of Directors or the executive officers of
the Company which proposal would (x) change the charter or by-laws of the
Company, each as currently in effect, with or without shareholder approval,
which change would reduce or otherwise adversely affect the rights and powers of
the shareholders of the Common Stock or (y) materially or substantially change
the business, assets or capital of the Company, including its interests in
subsidiaries.
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n. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property is
bound.
o. No Integrated Offering. Neither the Company nor any of its affiliates
nor any person acting on its or their behalf has, directly or indirectly, at any
time since January 1, 1997, made any offer or sales of any security or solicited
any offers to buy any security under circumstances that would eliminate the
availability of the exemption from registration under Rule 506 of Regulation D
in connection with the offer and sale of the Securities as contemplated hereby.
p. Dilution. The number of Shares issuable upon conversion of the
Preferred Stock may increase substantially in certain circumstances, including,
but not necessarily limited to, the circumstance wherein the trading price of
the Common Stock declines prior to the conversion of the Preferred Stock. The
Company's executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded,
in its good faith business judgment, that such issuance is in the best interests
of the Company. The Company specifically acknowledges that its obligation to
issue the Shares upon conversion of the Preferred Stock is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Preferred
Stock have not been and are not being registered under the provisions of the
1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company and opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Preferred Stock and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective Registration Statement, certificates and other
instruments representing any of the Securities shall bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to enter into
the Registration Rights Agreement on or before the Closing Date.
d. Filings and Shareholder Consent. (i) The Company undertakes and agrees
to make all necessary filings in connection with the sale of the Preferred Stock
to the Buyer under any United States laws and
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regulations applicable to the Company, or by any domestic securities exchange or
trading market, and to provide a copy thereof to the Buyer promptly after such
filing.
(ii) The Company undertakes and agrees to take all steps necessary to have
a vote of the shareholders of the Company regarding authorization of the
Company's issuance to the holders of the Preferred Stock of shares of Common
Stock in excess of twenty percent (20%) of the outstanding shares of Common
Stock on the Initial Closing Date or any Additional Closing Date, whichever is
higher on or before the Effective Date in accordance with NASDAQ Rule
4301(c)(25)(H)(i)(d)(2). The Company will recommend to the shareholders that
such authorization be granted and will seek proxies from shareholders not
attending the meeting (if such meeting is required to effectuate such
authorization) naming a director or officer of the Company as such shareholder's
proxy and directing the proxy to vote, or giving the proxy the authority to
vote, in favor of such authorization. The Company has obtained the commitment of
each director and officer of the Company owning, directly or indirectly, shares
of the Common Stock or who might be designated as a proxy for shareholders that
such director or officer will vote such shares and any proxy given to him or her
(except to extent specifically directed otherwise in a proxy) in favor of such
authorization. Upon determination that the shareholders have voted in favor of
such authorization, the Company shall cause its counsel to issue to the Buyer an
unqualified opinion (the "Authorization Opinion") that such authorization has
been duly adopted by all necessary corporate action of the Company and that the
Company will be able to issue, without restriction as to the number of such
shares, all shares of Common Stock as may be issuable upon conversion of the
Preferred Stock and without any limits imposed by the Cap Regulations (as
defined below) adopted on or before and in effect on the date of the
Authorization Opinion. The Authorization Opinion shall state that the Buyer may
rely thereon in connection with the transactions contemplated regarding the
Additional Preferred Stock and its holdings of the Preferred Stock.
e. Reporting Status. So long as the Buyer beneficially owns any of the
Preferred Stock, the Company shall file all reports required to be filed with
the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall
not terminate its status as an issuer required to file reports under the 1934
Act even if the 1934 Act or the rules and regulations thereunder would permit
such termination. The Company will take all reasonable action under its control
to continue the listing and trading of its Common Stock on The NASDAQ/SmallCap
Market and will comply in all material respects with the Company's reporting,
filing and other obligations under the by-laws or rules of the National
Association of Securities Dealers, Inc. ("NASD") or The NASDAQ/SmallCap Market.
f. Use of Proceeds. The Company will use the proceeds from the sale of the
Preferred Stock (excluding amounts paid by the Company for legal fees, finder's
fees and escrow agent fees in connection with the sale of the Preferred Stock)
for internal working capital purposes and for payment of the purchase price of
Infotel Technologies (PTE) Ltd., a company incorporated in Singapore, and shall
not, directly or indirectly, use such proceeds for any loan to or investment in
any other corporation, partnership, enterprise or other person, including any of
its affiliates, or to repay any debt to any of its affiliates.
g. Certain Agreements. The Company covenants and agrees that it will not,
without the prior written consent of the Buyer, enter into any subsequent or
further offer or sale of Common Stock or securities convertible into Common
Stock with any third party on any date which is earlier than the later of (A)
one hundred eighty (180) days after the Effective Date or (B) one hundred twenty
(120) days after the last Additional Closing Date.
h. Future Purchases. (i) The Buyer hereby unconditionally and irrevocably
agrees to purchase from the Company, and the Company hereby unconditionally and
irrevocably agrees to issue to the Buyer additional shares of Preferred Stock
(collectively, the "Additional Preferred Stock") having a liquidation amount of
up to the relevant Additional Tranche identified in subparagraph (h)(ii) below
multiplied by a fraction, of which the numerator is the principal amount of the
Initial Preferred Stock and the denominator is $1,250,000. The Additional
Preferred Stock shall be issued and acquired in three tranches (each, an
"Additional Tranche"), on the terms and subject to the conditions hereinafter
provided.
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(ii) The first Additional Tranche (the "First Additional Tranche") and the
second Additional Tranche (the "Second Additional Tranche") shall be for
$500,000 each. The third Additional Tranche (the "Third Additional Tranche")
shall be for $750,000.
(iii) The closing for the First Additional Tranche shall occur on the date
(the "First Additional Closing Date") which is sixty (60) days after the
Effective Date, unless otherwise agreed to by the Company and the Buyer. The
closing for the Second Additional Tranche shall occur on the date (the "Second
Additional Closing Date") which is thirty (30) days after the First Additional
Closing Date, unless otherwise agreed to by the Company and the Buyer. The
closing for the Third Additional Tranche shall occur on the date (the "Third
Additional Closing Date") which is thirty (30) days after the Second Additional
Closing Date, unless otherwise agreed to by the Company and the Buyer. The
closing of each Additional Tranche shall be conducted upon the same terms and
conditions as those applicable to the Initial Preferred Stock. Each of the First
Additional Closing Date, the Second Additional Closing Date and the Third
Additional Closing Date is referred to as an "Additional Closing Date."
(iv) On the relevant Additional Closing Date, (A) the Registration
Statement required to be filed under the Registration Rights Agreement shall
continue to be effective, and (B) the representations and warranties of the
Company contained in Section 3 hereof shall be true and correct in all material
respects (and the Company's issuance of the relevant Additional Preferred Stock
shall constitute the Company's making each such representation and warranty as
of such date) and there shall have been no material adverse changes (financial
or otherwise) in the business or conditions of the Company from the Initial
Closing Date through and including the relevant Additional Closing Date (and the
Company's issuance of the relevant Additional Preferred Stock shall constitute
the Company's making such representation and warranty as of such date).
(v) It shall be a condition to the Buyer's obligation to purchase the
relevant Additional Preferred Stock that, as of the relevant Additional Closing
Date, (A) the Market Price of the Common Stock, as adjusted to reflect any stock
splits, reverse stock splits or stock dividends effected or declared after the
Initial Closing Date, be Two Dollars ($2.00) or more per share, (B) the average
daily trading volume for the Common Stock for the thirty (30) consecutive
trading days ending the day before the Additional Closing Date be twenty
thousand (20,000) or more shares, and (C) the Authorization Opinion shall have
been issued to the Buyer.
i. Available Shares. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to yield two hundred percent (200%) of the number of shares of Common
Stock issuable at conversion as may be required to satisfy the conversion rights
of the Buyer pursuant to the terms and conditions of the Preferred Stock.
j. Limitation on Issuance of Shares. The Company may be limited in the
number of shares of Common Stock it may issue by virtue of (i) the number of
authorized shares or (ii) the applicable rules and regulations of the principal
securities market on which the Common Stock is listed or traded (collectively,
the "Cap Regulations"). The Company agrees whether or not provided in the
Certificate of Designations, (i) the Company will take all steps reasonably
necessary to be in a position to issue shares of Common Stock on conversion of
the Preferred Stock without violating the Cap Regulations and (ii) if, despite
taking such steps, the Company still can not issue such shares of Common Stock
without violating the Cap Regulations, the holder of a share Preferred Stock
which can not be converted as result of the Cap Regulations (each such share, an
"Unconverted Preferred Stock") shall have the option, exercisable in such
holder's sole and absolute discretion, to elect either of the following
remedies:
(x) require the Company to issue shares of Common Stock in accordance
with such holder's notice of conversion at a conversion purchase price
equal to the average of the closing bid price per share of Common Stock for
any five (5) consecutive trading days (subject to certain equitable
adjustments for certain events occurring during such period) during the
sixty (60) trading days immediately preceding the date of notice of
conversion; or
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(y) require the Company to redeem such share of Unconverted Preferred
Stock for an amount (the "Redemption Amount"), payable in cash, equal to:
V
------
CP
x M
where:
"V" means the liquidation preference of a share of Unconverted
Preferred Stock plus any accrued but unpaid dividends thereon;
"CP" means the conversion price in effect on the date of redemption
(the "Redemption Date") specified in the notice from the holder of the
Unconverted Preferred Stock electing this remedy; and
"M" means the highest closing bid price per share of the Common Stock
during the period beginning on the Redemption Date and ending on the date
of payment of the Redemption Amount.
