<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------
NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
As of July 27, 1999, there were 6,954,000 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission, although the
Company believes the disclosures made are adequate to make the information
presented not misleading, and, in the opinion of management, all adjustments
have been reflected which are necessary for a fair 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 nine months ended June 30, 1999 are
not necessarily indicative of the results of operations for a full year.
2
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------ -------------------
JUNE 30, 1999
- ------------------------------------------------------------------------------------------------ -------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $3,211,100
Restricted cash 271,300
Accounts receivable, less allowance for doubtful accounts of $228,300 5,957,800
Inventory 1,494,800
Current portion of notes receivable from related parties 206,600
Prepaid expenses and other 345,900
- ------------------------------------------------------------------------------------------------ -------------------
TOTAL CURRENT ASSETS 11,487,500
- ------------------------------------------------------------------------------------------------ -------------------
PROPERTY AND EQUIPMENT 2,006,600
Less accumulated depreciation (856,700)
- ------------------------------------------------------------------------------------------------ -------------------
PROPERTY AND EQUIPMENT, net 1,149,900
- ------------------------------------------------------------------------------------------------ -------------------
Excess of cost over net assets acquired of NHAN NA, net of accumulated amortization of $187,500 562,500
Excess of cost over net assets acquired of Infotel, net of accumulated amortization of $191,900 2,230,200
Long-term portion of notes receivable from related parties 117,300
Other assets 24,600
- ------------------------------------------------------------------------------------------------ -------------------
$15,572,000
- ------------------------------------------------------------------------------------------------ -------------------
- ------------------------------------------------------------------------------------------------ -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $1,087,400
Accounts payable 3,335,600
Accrued liabilities 2,117,400
Deferred revenue 1,785,100
Income tax payable 47,100
Notes payable to stockholders 1,250,000
Capital lease obligations, current portion 98,800
- ------------------------------------------------------------------------------------------------ -------------------
TOTAL CURRENT LIABILITIES 9,721,400
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 69,700
- ------------------------------------------------------------------------------------------------ -------------------
TOTAL LIABILITIES 9,791,100
- ------------------------------------------------------------------------------------------------ -------------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value, 2,000,000 shares authorized, 17,500
shares issued and outstanding 1,341,800
Common stock, $0.01 par value, 20,000,000 shares authorized, 6,954,000, shares
issued and outstanding 69,500
Additional paid-in capital 22,949,500
Accumulated deficit (18,376,500)
Cumulative translation loss, net of tax (203,400)
- ------------------------------------------------------------------------------------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 5,780,900
- ------------------------------------------------------------------------------------------------- ------------------
$15,572,000
- ------------------------------------------------------------------------------------------------- ------------------
- ------------------------------------------------------------------------------------------------- ------------------
</TABLE>
3
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
- ----------------------------------------------------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET REVENUES 3,253,300 $6,652,800 $6,239,100 $15,629,300
Cost of sales 1,766,600 4,309,200 3,803,800 10,252,100
- ----------------------------------------------------------- ----------- -------------- -------------- --------------
GROSS PROFIT 1,486,700 2,343,600 2,435,300 5,377,200
- ----------------------------------------------------------- ----------- -------------- -------------- --------------
OPERATING EXPENSES
Selling, general and administrative 1,260,700 1,901,900 3,556,400 5,863,100
Restructuring charges (Note 9) --- --- --- 189,000
Amortization of excess of cost over net assets
acquired, including impairment loss of
$4,084,300 in fiscal 1998 75,000 110,700 4,385,100 331,900
- ----------------------------------------------------------- ----------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 1,335,700 2,012,600 7,941,500 6,384,000
- ----------------------------------------------------------- ----------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 151,000 331,000 (5,506,200) (1,006,800)
OTHER INCOME (EXPENSE)
Interest income 17,900 37,100 70,800 81,300