If a holder owns more than one share of Unconverted Preferred Stock, such holder
may elect one of the above remedies with respect to some of such shares of
Unconverted Preferred Stock and the other remedy with respect to other shares of
Unconverted Preferred Stock. The Certificate of Designations shall not contain
any provisions inconsistent with the above terms. The provisions of this
paragraph are not intended to limit the scope of the provisions otherwise
included in the Certificate of Designations.
k. Hedging Transactions. The Company understands that the Buyer may be a
so-called "hedge" fund, and the Company hereby expressly agrees that the Buyer
shall not in any way be prohibited or restricted from any purchases or sales of
any securities or other instruments of, or related to, the Company or any of its
securities, including, but not necessarily limited to, puts, calls, futures
contracts, short sales and hedging and arbitrage transactions. The Buyer
acknowledges that such purchases, sales and other transactions may be subject to
various federal and state securities laws and agrees to comply with all such
applicable securities laws.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the Purchase Price for
the Initial Preferred Stock in accordance with Section 1(c) hereof, the Company
will irrevocably instruct its transfer agent to issue Common Stock from time to
time upon conversion of the Preferred Stock in such amounts as specified from
time to time by the Company to the transfer agent, bearing the restrictive
legend specified in Section 4(b) of this Agreement prior to registration of the
Shares under the 1933 Act, registered in the name of the Buyer or its nominee
and in such denominations to be specified by the Buyer in connection with each
conversion of the Preferred Stock. The Company warrants that no instruction
other than such instructions referred to in this Section 5 and stop transfer
instructions to give effect to Section 4(a) hereof prior to registration and
sale of the Shares under the 1933 Act will be given by the Company to the
transfer agent and that the Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement, and applicable law. Nothing in
this Section shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities. If the
Buyer provides the Company with an opinion of counsel reasonably satisfactory to
the Company that registration of a resale by the Buyer of any of the Securities
in accordance with clause (1)(B) of Section 4(a) of this Agreement is not
required under the 1933 Act, the Company shall (except as provided in clause (2)
of Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Converted Shares, promptly instruct the Company's transfer agent
to issue one or more certificates for Common Stock without legend in such name
and in such denominations as specified by the Buyer.
b. Subject to the completeness and accuracy of the Buyer's representations
and warranties herein, upon the conversion of any Preferred Stock by a person
who is a non-U.S. Person, and following the expiration of any then applicable
Restricted Period (as those terms are defined in Regulation S), the Company,
shall, at its expense, take all necessary action (including the issuance of an
opinion of counsel) to assure that the Company's transfer agent shall issue
stock certificates without restrictive legend or stop orders in the name of
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Buyer (or its nominee (being a non-U.S. Person) or such non-U.S. Persons as may
be designated by Buyer) and in such denominations to be specified at conversion
representing the number of shares of Common Stock issuable upon such conversion,
as applicable. Nothing in this Section 5, however, shall affect in any way
Buyer's or such nominee's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities.
c. (i) The Company will permit the Buyer to exercise its right to convert
the Preferred Stock by telecopying or delivering an executed and completed
Notice of Conversion to the Company and delivering, within five (5) business
days thereafter, the original Preferred Stock being converted to the Company by
express courier, with a copy to the transfer agent.
(ii) The term "Conversion Date" means, with respect to any conversion
elected by the holder of the Preferred Stock, the date specified in the Notice
of Conversion, provided the copy of the Notice of Conversion is telecopied to or
otherwise delivered to the Company in accordance with the provisions hereof so
that is received by the Company on or before such specified date.
(iii) The Company shall, at its expense, take all actions and use all means
necessary and diligent to cause its transfer agent to transmit the certificates
representing the Converted Shares issuable upon conversion of any Preferred
Stock (together with Preferred Stock not being so converted) to the Buyer via
express courier, by electronic transfer or otherwise, within three (3) business
days (such third business day, the "Delivery Date") after (A) the business day
on which the Company has received both of the Notice of Conversion (by facsimile
or other delivery) and the original Preferred Stock being converted (and if the
same are not delivered to the Company on the same date, the date of delivery of
the second of such items) or (B) the date a dividend payment on the Preferred
Stock, which the Company has elected to pay by the issuance of Common Stock, as
contemplated by the Preferred Stock, was due.
d. The Company understands that a delay in the issuance of the Shares of
Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond two (2) business days from the
Delivery Date):
<TABLE>
<CAPTION>
LATE PAYMENT FOR EACH
$10,000 OF PREFERRED STOCK
LIQUIDATION PREFERENCE OR INTEREST
NO. BUSINESS DAYS LATE AMOUNT BEING CONVERTED
---------------------- ----------------------------------
<S> <C>
1................................... $100
2................................... $200
3................................... $300
4................................... $400
5................................... $500
6................................... $600
7................................... $700
8................................... $800
9................................... $900
10.................................. $1,000
>10................................. $1,000+$200 for each Business Day
Late beyond 10 days
</TABLE>
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit the Buyer's right to
pursue actual damages for the Company's failure to issue and deliver the Common
Stock to the Buyer. Furthermore, in addition to any other remedies which may be
available to the Buyer, in the event that the Company fails for any reason to
effect delivery of such shares of Common Stock within two (2) business days
after the Delivery Date, the Buyer will be entitled to revoke the relevant
Notice of Conversion by delivering a notice to such effect to the Company
whereupon the Company
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and the Buyer shall each be restored to their respective positions immediately
prior to delivery of such Notice of Conversion.
e. If, by the relevant Delivery Date, the Company fails for any reason to
deliver the Shares to be issued upon conversion of a Preferred Stock and after
such Delivery Date, the holder of the Preferred Stock being converted (a
"Converting Holder") purchases, in an open market transaction or otherwise,
shares of Common Stock (the "Covering Shares") in order to make delivery in
satisfaction of a sale of Common Stock by the Converting Holder (the "Sold
Shares"), which delivery such Converting Holder anticipated to make using the
Shares to be issued upon such conversion (a "Buy-In"), the Company shall pay to
the Converting Holder, in addition to all other amounts contemplated in other
provisions of the Transaction Agreements, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder. By way of illustration and not
in limitation of the foregoing, if the Converting Holder purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000.
f. In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of the Buyer and its compliance with the
provisions contained in this paragraph, so long as the certificates therefor do
not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
g. The Company will authorize its transfer agent to give information
relating to the Company directly to the Buyer or the Buyer's representatives
upon the request of the Buyer or any such representative. The Company will
provide the Buyer with a copy of the authorization so given to the transfer
agent.
6. DELIVERY INSTRUCTIONS.
The Initial Preferred Stock or the Additional Preferred Stock, as the case
may be, shall be delivered by the Company to the Escrow Agent pursuant to
Section 1(b) hereof, on a delivery against payment basis, no later than on the
relevant Closing Date.
Notwithstanding the foregoing provision or any other provision hereof to
the contrary, the Escrow Agent is authorized and directed to retain in escrow,
out of the Purchase Price proceeds for the Initial Preferred Stock deposited in
escrow with the Escrow Agent, the sum of Five Hundred Thousand Dollars
($500,000; the "Retained Escrow Amount") until the Escrow Agent receives written
confirmation from counsel to the Company that the Registration Statement
complying with the provisions of the Registration Rights Agreement (including,
without limitation, [x] inclusion of all concepts specified therein, [y] after
affording counsel for the Initial Holder, as defined in the Registration Rights
Agreement the opportunity to review and comment on the draft of the Registration
Statement and [z] not including any statement therein to which such counsel to
the Initial Holder reasonably objected) has been filed with the SEC (the "Filing
Confirmation"). Upon receipt of the Filing Confirmation by the Escrow Agent, the
Escrow Agent shall release the Retained Escrow Amount to the Company as
contemplated by the Joint Escrow Instructions.
7. CLOSING DATE.
a. The Initial Closing Date shall occur on the date which is the first NYSE
trading day after the fulfillment or waiver of all closing conditions pursuant
to Sections 8 and 9 hereof or such other date and time as is mutually agreed
upon by the Company and the Buyer. The date of an Additional Closing Date shall
be
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the date specified by either party to other on at least ten (10) business days'
advance notice to the other; provided, however, that it shall be a condition of
such Additional Closing Date that , on or before such date, each of the
conditions contemplated by Section 4(h) and by Sections 8 and 9 hereof shall
have either been satisfied or been waived by the party in whose favor such
conditions run.
b. Each closing of the purchase and issuance of Preferred Stock shall occur
on the relevant Closing Date at the offices of the Escrow Agent and shall take
place no later than 12:00 Noon, New York time, on such day or such other time as
is mutually agreed upon by the Company and the Buyer.
c. Notwithstanding anything to the contrary contained herein, the Escrow
Agent will be authorized to release the Escrow Property only upon satisfaction
of the conditions set forth in Sections 8 and 9 hereof. The Certificates
representing the relevant Preferred Stock shall be delivered by the Company to
the Escrow Agent pursuant to Section 1(b) hereof no later than on the relevant
Closing Date.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Preferred
Stock to the Buyer pursuant to this Agreement on the relevant Closing Date is
conditioned upon:
a. The execution and delivery of this Agreement by the Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the purchase price for the relevant Preferred Stock
in accordance with this Agreement;
c. The accuracy on such Closing Date of the representations and warranties
of the Buyer contained in this Agreement, each as if made on such date, and the
performance by the Buyer on or before such date of all covenants and agreements
of the Buyer required to be performed on or before such date; and
d. There shall not be in effect any law, rule or regulation prohibiting or
restricting the transactions contemplated hereby, or requiring any consent or
approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock on the relevant Closing Date is conditioned upon:
a. The execution and delivery of this Agreement and the Registration Rights
Agreement by the Company;
b. Delivery by the Company to the Escrow Agent of the Certificate
representing the relevant Preferred Stock in accordance with this Agreement;
c. The accuracy in all material respects on such Closing Date of the
representations and warranties of the Company contained in this Agreement. each
as if made on such date, and the performance by the Company on or before such
date of all covenants and agreements of the Company required to be performed on
or before such date;
d. On such Closing Date, the Registration Rights Agreement shall be in full
force and effect and the Company shall not be in default thereunder;
e. On such Closing Date, the Buyer shall have received an opinion of
counsel for the Company, dated such Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, substantially to the effect set forth in
Annex III attached hereto;
f. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits or adversely
effects any of the transactions contemplated by this Agreement or the
Transaction Documents, and no proceeding or investigation shall have been
commenced or threatened which may have the effect of prohibiting or adversely
effecting any of the transactions contemplated by this Agreement or the
Transaction Documents;
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<PAGE> 83
g. From and after the date hereof to and including the relevant Closing
Date, the trading of the Common Stock shall not have been suspended by the SEC,
or the NASD and trading in securities generally on the New York Stock Exchange
or The NASDAQ/SmallCap Market shall not have been suspended or limited, nor
shall minimum prices been established for securities traded on The
NASDAQ/SmallCap Market, nor shall there be any outbreak or escalation of
hostilities involving the United States or any material adverse change in any
financial market that in either case in the reasonable judgment of the Buyer
makes it impracticable or inadvisable to purchase the relevant Preferred Stock;
and
h. With respect to each Additional Closing Date, each of the conditions set
forth in Section 4(h) hereof shall have either been satisfied or waived by the
Buyer.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware for contracts to be wholly performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of New York or the state courts
of the State of New York sitting in the City of New York in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions.
b. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
c. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
d. This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto.
e. All pronouns and any variations thereof refer to the masculine, feminine
or neuter, singular or plural, as the context may require.
f. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto.
g. This Agreement may be signed in one or more counterparts, each of which
shall be deemed an original.
h. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
i. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
j. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.
k. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
11. NOTICES.
Any notice required or permitted hereunder shall be given in writing
(unless otherwise specified herein) and shall be deemed effectively given on the
earliest of
(a) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
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<PAGE> 84
(b) the seventh business day after deposit, postage prepaid, in the
United States Postal Service by registered or certified mail, or
(c) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days' advance written notice similarly given to each of the other
parties hereto):
<TABLE>
<S> <C>
COMPANY: NHANCEMENT TECHNOLOGIES, INC.
39420 Liberty Street
Suite 250
Fremont, CA 94538
ATTN: Chief Financial Officer
Telephone No.: (510) 744-3333
Telecopier No.: (510) 744-4003
with a copy to:
Tomlinson Zisko Morosoli & Maser
200 Page Mill Road, 2nd Floor
Palo Alto, CA 94306
ATTN: Cindy Loe, Esq.
Telephone No.: (650) 325-8666
Telecopier No.: (650) 324-1808
BUYER: At the address set forth on the signature page of this
Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
Telephone No.: (212) 689-3322
</TABLE>
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The Company's and the Buyer's representations and warranties herein shall
survive the execution and delivery of this Agreement and the delivery of the
Preferred Stock and payment of the Purchase Price, and shall inure to the
benefit of the Buyer and the Company and their respective successors and
assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
A-14
<PAGE> 85
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by
one of its officers thereunto duly authorized as of the date set forth below.
<TABLE>
<S> <C>
Number of shares of initial preferred stock to be 6,250
purchased:............................................
Aggregate purchase price of such initial preferred $625,000.00
stock:................................................
</TABLE>
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this 13th day of April, 1998.
<TABLE>
<S> <C>
The Endeavour Capital Fund S.A.
- ----------------------------------------------------- ----------------------------------------------
Address Printed Name of Subscriber
c/o Endeavor Management Inc.
14/14 Divrei Chaim St
Jerusalem 94479 Israel
By: /s/ SHMULI MARGULIES
Telecopier No. 972-2-582-4443 ------------------------------------------
(Signature of Authorized Person)
Shmuli Margulies, Director
Printed Name and Title
BVI
- -----------------------------------------------------
Jurisdiction of Incorporation
or Organization
</TABLE>
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and correct and
that it has caused this Securities Purchase Agreement to be duly executed on its
behalf.
NHANCEMENT TECHNOLOGIES, INC.
By: /s/ DOUGLAS S. ZORN
--------------------------------------------------------
Douglas S. Zorn
Title: Chief Financial Officer
Date: April 13, 1998
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by
one of its officers thereunto duly authorized as of the date set forth below.
<TABLE>
<S> <C>
Number of shares of initial preferred stock to be purchased: 6,250
Aggregate purchase price of such initial preferred stock: $625,000.00
</TABLE>
A-15
<PAGE> 86
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this 13th day of April, 1998.
<TABLE>
<S> <C>
- ----------------------------------------------------- AMRO INTERNATIONAL S.A.
Address ----------------------------------------------
SO ULTRA FINANCE Pnted Name of Subscriber
Gross Munster Platz 26
Zurich LH 8022
Switzerland
By: /S/ H. U. BACHOFEN
------------------------------------------
Telecopier No.011-411-262-5515 (Signature of Authorized Person)
H.U. Bachofen, President/Director
Printed Name and Title
Panama
- -----------------------------------------------------
Jurisdiction of Incorporation
or Organization
</TABLE>
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and correct and
that it has caused this Securities Purchase Agreement to be duly executed on its
behalf.
NHANCEMENT TECHNOLOGIES, INC.
By: /S/ DOUGLAS S. ZORN
-----------------------------------------------------
Douglas S. Zorn
Title: Chief Financial Officer
Date: April 13, 1998
A-16
<PAGE> 87
JUNE 15, 1998
LETTER AGREEMENT
<TABLE>
<S> <C>
AMRO INTERNATIONAL S.A. The Endeavour Capital Fund S.A.
c/o Ultra Finance 14/14 Divrei Chaim Street
Grossmunster Platz 26 Jerusalem 94479
Zurich LH 8022 Israel
Switzerland Attn: Mr. Shmuli Margulies
Attn: Mr. H.U. Bachofen
</TABLE>
Re: Amendment to Securities Purchase Agreement
Gentlemen:
This letter agreement confirms our agreement that the following provisions
stated herein shall constitute an amendment to that certain Securities Purchase
Agreement dated as of April 13, 1998 (the "Agreement") and entered into by and
among AMRO INTERNATIONAL S.A. and The Endeavour Capital Fund S.A. (each, "Buyer"
and collectively, "Buyers"), and NHancement Technologies Inc. (the "Company") in
accordance with Section 10.j. of the Agreement.
Unless otherwise defined herein, the defined terms shall have the same
meaning as set forth in the Agreement. The Company and Buyers hereby acknowledge
and agree as follows:
1. The First Additional Tranche shall be increased from Five Hundred
Thousand Dollars ($500,000) to Seven Hundred Fifty Thousand Dollars
($750,000).
2. The Third Additional Tranche shall be decreased from Seven Hundred
Fifty Thousand Dollars ($750,000) to Five Hundred Thousand Dollars
($500,000).
3. The First Additional Closing Date shall occur on or two (2)
business days after the date the Company obtains the stockholder approval
to the effect that the Cap Regulations, as specified in Section 4.j of the
Agreement, will not restrict the Company's issuance of the shares of Common
Stock to any Buyer in connection with such Buyer's conversion of the
Initial Preferred Stock or any Additional Preferred Stock, as of such First
Additional Closing Date, provided that all other conditions to the closing
of the First Additional Tranche shall have been satisfied by the Company or
waived by the Buyers. The Company agrees to use its best efforts to satisfy
all such conditions as soon as possible. The Company further represents and
warrants that a proposal to such effect will be duly and properly submitted
for the stockholder approval at the special stockholder meeting expected to
be held on or about July 6, 1998.
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<PAGE> 88
NHancement Technologies Inc.
Letter Agreement
Page 2
IN WITNESS WHEREOF, this letter agreement has been executed by the
undersigned this 15th day of June 1998.
THE COMPANY:
NHANCEMENT TECHNOLOGIES INC.
By: /s/ DOUGLAS S. ZORN
------------------------------------
Its: Chief Financial Officer
--------------------------------------
Acknowledged and Agreed:
AMRO INTERNATIONAL S.A.
By: /s/ H.U. BACKOFEN
------------------------------------
Its:
--------------------------------------
THE ENDEAVOUR CAPITAL FUND S.A.