Interest expense (12,400) (131,000) (45,500) (246,100)
Other 36,800 15,800 72,900 30,300
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
Total other income (expense) 42,300 (78,100) 98,200 (134,500)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 193,300 252,900 (5,408,000) (1,141,300)
INCOME TAX EXPENSE (BENEFIT) 26,000 1,100 (66,100) 1,100
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 167,300 251,800 (5,341,900) (1,142,400)
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
DISCONTINUED OPERATIONS
Loss from operations of Advantis (119,700) --- (217,900) ---
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
NET INCOME (LOSS) 47,600 $251,800 ($5,559,800) ($1,142,400)
PREFERRED DIVIDENDS (430,100) (717,200) (430,100) (724,000)
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS (382,500) ($465,400) ($5,989,900) ($1,886,400)
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
BASIC AND DILUTED NET LOSS FROM CONTINUING OPERATIONS PER
COMMON SHARE (NOTE 7) ($.06) ($.08) ($1.31) ($.32)
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
BASIC AND DILUTED NET LOSS FROM DISCONTINUED OPERATIONS
PER COMMON SHARE (NOTE 7) ($.02) --- ($.05) ---
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 7) ($.08) ($.08) ($1.36) ($.32)
- ----------------------------------------------------------- ------------ ------------- -------------- --------------
</TABLE>
4
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
PAR VALUE PAR VALUE 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 --- --- 21,900 200 15,300 (15,500) --- ---
Preferred shares converted
into common stock (3,200) (252,200) 500,000 5,000 247,200 --- --- ---
Issuance of common stock
options and warrants for
payment of outside
service fees and
severance benefits --- --- --- --- 71,700 --- --- 71,700
Issuance of Preferred
Stock, net of cash stock
issuance costs of
$265,000 (Note 5) 17,500 1,485,000 --- --- --- --- --- 1,485,000
Issuance of warrants for
Preferred financing (Note 5) --- (143,200) --- --- 143,200 --- --- ---
Deemed dividend on
preferred stock (Note 5) --- --- --- --- 708,500 (708,500) --- ---
Shareholder debt
converted to equity (Note
1) --- --- 559,100 5,600 629,000 --- --- 634,600
Shareholder debt
converted to equity (Note
1) --- --- 116,565 1,200 115,400 --- --- 116,600
Additional Common stock
issued for Infotel
acquisition --- --- 177,200 1,800 (1,800) --- --- ---
Comprehensive loss:
Net loss --- --- --- --- --- (1,142,400) --- (1,142,400)
Cumulative translation
loss --- --- --- --- --- --- (28,500) (28,500)
- --------------------------- -------- ------------ ----------- ----------- -------------- --------------- ------------ ------------
Total comprehensive loss --- --- --- --- --- --- --- (1,170,900)
- --------------------------- -------- ------------ ----------- ----------- -------------- --------------- ------------ ------------
- --------------------------- -------- ------------ ----------- ----------- -------------- --------------- ------------ ------------
Balance, June 30, 1999 17,500 $1,341,800 6,954,000 $69,600 $22,949,400 ($18,376,500) ($203,400) $5,780,900
- --------------------------- -------- ------------ ----------- ----------- -------------- --------------- ------------ ------------
- --------------------------- -------- ------------ ----------- ----------- -------------- --------------- ------------ ------------
</TABLE>
5
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- -------------------------------------
NINE MONTHS ENDED JUNE 30,
1998 1999
- ---------------------------------------------------------------------------------- --------------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($5,559,800) (1,142,400)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Loss from discontinued operations 217,900 ---
Depreciation and other amortization 352,600 300,300
Amortization of excess cost over net assets acquired, including impairment loss 4,185,500 331,900
Gain on sale of fixed assets --- (11,600)
Compensation related to grant of stock options and warrants --- 71,700
Other (57,500) 18,100
Changes in operating assets and liabilities:
Accounts receivable (1,177,100) (1,402,300)
Inventory 330,000 (166,500)
Prepaid expenses and other (181,000) (100,300)
Other assets 223,200 221,500
Income tax payable (186,000) (174,700)
Accounts payable and other current liabilities 289,400 2,001,800
- ---------------------------------------------------------------------------------- ---------------------- ---------------
CASH USED IN CONTINUING ACTIVITIES (1,562,800) (52,500)
CASH PROVIDED IN DISCONTINUED OPERATIONS (57,800) ---
- ---------------------------------------------------------------------------------- ---------------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,620,600) (52,500)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash --- 93,100
Cash purchase price of Infotel, net of cash acquired of $2,326,000 (30,300) ---
Deferred acquisition costs (135,600) ---
Note receivable from related party (1,100) 12,100
Proceeds on sale of fixed assets --- 145,800
Purchase of property and equipment (236,400) (192,200)
- ---------------------------------------------------------------------------------- ---------------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (403,400) 58,800