By: /s/ S. MARGULIES
------------------------------------
Its:
--------------------------------------
A-18
<PAGE> 89
PAYMENT AND TERMINATION AGREEMENT
This Payment and Termination Agreement (the "AGREEMENT") entered into as of
September 24, 1998 between NHancement Technologies Inc., a Delaware corporation
(the "COMPANY"), and AMRO International S.A. and The Endeavour Capital Fund S.A.
(each, a "BUYER"), with reference to the Securities Purchase Agreement among the
Company and Buyers dated April 13, 1998 (the "SECURITIES PURCHASE AGREEMENT")
and those certain Promissory Notes made by the Company in favor of each of the
Buyers dated June 15, 1998 and each in the principal amount of Three Hundred
Seventy-Five Thousand Dollars ($375,000) (individually a "NOTE" and collectively
the "NOTES").
NOW, THEREFORE, the Company and the Buyers agree as follows:
1. Payment of Notes. Concurrently with the Agreement, the Company will pay
to each Buyer all principal and interest due on each Note through the date
hereof and each Buyer will return to the Company the original of such Note
marked paid in full.
2. Termination of Securities Purchase Agreement. In consideration of the
payment by the Company to each Buyer of the sum of Sixty-Seven Thousand Five
Hundred Dollars ($67,500), the Company and the Buyers agree that the Buyer shall
not be obligated to purchase, and the Company shall not be obligated to sell,
any further shares of the Company's Series A Convertible Preferred Stock (the
"PREFERRED STOCK") under the Securities Purchase Agreement and that all of the
Company's and the Buyers' respective obligations under the Securities Purchase
Agreement and related documentation, including, but not limited to, any
commitments entered into by the Company's Directors and Officers pursuant to
Section 4(d)(ii) of the Securities Purchase Agreement shall cease and terminate
as of the date hereof except for the following obligations which shall continue
to survive to the extent necessary to permit their complete fulfilment or
discharge: (1) Sections 4(a), (b), (d), (e), (g), (i), (j) & (k), 5, 10, 11 and
12 of the Securities Purchase Agreement, (2) the Company's Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof, as amended, for so long as any shares of Preferred Stock
remain outstanding, (3) the Registration Rights Agreement entered into and in
connection with the Securities Purchase Agreement, (4) the Joint Escrow
Instructions among the Company, the Buyers and the Escrow Agent named therein.
3. Immediately Available Funds. All payments made by the Company to the
Buyers hereunder shall be made concurrent with the execution delivery of this
Agreement and shall be made in immediately available funds.
A-19
<PAGE> 90
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the Company and Buyers as of the date set forth above.
<TABLE>
<S> <C>
AMRO INTERNATIONAL S.A. NHANCEMENT TECHNOLOGIES INC.
By: /s/ HANS ULRICH BACHOFEN By: /s/ DOUGLAS S. ZORN
----------------------------------------
- -------------------------------------------- Douglas S. Zorn, Chief Financial Officer
Its: Director/President
- --------------------------------------------
THE ENDEAVOUR CAPITAL FUND S.A.
By: /s/ SHMULI MARGULIES
- --------------------------------------------
Its: Director
- --------------------------------------------
</TABLE>
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<PAGE> 91
ANNEX B
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
SERIES A PREFERRED STOCK
OF
NHANCEMENT TECHNOLOGIES INC.
------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
------------------------
NHANCEMENT TECHNOLOGIES INC., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article FOUR of its
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation by a special meeting held on April 9, 1998 adopted the following
resolution, which resolution remains in full force and effect on the date
hereof:
RESOLVED, that there is hereby established a series of authorized preferred
stock having a par value of $0.01 per share, which series shall be designated as
"Series A Convertible Preferred Stock", shall consist of Thirty Thousand
(30,000) shares and shall have the following voting powers, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions as follows:
1. Definitions. For purposes of this resolution, the following terms shall
have the following definitions:
1.1 "Board" shall mean the Board of Directors of the Corporation.
1.2 "Common Stock" shall mean the Common Stock of the Corporation.
1.3 "Conversion Price" shall mean the lesser of the Fixed Conversion
Price or the Market Conversion Price on the date the Conversion Rights are
exercised.
1.4 "Conversion Rights" shall have the meaning set forth in Section
4.
1.5 "Corporation"shall mean this corporation.
1.6 "Fixed Conversion Price" shall mean the average closing bid price
of the Common Stock for the five (5) trading days ending on the trading day
immediately before the Original Issue Date, as reported by Bloomberg, LP
or, if not so reported, as reported on the over-the-counter market, as
adjusted herein.
1.7 "Initial Purchase Price" shall mean One Hundred Dollars ($100)
paid for purchase of each share of Preferred Stock.
1.8 "Market Conversion Price" shall mean the Seventy-Five percent
(75%) of the Market Price calculated through the last trading day
immediately before the date the Conversion Rights are exercised in
accordance with Section 4.3.1.
1.9 "Market Price" shall mean the average closing bid price of the
Common Stock for the five (5) trading days ending on the trading day
immediately before the date indicated in the relevant provision hereof (i)
as reported by Bloomberg, LP or, if not so reported, as reported over on
the over-the-counter
B-1
<PAGE> 92
market or (ii) if the Common Stock is listed on a stock exchange, the
closing price on such exchange as reported in The Wall Street Journal.
1.10 "Original Issue Date" means the date the first share of
Preferred Stock is issued.
1.11 "Preferred Stock" shall refer to the Series A Convertible
Preferred Stock of the Corporation.
1.12 "Redemption Date" shall have the meaning set forth in Section
7.1.
1.13 "Redemption Event" shall have the meaning set forth in Section
7.1.
1.14 "Redemption Notice" shall have the meaning set forth in Section
7.3.
1.15 "Redemption Price" shall mean One Hundred Eighteen Dollars
($118.00) plus all unpaid dividends.
1.16 "Subsidiary" shall mean any corporation at least fifty percent
(50%) of whose outstanding voting stock shall at the time be owned,
directly or indirectly, by the Corporation or by one or more such
Subsidiaries.
2. Dividends and Distributions.
2.1 The holders of the outstanding shares of Preferred Stock shall be
entitled to receive, when and as declared by the Board, out of any funds
legally available therefor, dividends at the rate of Five Dollars ($5.00)
per share, per annum, but prorated for any partial year (subject to
appropriate adjustments for stock splits, stock dividends, combinations or
other recapitalizations). Such dividends shall be payable, at the option of
the Board, in cash to the extent permitted by law, in shares of Common
Stock valued at the Conversion Price then in effect plus cash in lieu of
any fractional share or a combination of cash and shares of Common Stock.
Such dividends shall be cumulative and shall be payable within sixty (60)
days following the end of each fiscal year of the Corporation.
2.2 Unless full dividends on the Preferred Stock for the then current
fiscal year shall have been paid or declared and a sum sufficient for the
payment thereof set apart: (i) no dividend whatsoever (other than a
dividend payable solely in Common Stock) shall be paid or declared, and no
distribution shall be made, on the Common Stock or pursuant to Section 2.3
below, and (ii) no shares of Common Stock or Preferred Stock shall be
purchased, redeemed or acquired by the Corporation and no moneys shall be
paid into or set aside, or made available for a sinking fund, for the
purchase, redemption or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock
from directors, officers, employees or consultants of the Corporation or of
any Subsidiary pursuant to agreements under which the Corporation has the
option, but not the obligation, to repurchase such shares upon the
occurrence of certain events, including the termination of employment or to
the redemption of shares of Preferred Stock pursuant to Section 7.
2.3 The holders of the outstanding shares of Common Stock and
Preferred Stock shall at all times be treated as a single class with
respect to dividends and distributions (excluding dividends in or
distributions of shares of Common Stock, but including dividends or
distributions of other securities of the Corporation), other than those set
forth in Sections 2.1 and 2.2 hereof, and, provided the conditions in
Section 2.2 hereof are satisfied, such single class, in addition to the
dividends payable to the Preferred Stock pursuant to Section 2.1, shall be
entitled to dividends when, as and if declared by the Board, out of any
funds legally available therefor; provided, however, that (i) each share of
Preferred Stock shall be entitled to dividends and distributions equal to
the aggregate amount of such dividends and distributions which the holder
of that number of shares of Common Stock into which such shares of the
Preferred Stock may be converted (on the record date fixed for determining
payment of such dividend or distribution) shall be entitled to receive, and
(ii) in any fiscal year the amount of dividends to which the Preferred
Stock shall be entitled under this Section 2.3 shall be reduced by the
amount of dividends declared and paid pursuant to Section 2.1.
B-2
<PAGE> 93
3. Liquidation.
3.1 In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any payment or
declaration and setting apart for payment of any amount shall be made in
respect of the Common Stock, the holder of each share of Preferred Stock
then outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether such
assets are capital, surplus or earnings, an amount equal to One Hundred
Dollars ($100.00) for each share of Preferred Stock (subject to appropriate
adjustments for stock splits, combinations or other recapitalizations of
the Preferred Stock), plus an amount equal to all unpaid dividends, to and
including the date full payment shall be tendered to the holders of
Preferred Stock with respect to such liquidation, dissolution or winding
up. If the assets to be distributed to the holders of the Preferred Stock
upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to permit the payment to
such stockholders of the full preferential amounts as set forth above, then
all of the assets of the Corporation to be distributed shall be distributed
first to the holders of the Preferred Stock pro rata, based on the number
of shares of such stock outstanding.