- ---------------------------------------------------------------------------------- ---------------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under line of credit 80,000 856,400
Proceeds from shareholders notes payable 1,400,000 ---
Proceeds from sale of preferred stock 1,047,400 1,485,000
Principal payments on capital leases --- (50,200)
Principal payment on notes payable --- (741,600)
Principal payment on long-term debt due to stockholders (187,500) ---
- ---------------------------------------------------------------------------------- ---------------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,339,900 1,549,600
- ---------------------------------------------------------------------------------- --------------------- ---------------
Effect of exchange rate changes on cash (139,000) (22,000)
- ---------------------------------------------------------------------------------- --------------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 176,900 1,533,900
- ---------------------------------------------------------------------------------- --------------------- ---------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,326,300 1,677,200
- ---------------------------------------------------------------------------------- --------------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,503,200 3,211,100
- ---------------------------------------------------------------------------------- --------------------- ---------------
- ---------------------------------------------------------------------------------- --------------------- ---------------
SUPPLEMENTAL DATA:
Interest paid $67,000 $317,000
</TABLE>
6
<PAGE>
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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.
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 recorded
additional purchase consideration of $1,390,400 based on Infotel's profits
through June 30, 1998.
During the nine months ended June 30, 1999, property and equipment
additions of $150,400 were financed by capital lease obligations.
On June 7, 1999, the Company issued 116,600 shares of its Common Stock
for conversion of $116,600 of debt from a stockholder.
On June 15, 1999, the Company recorded the final additional purchase
consideration of $494,600 based on Infotel's profits in fiscal 1999. The
Company issued 559,100 shares of its Common Stock for conversion of
$634,600 of the additional consideration due the former stockholders of
Infotel.
7
<PAGE>
1. LIQUIDITY
The Company had net income of $251,800 and $21,900 for the third and second
quarters of fiscal 1999. However, the Company incurred losses from
continuing operations of $5.6 million and $1.1 million for the nine months
ended June 30, 1998 and 1999 respectively. The losses in 1998 included
non-cash charges for goodwill impairment of $4.1 million, amortization of
the excess over net assets acquired of $0.3 million and a loss of $0.2
million from discontinued operations. At June 30, 1999, the Company had
working capital of $1,766,100, an improvement of $2,296,400 from March 31,
1999. The major reasons for the improvement in working capital were (i) the
issuance of $1,750,000 of its Series A Convertible Preferred Stock, less
approximately $265,000 in related expenses, (ii) the acceptance by the
former Infotel shareholders of additional shares of the Common Stock of
NHancement Technologies Inc. in lieu of $634,600 in performance payments
due under the terms of the acquisition agreement, (iii) the conversion of
$116,600 of debt owed to a major shareholder into shares of the
NHancement's Common Stock and (iv) profitability in the quarter. Although
no assurance can be given, management believes its cash balance as of June
30, 1999 of about $3.5 million coupled with continuing profits will provide
sufficient cash flow for future operations. The Company believes that the
changes in management, cost cutting measures and its renewed focus on its
core businesses implemented in the second and third fiscal quarters, along
with its current customer order backlog of $5.0 million have positioned it
for continued profitability. However if the Company fails to maintain
profitable operations, its financial condition will be adversely affected.
On February 17, 1999, the Company received written notification from
The Nasdaq Stock Market that the Company's Common Stock would be delisted
from the Nasdaq SmallCap Market, effective with the close of business on
February 24, 1999, due to the Company's non-compliance with the net
tangible assets/market capitalization/net income requirement for continued
listing, as set forth under Marketplace Rule 4310(c)(2).
The Company's subsequent request for an oral hearing with the Nasdaq
Listing Qualifications Panel was granted and the Company attended the
hearing on April 29, 1999. On June 3, 1999, the Nasdaq Listing
Qualifications Panel issued a positive determination on the Company's
request for continued inclusion on The Nasdaq SmallCap Market pursuant to
an exception to the net tangible assets/market capitalization/net income
requirement. Consequently, the Company's Common Stock continues to be
listed, without interruption, on the Nasdaq SmallCap Market.
Pursuant to the Infotel Technologies (Pte) Ltd ("Infotel") acquisition
agreement, the Company was required to pay $1,390,000 to the former Infotel
shareholders 30 days after the filing of the 10-KSB, which was filed on
January 13, 1999. The Company failed to make payment to the former Infotel
shareholders as required by the terms of the acquisition agreement.
Consequently, the former Infotel shareholders had the option of accepting
either NHancement Common Stock or a minority interest in the Common Stock
of Infotel in lieu of cash. The former Infotel shareholders had 45 days
after non-payment by the Company to notify the Company in writing of which
option they had elected. Since the former Infotel shareholders did not
elect either option, the debt began accruing interest on February 15, 1999,
daily at the rate of 3% per year above the prime lending rate of The
Development Bank of Singapore Ltd. Furthermore, based on Infotel's 1999
fiscal year performance the Company has recorded an additional $494,600 due
to the former shareholders of Infotel. These two amounts represent the
entire contingent amount of SD$3,200,000 (or US$1,884,600) which was due
the former shareholders of Infotel under the terms of the acquisition
agreement upon satisfaction of all contingencies. On April 29, 1999 the
Company negotiated a settlement agreement with the former Infotel
shareholders, contingent on the Company's continued listing on Nasdaq, to
defer $1,250,000 of the cash payment until 60 days after the Company met
Nasdaq's requirements for continued listing and
8
<PAGE>
to accept $634,600 of the performance payment in additional shares of the
Company's Common Stock. Subsequently, the Company was successful in
meeting the requirements imposed by Nasdaq for continued listing and the
settlement with Infotel became effective, without contingency. A closing
meeting with the former Infotel shareholders is scheduled for August 13,
1999 at which the $1.25 million plus accrued interest will be distributed.
The Company will have no further payment obligations under the terms of
the acquisition agreement following delivery of this amount.
2. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation headquartered in
Fremont, California ("NHancement" or the "Company"), was incorporated in
October 1996 as a holding company. The business of NHancement is conducted
by its operating company subsidiaries: NHancement Technologies North
America, Inc. ("NHAN NA", formerly Voice Plus, Inc.) and Infotel. NHAN NA,
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 a systems integrator of infrastructure data communications
equipment, turnkey project management services, and radar systems and a
provider of test measuring systems. Accordingly, the consolidated financial
statements include the results of the operations from NHancement and its
NHAN NA subsidiary for both periods presented and those of Infotel for the
eight days ended June 30, 1998 and the three months and nine months ended
June 30, 1999. Furthermore, the results of operations of Advantis Network &
Systems Sdn Bhd, which was acquired on December 15, 1997, are classified as
discontinued as this subsidiary was divested on September 30, 1998.
3. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements as of June 30, 1999
and for the three and nine months ended June 30, 1999 and 1998 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 nine months 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.
9
<PAGE>
4. STOCK OPTIONS AND WARRANTS
During the nine months ended June 30, 1999, the Company granted options
to purchase approximately 1,024,500 shares of the Company's Common Stock to
employees, and options to purchase 75,000 shares of Common Stock to outside
directors, with exercise prices for these employees and director options
ranging from $1.125 to $1.375 per share. During the same period, the
Company also issued warrants to purchase 50,000 shares of Common Stock to
the former CEO; warrants to purchase 50,000 shares of Common Stock to James
S. Gillespie (the former owner of NHAN NA (formerly Voice Plus, Inc.) and
currently a consultant to and a Director of the Company); warrants to
purchase 500,000 shares of Common Stock to outside advisors to assist the
Company with acquisitions and additional financing and warrants to purchase
175,000 shares of Common Stock to the buyers of the Preferred Stock issued
on June 15, 1999, with exercise prices for these various warrant issuances
ranging from $1.00 to $1.368 per warrant. In addition, the Company issued
warrants to purchase 200,000 shares of Common Stock to the buyers of the
Preferred Stock that are exercisable only if the Company redeems the
Preferred Stock in accordance with the terms of the Securities Purchase
Agreement, as amended, and the Certificate of Designations, as amended.