3.2 After the payment or distribution to the holders of the Preferred
Stock of the full preferential amounts as set forth in Section 3.1, the
holders of the Common Stock then outstanding shall be entitled pro rata,
based on the number of shares of such stock outstanding, to all the
remaining assets of the Corporation.
4. Conversion. The holders of the Preferred Stock shall have the
conversion rights (the "Conversion Rights") set forth in this Section 4. In the
event of a call for redemption of any shares of Preferred Stock pursuant to
Section 7 hereof, the Conversion Rights of the Preferred Stock contained in this
Section 4 shall terminate as to the shares designated for redemption unless
default is made in the payment of the Redemption Price.
4.1 Right to Convert. Each share of the Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, into that number of fully paid and
nonassessable shares of Common Stock (or other securities or property
pursuant to Section 4.6 or 4.7 below) which shall result from dividing the
Initial Purchase Price for the Preferred Stock in effect at the time of
conversion into the Conversion Price.
4.2 Automatic Conversion.
4.2.1 Each share of Preferred Stock shall not be automatically
convertible into Common Stock.
4.3 Mechanics of Voluntary Conversion. The Corporation will permit
any holder of Preferred Stock to exercise its right to convert the
Preferred Stock by telecopying or delivering an executed and completed
notice of conversion to the Corporation and delivering, within five (5)
business days thereafter, the original Preferred Stock certificate being
converted to the Corporation by express courier with a copy to the
Corporation's transfer agent. The term "Conversion Date" means, with
respect to any conversion elected by the holder of the Preferred Stock, the
date specified in the notice of conversion, provided the copy of the notice
of conversion is telecopied to or otherwise delivered to the Corporation in
accordance with the provisions hereof so that it is received by the
Corporation on or before such specified date. The Corporation shall, at its
expense, take all actions and use all means necessary and diligent to cause
its transfer agent to transmit the certificates representing the Common
Stock issuable upon conversion of any Preferred Stock (together with
Preferred Stock not being so converted) to the holder thereof via express
courier, by electronic transfer or otherwise, within three (3) business
days after (i) the business day on which the Corporation has received both
the notice of conversion (by facsimile or other delivery) and the original
Preferred Stock certificate being converted (and if the same are not
delivered to the Corporation on the same date, the date of delivery of the
second of such items) or (ii) the date a dividend payment on the Preferred
Stock, which the Corporation has elected to pay by the issuance of Common
Stock, as contemplated hereunder, was due.
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<PAGE> 94
4.4 Dividend Payment Upon Conversion. Upon any conversion of shares
of Preferred Stock into shares of Common Stock, the Corporation shall pay
all unpaid dividends on the shares of Preferred Stock being converted;
provided, however, that if the Corporation shall be prohibited by law from
making all such payments in cash, the Corporation shall, in lieu of making
a full cash payment of all such accrued and unpaid dividends, make payment
thereof in cash to the extent permitted by law and shall pay the balance in
whole shares of Common Stock, valued at the Conversion Price then in
effect, plus cash in lieu of any fractional share.
4.5 Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time effect a subdivision of the outstanding shares of Common
Stock (or other securities into which the Preferred Stock may be
converted), then, and in each such case, the Fixed Conversion Price as in
effect immediately before such subdivision shall be proportionately
decreased and, conversely, if the Corporation shall at any time combine the
outstanding shares of Common Stock (or other securities into which the
Preferred Stock may be converted), then, and in each such case, the Fixed
Conversion Price as in effect immediately before such combination shall be
proportionately increased.
4.6 Adjustment for Reclassification, Exchange and Substitution. If
the Common Stock (or other securities into which the Preferred Stock may be
converted) shall at any time be reclassified or otherwise changed, whether
by reorganization, spin off, reclassification or otherwise (other than by a
merger, consolidation or sale of assets described in Section 4.7), then,
and in each such event, each share of Preferred Stock shall thereafter be
convertible into the kind and amount of shares of stock and other
securities or property which the holder of that number of shares of Common
Stock (or other securities) into which such share of Preferred Stock shall
be convertible immediately prior to such event would be entitled to receive
upon the occurrence of such event.
4.7 Merger, Consolidation and Sale of Assets. If the Corporation
shall at any time merge or consolidate with or into another corporation
(other than where the Corporation is the surviving corporation and there is
no reclassification or change in the Common Stock or other securities into
which the Preferred Stock may be converted) or shall sell all or
substantially all of its properties and assets to any other person, then,
as a part of such merger, consolidation or sale, provision shall be made to
assure that the holders of Preferred Stock shall thereafter be entitled to
receive, upon conversion of the Preferred Stock, the kind and amount of
shares of stock and other securities or property of the Corporation, or of
the successor corporation resulting from such merger, consolidation or
sale, that the holders of that number of shares of Common Stock (or other
securities) into which the Preferred Stock shall be convertible immediately
prior to such merger, consolidation or sale would be entitled to receive on
such merger, consolidation or sale. In every such case, appropriate
adjustment shall be made in application of the provisions of this Section 4
with respect to the rights of the holders of Preferred Stock after the
merger, consolidation or sale to the end that the provisions of this
Section 4 (including adjustment of the Fixed Conversion Price then in
effect and the kind and amount of shares or other property into which the
Preferred Stock may be converted) shall be applicable after that event, as
nearly equivalent as may be practicable.
4.8 Time of Adjustments to Conversion Price. All adjustments to the
Fixed Conversion Price, unless otherwise specified herein, shall be
effective as of the earlier of:
4.8.1 the date of issue of the security causing the adjustment;
4.8.2 the effective date of a division or combination of shares;
or
4.8.3 the record date of any action of holders of the
Corporation's capital stock of any class taken for the purpose of
dividing or combining shares or entitling stockholders to receive a
distribution or dividends payable in Common Stock.
4.9 Notice of Adjustments. In each case of an adjustment of the
Fixed Conversion Price, the Corporation, at its expense, shall cause the
Chief Financial Officer of the Corporation to compute such adjustment and
prepare a certificate setting forth such adjustment and showing in detail
the facts upon
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<PAGE> 95
which such adjustment is based. The Corporation shall promptly mail a copy
of each such certificate to each holder of Preferred Stock affected by such
adjustment.
4.10 Duration of Adjusted Conversion Price. Following each
adjustment of the Fixed Conversion Price, such adjusted Fixed Conversion
Price shall remain in effect until a further adjustment of such Fixed
Conversion Price hereunder.
4.11 Minimum Adjustment. No adjustment of the Fixed Conversion Price
shall be made in an amount less than One Cent ($0.01) per share (subject to
appropriate adjustments for stock splits and stock dividends, and provided
that at such time as events causing adjustments accumulating One Cent
($0.01) or more have occurred adjustments to the Fixed Conversion Price
shall be made), and no adjustment of the Fixed Conversion Price shall have
the effect of increasing the Fixed Conversion Price above such Fixed
Conversion Price in effect immediately prior to such adjustment (except for
the upward adjustments provided in Section 4.5).
4.12 Notices of Record Date. In the event of any reclassification of
or other change in the capital stock of the Corporation or any merger or
consolidation of the Corporation, transfer of all or substantially all of
the assets of the Corporation to any other person or voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of shares of Preferred Stock, at
least thirty (30) days prior to the record date of such event, a notice
specifying the date on which such event is expected to become effective and
the time, if any, that is to be fixed as to when the holders of record of
shares of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such event.
4.13 Fractional Shares. No fractional shares of Common Stock shall
be issued upon conversion of shares of Preferred Stock. The number of
shares of Common Stock to which a holder of shares of Preferred Stock shall
be entitled shall be based on the aggregate number of shares of Preferred
Stock then being converted by such holder. In lieu of any fractional share
to which such holder would otherwise be entitled, the Corporation shall pay
cash equal to the fair market value of such fraction based on the Market
Price on the date of conversion.
4.14 Reservation of Stock Issuable upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock (or other securities into which the
Preferred Stock may be converted), solely for the purpose of effecting the
conversion of the Preferred Stock, such number of its shares of Common
Stock (or other securities) as shall, from time to time, be sufficient to
effect the conversion of all outstanding shares of Preferred Stock. If at
any time the number of authorized but unissued shares of Common Stock (or
other securities) shall not be sufficient to effect the conversion of all
the Preferred Stock then outstanding, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock (or other
securities) to such number of shares as shall be sufficient for such
purpose. If any shares of Common Stock reserved for the purpose of
conversion of shares of Preferred Stock require registration, qualification
or listing with, or approval of, any governmental authority, stock exchange
or other regulatory body under any federal or state law or regulation or
otherwise before such shares may be validly issued or delivered upon
conversion, the Corporation will, in good faith, at its own expense and as
expeditiously as possible, endeavor to secure such registration,
qualification, listing or approval, as the case may be.
4.15 Notices. Any notice required by the provisions of this Section
4 to be given to the holder of shares of Preferred Stock shall be deemed
given five (5) business days after the same has been deposited in the
United States mail, certified or registered, postage prepaid and addressed
to each holder of record at such holder's address appearing on the stock
record books of the Corporation.
4.16 Payment of Taxes. The Corporation will pay all taxes and other
governmental charges (other than taxes based on income) that may be imposed
in respect of the issue or delivery of shares of Common Stock (or other
securities or property) upon conversion of Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in
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the issue and delivery of shares of Common Stock in a name other than that
in which the shares of Preferred Stock so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of any such tax, or has
established to the satisfaction of the Corporation that such tax has been
paid.