5. FINANCING ACTIVITIES
On June 15, 1999 the Company completed the remaining $1,750,000 tranche
of Series A Convertible Preferred Stock (less commissions and certain other
costs and expenses of approximately $265,000). The Preferred Stock bears a
5% cumulative dividend and has a liquidation preference equal to the
original purchase price plus cumulative but unpaid dividends. 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 the conversion, except in no event
will the conversion price per share be less than $0.80 before applying the
25% discount. The 25% conversion discount was reflected as a preferred
stock deemed dividend and resulted in a $583,300 decrease in income or
increase in the loss applicable to Common Stock in computing the net
income/loss per share. In addition, the warrants to purchase 175,000 shares
of the Company's Common Stock were granted to the Preferred investors and
are reflected as a $125,200 deemed dividend.
In October 1998, the Company through its NHAN NA subsidiary obtained a
$1.0 million accounts receivable credit line with an U.S. finance company
with an advance rate of 80% of eligible receivables 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 the bank prime rate to be used for Infotel's overdraft protection,
letters of credit, letters of guarantee, foreign exchange and revolving
credit. The Company hoped to complete this facility during the quarter, but
because of the extensive amount of information and documentation required
by foreign banks, the facility is expected to be completed during the
fourth fiscal quarter.
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.
10
<PAGE>
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 nine months ended June 30,
1998, 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 pro forma results exclude the loss from
discontinued operations.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------- ---------------------------------
UNAUDITED PRO FORMA
NINE MONTHS ENDED
JUNE 30, 1998
----------------------------------------------------------------------------- ---------------------------------
<S> <C>
Net revenues $14,488,600
Net loss ($4,754,800)
Preferred stock dividend (430,100)
Basic and diluted net loss available to common shareholders (5,184,900)
Basis and diluted net loss per common share ($.92)
Weighted average common and common equivalent shares outstanding 5,616,200
------------------------------------------------------------------------------------- -----------------
</TABLE>
7. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128,
Earnings Per Share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
NET LOSS - NUMERATOR 1998 1999 1998 1999
-------------------- ---- ---- ---- ----
--------------------------------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $47,600 $251,800 ($5,559,800) ($1,142,400)
Preferred stock dividends (430,100) (717,200) (430,100) (724,000)
--------------------------------------- ---------------- -------------- --------------- ----------------
Basic and diluted net loss applicable
to common stock ($382,500) ($465,400) ($5,989,900) ($1,886,400)
--------------------------------------- ---------------- -------------- --------------- ----------------
--------------------------------------- ---------------- -------------- --------------- ----------------
COMMON SHARES - DENOMINATOR
Basic weighted average common shares
outstanding 4,506,300 6,201,000 4,389,000 5,912,400
Options and warrants --- --- --- ---
--------------------------------------- ---------------- -------------- --------------- ----------------
--------------------------------------- ---------------- -------------- --------------- ----------------
Diluted weighted average common
shares outstanding 4,506,300 6,201,000 4,389,000 5,912,400
--------------------------------------- ---------------- -------------- --------------- ----------------
--------------------------------------- ---------------- -------------- --------------- ----------------
</TABLE>
Options and warrants to purchase 2,568,900 shares and Preferred Stock
convertible into approximately 1,750,000 shares of Common were outstanding
at June 30, 1999 and options and warrants to purchase 1,009,300 shares and
Preferred Stock convertible into 614,200 shares of Common Stock were
outstanding at June 30, 1998 but were not included in the computation of
diluted loss per common share because the effect would be antidilutive.
Also, 177,200 additional consideration shares, which would be issuable
according to the antidilution provisions in the Infotel acquisition
agreement are not included in the computation of the diluted loss per
Common share.
11
<PAGE>
8. SEGMENT REPORTING
NHancement's reportable operating segments include NHancement
Technologies North America, Inc. ("NHAN NA", formerly Voice Plus, Inc.) and
Infotel Technologies (Pte) Ltd ("Infotel"). Infotel is based in Singapore
and derives substantially all of its revenue from sales in Asia.
<TABLE>
<CAPTION>
Financial information for these segments includes the following:
Three months ended June 30, 1999
------------------------------------------ -------------- ---------------- --------------- -----------------
NHAN NA INFOTEL OTHER(2) TOTAL
------------------------------------------ -------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Sales to external customers $4,062,000 $2,590,800 --- $6,652,800
Income (loss) from continuing operations 615,300 240,300 ($603,800) 251,800
Total assets 5,306,400 8,027,000 2,238,600 15,572,000
------------------------------------------ -------------- ---------------- --------------- -----------------
Three months ended June 30, 1998
------------------------------------------ -------------- ---------------- --------------- -----------------
NHAN NA INFOTEL OTHER(2) TOTAL
------------------------------------------ -------------- ---------------- --------------- -----------------
Net Sales to external customers $3,003,300 $235,000 $15,000 $3,253,300
Income (Loss) from continuing operations 468,900 71,000 (372,600) 167,300
Total assets 4,652,600 5,742,700 4,807,800 15,203,100
------------------------------------------ -------------- ---------------- --------------- -----------------
Nine months ended June 30, 1999
------------------------------------------ -------------- ---------------- --------------- -----------------
NHAN NA INFOTEL OTHER(2) TOTAL
------------------------------------------ -------------- ---------------- --------------- -----------------
Net Sales to external customers $9,096,000 $6,533,300 --- $15,629,300
Income (loss) from continuing operations 649,000 480,000 ($2,271,400) ($1,142,400)
Total assets 5,306,400 8,027,000 2,238,600 15,572,000
------------------------------------------ -------------- ---------------- --------------- -----------------
Nine months ended June 30, 1998
------------------------------------------ -------------- ---------------- --------------- -----------------
NHAN NA(1) INFOTEL OTHER(2) TOTAL
------------------------------------------ -------------- ---------------- --------------- -----------------
Net Sales to external customers $5,987,700 $235,000 $16,400 $6,239,100
Income (Loss) from continuing operations (4,290,200) 71,000 (1,122,700) (5,341,900)
Total assets 4,652,600 5,742,700 4,807,800 15,203,100
------------------------------------------ -------------- ---------------- --------------- -----------------
(1) NHAN NA loss includes an impairment loss of $4,084,300.
(2) Other includes corporate expenses.
</TABLE>
9. RESTRUCTURING CHARGES
The Company restructured its operations in the second quarter ended
March 31, 1999. Restructuring charges consisted mostly of severance
payments to the former CEO and operational and administrative employees of
NHAN NA. A total of five employees were terminated in the quarter ended
March 31, 1999 and a total of $189,000 of expenses related to severance
benefits were expensed and paid in the quarter. No restructuring charges
were incurred in the third quarter ended June 30, 1999.
10. SUBSEQUENT EVENTS
Effective July 16, 1999, the Acting Chief Financial Officer resigned to
pursue other interests. The Company, which was already conducting a search
for a Chief Financial Officer, will continue its search. A temporary senior
financial executive is being sought in the interim from established local
temporary professional employment agencies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NHancement Technologies Inc. ("NHancement" or the "Company") through its
North American subsidiary, specializes in multimedia systems that improve
internal and external communication functions and provides customized
software development for each client's individualized needs. The Company's
Asian subsidiary is an integrator and distributor of communication systems
and test equipment.
The Company's consolidated financial statements include the accounts of
the Company and its two operating segments: NHancement Technologies North
America, Inc. ("NHAN NA" formerly Voice Plus, 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 in this Form 10-QSB, including,
without limitation, statements related to anticipated cash flow sources and
uses under "Liquidity and Capital Resources", the mitigation of the Year 2000
issue under "Impact of the Year 2000 Issue" and other statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financing alternatives, financial
position, business strategy, plans and objectives of management of the
Company for future operations, and industry conditions, are forward-looking
statements. 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 changes in current accounting rules, all of
which may be beyond the control of the Company. 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
Management's Discussion and Analysis of Consolidated Results of Financial
Condition and Results of Operations ("MD&A") should be read in conjunction
with the consolidated financial statements included herein. Further, this
third fiscal quarterly report on Form 10-QSB should be read in conjunction
with the Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements included in its 1998 Annual Report on Form
10-KSB. In addition, you are urged to read this report in conjunction with
the risk factors described herein.