4.17 Status of Converted Stock. In case any shares of Preferred
Stock shall be converted pursuant hereto or redeemed pursuant to Section 7,
the shares so converted or redeemed shall be canceled and the authorized
number of shares of Preferred Stock shall be reduced accordingly.
5. Restrictions and Limitations.
5.1 Restrictions. At all times that any shares of Preferred Stock
are outstanding, the Corporation shall not, and shall not permit any
Subsidiary to, without the approval by vote or written consent of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the
Preferred Stock then outstanding, voting as a single, separate class:
5.1.1 Purchase, redeem or otherwise acquire (or pay into, or set
aside for, a sinking fund for such purpose) any Common Stock or any
other equity security; provided, however, that this restriction shall
not apply to the redemption of Preferred Stock pursuant to Section 7 or
to the repurchase of shares of Common Stock from directors, officers,
employees or consultants of the Corporation, or of any Subsidiary,
pursuant to agreements under which the Corporation has the option, but
not the obligation, to repurchase such shares upon the occurrence of
certain events, including termination of employment; or
5.1.2 Authorize or issue, or obligate itself to issue, any equity
security senior to the Preferred Stock as to dividend or liquidation
preferences (but this shall not apply to equity securities with dividend
or liquidation preferences equal or subordinate to the Preferred Stock).
5.2 Amendments to Certificate. The Corporation shall not amend its
Certificate of Incorporation without the approval by vote or written
consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the
Preferred Stock then outstanding if such amendment would:
5.2.1 Reduce the dividend rate on such Preferred Stock or change
the relative seniority rights of the holders of such Preferred Stock as
to the payment of dividends in relation to the holders of any other
Preferred Stock or Common Stock of the Corporation;
5.2.2 Reduce the amount payable to the holders of the Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of such Preferred Stock to the
rights upon liquidation of the holders of any other Preferred Stock or
Common Stock of the Corporation; or
5.2.3 Cancel or modify the Conversion Rights provided in Section 4
hereof.
6. Voting Rights. Except as otherwise expressly provided herein or as
required by law, the holders of the Preferred Stock and Common Stock shall be
entitled to vote on all matters. Each share of Common Stock shall be entitled to
one vote and each share of Preferred Stock shall be entitled to that number of
votes equal to the largest number of whole shares of Common Stock into which
such share of Preferred Stock may be converted as of the close of business on
the record date fixed for any meeting of the stockholders of the Corporation or
the effective date of any written consent of the stockholders of the Corporation
(with any fractional share determined on an aggregate basis for each holder
being rounded up to the next whole share). Except as otherwise expressly
provided herein or as required by law, the holders of Preferred Stock and Common
Stock shall vote together as a single class and not as separate classes.
7. Redemption of Preferred Stock.
7.1 Redemption Price. At any time after the Original Issue Date and
prior to the conversion of a share of Preferred Stock pursuant to the
exercise of Conversion Rights, if the Market Price at any time or from time
to time is less than Two Dollars ($2.00) per share (a "Redemption Event"),
then the Corporation, at the option of the Board, may, at any time it may
lawfully do so, redeem in whole or in part
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the outstanding shares of Preferred Stock by paying cash therefor in the
amount of the Redemption Price, which option shall be exercisable upon and
by the Corporation's providing written notice to the holders of Preferred
Stock (a) within ten (10) days following any Redemption Event or (b) in the
event a holder elects to exercise Conversion Rights within such ten
(10)-day period, within two (2) days following a holder's satisfaction of
the mechanics of voluntary conversion set forth in Section 4.3.1. In the
event the Corporation timely elects to redeem any shares of Preferred Stock
pursuant to the foregoing, the Conversion Rights (including the Conversion
Rights exercised by holder pursuant to subpart (b) of the preceding
sentence) shall immediately cease and terminate without exercise as to the
shares designated by the Corporation for redemption unless default is made
in the payment of the Redemption Price. Any such redemption shall be
consummated within five (5) days following the delivery of the
Corporation's written notice of redemption hereunder (the "Redemption
Date").
7.2 Partial Redemption. In the event of any redemption of only a
part of the outstanding Preferred Stock, the Corporation shall effect such
redemption pro rata among all the holders of the then outstanding Preferred
Stock based on the number of shares of such stock held by each holder.
7.3 Redemption Procedure. At least two (2) days prior to the
Redemption Date, written notice shall be mailed, via next day delivery,
postage prepaid, to each holder of record (at the close of business on the
business day next preceding the day on which notice is given) of Preferred
Stock to be redeemed at such holder's address appearing on the stock record
books of the Corporation, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder,
the Redemption Date, the Redemption Price, the place at which payment may
be obtained and that such holders' Conversion Rights (as set forth in
Section 5 hereof) as to such shares have terminated and calling upon such
holder to surrender to the Corporation, in the manner and at the place
designated, such holder's certificate or certificates representing the
shares to be redeemed (such notice is hereinafter referenced as the
"Redemption Notice"). On or after the Redemption Date, each holder of
shares of Preferred Stock to be redeemed shall surrender such holder's
certificate or certificates representing such shares to the Corporation, in
the manner and at the place designated in the Redemption Notice, and
thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
record owner thereof and each surrendered certificate shall be canceled. In
the event less than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares. From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of
such shares as holders of Preferred Stock of the Corporation (except the
right to receive the Redemption Price without interest upon surrender of
their certificate or certificates) shall cease and terminate with respect
to such shares, and such shares shall not thereafter be transferred on the
books of the Corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the Corporation legally available for
redemption of shares of Preferred Stock on any Redemption Date are
insufficient to redeem the total number of shares of Preferred Stock to be
redeemed on such date, those funds which are legally available will be used
to redeem the maximum possible number of such shares pro rata among the
holders of such shares to be redeemed. The shares of Preferred Stock not
redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds
of this Corporation are legally available for the redemption of shares of
Preferred Stock, such funds will immediately be used to redeem the balance
of the shares which the Corporation has become obligated to redeem on any
Redemption Date but which it has not redeemed.
7.4 Payment. One (1) day prior to the Redemption Date, the
Corporation shall deposit the Redemption Price of all outstanding shares of
Preferred Stock designated for redemption in the Redemption Notice with a
bank or trust company having aggregate capital and surplus in excess of One
Hundred Million Dollars ($100,000,000) as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed. Simultaneously, the Corporation shall deposit irrevocable
instructions and authority to such bank or trust company to immediately
confirm the receipt of such deposit to the holders of the Preferred Stock
being redeemed hereunder and pay (by wire transfer or otherwise as such
holders shall direct), on and after the date fixed for redemption or prior
thereto, the
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Redemption Price of the Preferred Stock to the holders thereof upon
surrender of their certificates. In the event the Corporation fails to
comply with the provisions of this Section 7, the Corporation's redemption
shall be cancelled and any further right to redeem the Preferred Stock
hereunder shall immediately cease and terminate and be of no further force
or effect. Any monies deposited by the Corporation pursuant to this Section
7.4 remaining unclaimed the expiration of two (2) years following the
Redemption Date shall thereafter be returned to the Corporation, provided
that the stockholder to whom such monies would be payable shall be
entitled, upon proof of his ownership of the Preferred Stock and payment of
any bonds requested by the Corporation, to receive such monies but without
interest from the Redemption Date.
8. Construction. A reference in this resolution to any Section shall
include a reference to every Section the number of which begins with the number
of the Section to which reference is specifically made (e.g., a reference to
Section 4.8 shall include a reference to Sections 4.8.1 and 4.8.2).
9. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Preferred Stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Certificate of Incorporation.
10. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Preferred
Stock and qualifications, limitations and restrictions thereof set forth in this
resolution (as such resolution may be amended from time to time) are invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other voting powers, preferences and relative, participating,
optional and other special rights of the Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable voting powers, preferences and relative, participating, optional
and other special rights of the Preferred Stock and qualifications, limitations
and restrictions thereof shall, nevertheless, remain in full force and effect,
and no voting powers, preferences and relative, participating, optional or other
special rights of the Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of the Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by William E. Zisko, its Assistant Secretary this 9th day of April,
1998.
/s/ WILLIAM E. ZISKO
--------------------------------------
William E. Zisko,
Assistant Secretary
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AMENDED
CERTIFICATE OF DESIGNATIONS
OF
SERIES A PREFERRED STOCK
OF
NHANCEMENT TECHNOLOGIES INC.
NHANCEMENT TECHNOLOGIES INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: The Corporation has not issued any shares of Series A Preferred
Stock.
SECOND: The amendment to the Corporation's Certificate of Designations of
Series A Preferred Stock, as filed on April 9, 1998, sets forth in the following
resolution approved by a majority of the Corporation's Board of Directors was
duly adopted in accordance with the provisions of Section 151 of the Delaware
General Corporation Law:
"RESOLVED, that the Certificate of Designations of the corporation be
amended by striking Section 1.8 in its entirety and replacing it with the
following: 1.8 "Market Conversion Price" shall mean the Seventy-Five
percent (75%) of the Market Price calculated through the last trading day
immediately before the date the Conversion Rights are exercised in
accordance with Section 4.3."
"RESOLVED FURTHER, that the Certificate of Designations of the
corporation be amended by striking Section 7.1 in its entirety and
replacing it with the following: 7.1 Redemption Price. At any time after
the Original Issue Date and prior to the conversion of a share of Preferred
Stock pursuant to the exercise of Conversion Rights, if the Market Price at
any time or from time to time is less than Two Dollars ($2.00) per share (a
"Redemption Event"), then within ten (10) days from any Redemption Event,
the Corporation, at the option of the Board, may, at any time it may
lawfully do so, redeem in whole or in part, the outstanding shares of
Preferred Stock by paying cash therefor in the amount of the Redemption
Price, which option shall be exercisable upon and by the Corporation
providing a written notice to the holders of Preferred Stock. In the event
a holder timely elects to exercise the Conversion Rights prior to delivery
by the Corporation of its notice of redemption, the Corporation's option to
redeem any outstanding shares of Preferred Stock pursuant to the foregoing
shall immediately cease and terminate with respect to any shares so
tendered for conversion, unless the holder does not satisfy the mechanics
of voluntary conversion set forth in Section 4.3. In the event that the
Corporation timely elects to redeem any shares of Preferred Stock pursuant
to the foregoing, the Conversion Rights shall immediately cease and
terminate as to the shares properly so designated by the Corporation for
redemption, unless default is made in the payment of Redemption Price. Any
such redemption shall be consummated within five (5) days following the
delivery of the Corporation's written notice of redemption hereunder (the
"Redemption Date")".
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by Douglas Zorn its Secretary this 13th day of April, 1998.
/s/ DOUGLAS ZORN
--------------------------------------
Douglas Zorn, Secretary
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ANNEX C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 13, 1998 (this
"Agreement"), is made by and between NHANCEMENT TECHNOLOGIES, INC., a Delaware
corporation, with headquarters located at 39420 Liberty Street, Suite 250,
Fremont, CA 94538 (the "Company"), and each entity named on a signature page
hereto (each, an "Initial Investor").
WITNESSETH:
WHEREAS, upon the terms and subject to the conditions of the Securities
Purchase Agreement, dated as of April 13, 1998, between the Initial Investor and
the Company (the "Securities Purchase Agreement"; terms not otherwise defined
herein shall have the meanings ascribed to them in the Securities Purchase
Agreement), the Company has agreed to issue and sell to each Initial Investor
shares of Series A Convertible Preferred Stock, $.01 par value per share, of the
Company, in an aggregate purchase price (the "Purchase Price") not exceeding
$3,000,000 (the "Preferred Stock," which term, as used herein shall have the
meaning ascribed to it in the Securities Purchase Agreement); and
WHEREAS, the Preferred Stock are convertible into shares of Common Stock
(the "Conversion Shares") upon the terms and subject to the conditions contained
in the Certificate of Designations; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Investor" means the Initial Investor and any permitted transferee
or assignee who agrees to become bound by the provisions of this Agreement
in accordance with Section 9 hereof.
(ii) "Potential Material Event" means any of the following: (a) the
possession by the Company of material information not ripe for disclosure
in a registration statement, which shall be evidenced by determinations in
good faith by the Board of Directors of the Company that disclosure of such
information in the registration statement would be detrimental to the
business and affairs of the Company; or (b) any material engagement or
activity by the Company which would, in the good faith determination of the
Board of Directors of the Company, be adversely affected by disclosure in a
registration statement at such time, which determination shall be
accompanied by a good faith determination by the Board of Directors of the
Company that the registration statement would be materially misleading
absent the inclusion of such information.
(iii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(iv) "Registrable Securities" means the Conversion Shares.
(v) "Registration Statement" means a registration statement of the
Company under the Securities Act.
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(b) Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the
SEC, as soon as possible after the Closing Date but no later than twenty-one
(21) days following the Initial Closing Date, either a Registration Statement on
Form S-3 or an amendment to an existing Registration Statement, in either event
registering for resale by the Investor a sufficient number of shares of Common
Stock for the Initial Investors to sell the Registrable Securities (or such
lesser number as may be required by the SEC, but in no event less than two
hundred percent (200%) of the aggregate number of shares into which the Initial
Preferred Stock and the Additional Preferred Stock would be convertible at the
time of filing of such Registration Statement (assuming for such purposes that
the maximum Additional Preferred Stock had been issued at such date and that all
Preferred Stock had been eligible to be converted, and had been converted, into
Conversion Shares in accordance with their terms, whether or not such issuance,
eligibility or conversion had in fact occurred as of such date). The
Registration Statement (i) shall include only the Registrable Securities and
150,000 shares of Common Stock held by the Stockholder (as defined in and as
contemplated by the last paragraph of Exhibit 1 annexed hereto) and (ii) shall
also state that, in accordance with Rule 416 and 457 under the Securities Act,
it also covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Preferred Stock resulting from
adjustment in the Conversion Price or to prevent dilution resulting from stock
splits, or stock dividends. The Company will use its reasonable best efforts to
cause such Registration Statement to be declared effective no later than the
earlier of (x) five (5) days after notice by the SEC that it may be declared
effective or (y) sixty (60) days after the Initial Closing Date. If at any time
the number of shares of Common Stock into which the Preferred Stock may be
converted exceeds the aggregate number of shares of Common Stock then
registered, the Company shall, within ten (10) business days, either (i) amend
the Registration Statement filed by the Company pursuant to the preceding
provisions of this Section 2, if such Registration Statement has not been
declared effective by the SEC at that time, to register all shares of Common
Stock into which the Preferred Stock may currently or in the future be
converted, or (ii) if such Registration Statement has been declared effective by
the SEC at that time, file with the SEC an additional Registration Statement on
Form S-3 or other appropriate form to register the shares of Common Stock into
which the Preferred Stock may currently or in the future be converted that
exceed the aggregate number of shares of Common Stock already registered.
(b) Payments by the Company.
(i) If the Registration Statement covering the Registrable Securities
is not filed in proper form with the SEC within twenty-one (21) days after
the Initial Closing Date (the "Required Filing Date"), the Company will
make payment to the Initial Investor in such amounts and at such times as
shall be determined pursuant to this Section 2(b).
(ii) If the Registration Statement covering the Registrable Securities
is not effective (a) within the earlier of (1) five (5) days after notice
by the SEC that it may be declared effective or (2) sixty (60) days
following the Initial Closing Date (the "Required Effective Date"), or (b)
after a Suspension Period (as defined below), then the Company will make
payments to the Initial Investor in such amounts and at such times as shall
be determined pursuant to this Section 2(b).
(iii) The amount (the "Periodic Amount") to be paid by the Company to
the Initial Investor shall be determined as of each Computation Date (as
defined below) and such amount shall be equal to (A) two percent (2%) of
the purchase price paid by the Initial Investor (the "Purchase Price") for
all Preferred Stock purchased pursuant to the Securities Purchase Agreement
for the period from the date following the Required Filing Date or the
Required Effective Date, as the case may be, to the first relevant
Computation Date, and (B) three percent (3%) to each Computation Date
thereafter. By way of illustration and not in limitation of the foregoing,
if the Registration Statement is timely filed but is not declared effective
until one hundred thirty-five (135) days after the Closing Date, the
Periodic Amount will aggregate eight percent (8%) of the Purchase Price of
the Preferred Stock (2% for days 61-90, plus 3% for days 91-120 and 3% for
days 121-135).
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(iv) Each Periodic Amount will be payable by the Company in cash or
other immediately available funds to the Investor monthly, without
requiring demand therefor by the Investor.
(v) The parties acknowledge that the damages which may be incurred by
the Investor if the Registration Statement is not filed by the Required
Filing Date or if the Registration Statement has not been declared
effective by the Required Registration Date may be difficult to ascertain.
The parties agree that the Periodic Amount represent a reasonable estimate
on the part of the parties, as of the date of this Agreement, of the amount
of such damages.
(vi) Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this provision shall not be payable to the extent any delay in
the effectiveness of the Registration Statement occurs because of an act
of, or a failure to act or to act timely by the Initial Investor or its
counsel, or in the event all of the Registrable Securities may be sold
pursuant to Rule 144 or another available exemption under the Act.
(vii) "Computation Date" means (i) the date which is the earlier of
(A) thirty (30) days after the Required Filing Date and the Required
Effective Date, as the case may be, or (B) the date after the Required
Filing Date or the Required Registration Date on which the Registration
Statement is filed (with respect to payments due as contemplated by Section
2(b)(i) hereof) or declared effective (with respect to payments due as
contemplated by Section 2(b)(ii) hereof), as the case may be, and (ii) each
date which is the earlier of (A) thirty (30) days after the previous
Computation Date or (B) the date after the previous Computation Date on
which the Registration Statement is filed (with respect to payments due as
contemplated by Section 2(b)(i) hereof) or declared effective (with respect
to payments due as contemplated by Section 2(b)(ii) hereof), as the case
may be.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC by the Required Filing Date, a
Registration Statement with respect to not less than the number of Registrable
Securities provided in Section 2(a) above, and thereafter use its reasonable
best efforts to cause each Registration Statement relating to Registrable
Securities to become effective by the Required Effective Date and keep the
Registration Statement effective at all times during the period (the
"Registration Period") continuing until the earliest of (i) the date that is two
(2) years after the Initial Closing Date, (ii) the date when the Investors may
sell all Registrable Securities under Rule 144 without restriction or (iii) the
date the Investors no longer own any of the Registrable Securities, which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration effective at all times during the Registration Period, and,
during the Registration Period, comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities of the Company
covered by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in the Registration
Statement;
(c) The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects.
(d) Notify each Holder of Registrable Securities to be sold, their Counsel
and any managing underwriters immediately (and, in the case of (i)(A) below, not
less than five (5) days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) Business Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the
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Registration Statement is proposed to be filed; (B) whenever the SEC notifies
the Company whether there will be a "review" of such Registration Statement; (C)
whenever the Company receives (or a representative of the Company receives on
its behalf) any oral or written comments from the SEC respect of a Registration
Statement (copies or, in the case of oral comments, summaries of such comments
shall be promptly furnished by the Company to the Holders); and (D) with respect
to the Registration Statement or any post-effective amendment, when the same has
become effective; (ii) of any request by the SEC or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the SEC of any stop order suspending the effectiveness of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
or warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event that to the best knowledge of the Company makes any
statement made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus, as the case may be, it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. In addition, the
Company shall furnish the Holders with copies of all intended written responses
to the comments contemplated in clause (C) of this Section 3(d) not later than
one (1) Business Day in advance of the filing of such responses with the SEC so
that the Holders shall have the opportunity to comment thereon.
(e) Furnish to each Investor whose Registrable Securities are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(f) As promptly as practicable after becoming aware of such event, notify
each Investor of the happening of any event of which the Company has knowledge,
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and use its best efforts promptly to prepare a supplement or
amendment to the Registration Statement or other appropriate filing with the SEC
to correct such untrue statement or omission, and deliver a number of copies of
such supplement or amendment to each Investor as such Investor may reasonably
request;
(g) As promptly as practicable after becoming aware of such event, notify
each Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance by the SEC
of a Notice of Effectiveness or any notice of effectiveness or any stop order or
other suspension of the effectiveness of the Registration Statement at the
earliest possible time;
(h) Notwithstanding the foregoing, if at any time or from time to time
after the date of effectiveness of the Registration Statement, the Company
notifies the Investors in writing of the existence of a Potential Material
Event, the Investors shall not offer or sell any Registrable Securities, or
engage in any other transaction involving or relating to the Registrable
Securities, from the time of the giving of notice with respect to a Potential
Material Event until such Investor receives written notice from the Company that
such Potential Material Event either has been disclosed to the public or no
longer constitutes a Potential Material Event; provided, however, that the
Company may not so suspend the right to such holders of Registrable Securities
for more than two twenty (20) day periods in the aggregate during any 12-month
period
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("Suspension Period") with at least a ten (10) business day interval between
such periods, during the periods the Registration Statement is required to be in
effect;
(i) Use its reasonable efforts to secure designation of all the Registrable
Securities covered by the Registration Statement on the "Small Capitalization
Market" of the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
quotation of the Registrable Securities on The NASDAQ SmallCap Market; or if,
despite the Company's reasonable efforts to satisfy the preceding clause, the
Company is unsuccessful in doing so, to secure NASDAQ/OTC Bulletin Board
authorization and quotation for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities;
(j) Provide a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
(k) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts as the case may be, as the Investors may reasonably
request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(l) Take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of the Registrable Securities pursuant to the
Registration Statement.
4. Obligations of the Investors. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of the Registrable Securities
held by it, as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to have any
of such Investor's Registrable Securities included in the Registration
Statement. If at least two (2) business days prior to the filing date the
Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(e) or 3(f),
above, such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
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5. Expenses of Registration.
(a) All reasonable expenses (other than underwriting discounts and
commissions of the Investor) incurred in connection with registrations, filings
or qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printers and accounting fees,
the fees and disbursements of counsel for the Company and a fee for a single
counsel for the Investor not exceeding $3,500, shall be borne by the Company.
(b) Except as and to the extent specifically set forth in Exhibit 1
attached hereto, neither the Company nor any of its subsidiaries has, as of the
date hereof, nor shall the Company nor any of its subsidiaries, on or after the
date of this Agreement, enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as and to the extent
specifically set forth in Exhibit 1 attached hereto, neither the Company nor any
of its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person. Without
limiting the generality of the foregoing, without the written consent of the
Holders of a majority of the then outstanding Registrable Securities, the
Company shall not grant to any person the right to request the Company to
register any securities of the Company under the Securities Act unless the
rights so granted are subject in all respects to the prior rights in full of the
Holders set forth herein, and are not otherwise in conflict or inconsistent with
the provisions of this Agreement.
6. Indemnification. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any post-effective amendment thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to clause (b) of this Section 6, the Company shall
reimburse the Investors, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a) shall not (I) apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) be available to the extent such Claim is based on a failure of
the Investor to deliver or cause to be delivered the prospectus made available
by the Company; or (III) apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Each Investor will indemnify
the Company and its officers, directors and agents against any claims arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company, by or on behalf of such
Investor, expressly for use in connection with the
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preparation of the Registration Statement, subject to such limitations and
conditions as are applicable to the Indemnification provided by the Company to
this Section 6. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In case any
such action is brought against any Indemnified Person or Indemnified Party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such Indemnified Person or Indemnified Party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such Indemnified Person or Indemnified Party under this Section 6 for
any legal or other reasonable out-of-pocket expenses subsequently incurred by
such Indemnified Person or Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation, unless the indemnifying
party shall not pursue the action of its final conclusion. The Indemnified
Person or Indemnified Party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof, but the fees and
reasonable out-of-pocket expenses of such counsel shall not be at the expense of
the indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the Indemnified Person or
Indemnified Party. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as
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may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any Preferred Stock of the Company which is
convertible into such securities) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay, or the payments set forth in
Section 2(c) hereof. Any preceding provision of this Section 9 to the contrary
notwithstanding, no assignment to a transferee contemplated by this Section 9
shall be for an amount less than the lower of (x) ten percent (10%) of the
Initial Investor's rights hereunder or (y) one hundred percent (100%) of the
rights hereunder then held by the Investor.
10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an eighty (80%) percent
interest of the Registrable Securities. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be in writing
and shall be deemed to be sufficiently given when personally delivered (by hand,
by courier, by telephone line facsimile transmission, receipt confirmed, or
other means) or sent by certified mail, return receipt requested, properly
addressed and with proper postage pre-paid (i) if to the Company, NHANCEMENT
TECHNOLOGIES, INC., 39420 Liberty Street, Suite 250, Fremont, CA 94538, ATTN:
Chief Financial Officer, Telecopier No.: (510) 744-4003; with a copy to
Tomlinson Zisko Morosoli & Maser, 200 Page Mill Road, 2nd Floor, Palo Alto, CA
94306, ATTN: Cindy Loe, Esq., Telecopier No.: (650) 324-1808; (ii) if to the
Initial Investor, at the address set forth under its name in the Securities
Purchase Agreement, with a copy to Samuel Krieger, Esq., Krieger & Prager, 319
Fifth Avenue, Third Floor, New York, NY 10016, Telecopier No.: (212) 213-2077;
and (iii) if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b), and shall be
effective, when personally delivered, upon receipt and, when so sent by
registered or certified mail, four (4) calendar days after deposit with the
United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware for contracts to be wholly performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of New York or the state courts
of the State of New York sitting in
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the City of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non coveniens, to the bringing of any
such proceeding in such jurisdictions.
(e) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company to perform its
obligations under Section 3(a) hereof, or any delay in such performance could
result in loss to the Investors, and the Company agrees that, in addition to any
other liability the Company may have by reason of such failure or delay, the
Company shall be liable for all direct damages caused by any such failure or
delay, unless the same is the result of force majeure. Neither party shall be
liable for consequential damages.
(k) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
COMPANY:
NHANCEMENT TECHNOLOGIES, INC.
By: /s/ DOUGLAS S. ZORN
------------------------------------
Name: Douglas S. Zorn
Title: Chief Financial Officer
INITIAL INVESTOR:
The Endeavour Capital Fund S. A.
By: /s/ SHMULI MARGULIES
------------------------------------
Name: Shmuli Margulies
Title: Director
INITIAL INVESTOR:
AMRO INTERNATIONAL S. A.
By: /s/ H. U. BACHOFEN
------------------------------------
Name: H. U. Bachofen
Title: President and Director
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<PAGE> 110
NHANCEMENT TECHNOLOGIES INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS, APRIL 12, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Douglas S. Zorn and Linda Moore, and each
or any of them (with power of substitution), proxies for the undersigned to
represent and to vote, as designated on the reverse side hereof, all shares of
Common Stock of NHancement Technologies Inc., which the undersigned would be
entitled to vote if personally present at the Special Meeting of its
stockholders to be held on April 12, 1999, and at any reconvened session
thereof, subject to any directions indicated on the reverse side of this card.
If no directions are given, this proxy will be voted FOR each of the Proposals.
This proxy is continued on the reverse side. Please sign and return
promptly in the envelope provided. No postage is required if mailed in the
United States. If you attend the Special Meeting and vote in person, the proxy
will not be used.
Continued and to be signed and dated on reverse side.
<PAGE> 111
The directors recommend a vote FOR each of the following Proposals:
1. Ratification and approval of the issuance of 2,441 shares of Series A
Convertible Preferred Stock and all shares of Common Stock issuable upon
conversion thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the issuance of 17,500 shares of Series A Convertible
Preferred Stock and all shares of Common Stock issuable upon conversion thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as name or names appear on this proxy. If stock is held
jointly, each holder should sign. If signing as attorney, trustee, executor,
administrator, custodian, guardian or corporate officer, please give full title.
DATE , 1999
SIGNED
Please sign, date and return
this card promptly in the
enclosed envelope Please mark
votes as in this example: [X]