In this MD&A, the Company explains its results of operations and
discusses its financial condition for the three and nine-month fiscal periods
ended June 30, 1999, as compared to the corresponding periods in 1998. The
discussion of financial condition includes: (1) changes in the voice
processing, data processing and communications industries, including 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 February 17, 1999, the Company received written notification from The
Nasdaq Stock Market that the Company's Common Stock would be delisted from
the Nasdaq SmallCap Market, effective with the close of business on February
24, 1999, due to the Company's non-compliance with the net tangible
13
<PAGE>
assets/market capitalization/net income requirement for continued listing, as
set forth under Marketplace Rule 4310(c)(2).
The Company's subsequent request for an oral hearing with the Nasdaq
Listing Qualifications Panel was granted and the Company attended the hearing
on April 29, 1999.
On June 3, 1999, the Nasdaq Listing Qualifications Panel issued a
positive determination on the Company's request for continued inclusion on
The Nasdaq SmallCap Market pursuant to an exception to the net tangible
assets/market capitalization/net income requirement. The terms of the ruling
included the following exceptions to which the Company was required to adhere
in order to continue listed status on the Nasdaq SmallCap Market:
1. By June 15, 1999, the Company was required to have completed a $1,750,000
sale of its Series A Convertible Preferred Stock.
2. On or before June 15, 1999, the Company was required to have made a public
filing with the SEC and Nasdaq detailing a minimum of $2,700,000 in net
tangible assets.
3. The Company was required to demonstrate compliance with all requirements
for continued listing on the Nasdaq SmallCap Market.
4. Until June 15, 1999, the Company was required to provide prompt
notification to Nasdaq of any significant events that may have occurred.
5. The Company was required to have maintained a minimum closing bid price of
$1.00 per share until June 15, 1999 (the "exception period") and would have
been subject to an additional 90-day exception period if its stock had
fallen below the minimum bid price. In that event, the Company would have
been required to sustain the minimum closing bid price for a minimum of 10
consecutive trading days during the additional exception period.
On June 15, 1999, the Company completed the $1,750,000 tranche of Series
A Convertible Preferred Stock. This transaction was accomplished by means of
an Amendment dated June 11, 1999 to the Securities Purchase Agreement dated
April 13, 1998, and an Amendment dated June 11, 1999 to the Certificate of
Designations as filed with the Delaware Secretary of State on April 9, 1998,
as amended on April 13, 1998.
On June 15, 1999, the Company completed its public filing with the SEC
and Nasdaq of the Form 8-K detailing a minimum of $2,700,000 in net tangible
assets. Throughout the exception period ended June 15, 1999, the Company had
maintained a minimum closing bid price of $1.00 per share, had no significant
events to report to Nasdaq and had demonstrated compliance with all
requirements for continued listing on the Nasdaq SmallCap Market.
Consequently, the Company's Common Stock continues to be listed, without
interruption, on the Nasdaq SmallCap Market.
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings and
explains variances within revenues and expenses for the fiscal three and
nine-month periods ended June 30, 1999 and 1998.
The following table shows results of operations, as a percentage of net
sales, for the nine-month periods ended June 30, 1999 and 1998.
14
<PAGE>
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
--------------------------------------------------------- --------------------------
NINE MONTHS ENDED
JUNE 30,
1998 1999
--------------------------------------------------------- ------------- ------------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 61.0 % 65.6 %
Gross profit 39.0 % 34.4 %
Selling, general and administrative expenses 57.0 % 38.7 %
Loss on impairment and amortization of excess of cost
over net assets acquired 70.3 % 2.1 %
Loss from operations (88.3)% (6.4)%
Other income (expense) 1.6 % (0.9)%
Loss from continuing operations before income taxes (86.7)% (7.3)%
Income tax benefit (1.1)% 0.0 %
Loss from continuing operations (85.6)% (7.3)%
Loss from discontinued operations (3.5)% ---
Net loss (89.1)% (7.3)%
--------------------------------------------------------- ------------- ------------
</TABLE>
The Company's primary focus in the nine months ended June 30, 1999 was as
an integrator and distributor of voice processing, data processing and
communications systems. These operations were conducted through the Company's
NHAN NA and Infotel subsidiaries. Company-wide revenue for the quarter ended
June 30, 1999 increased $3.4 million to $6.7 million as compared to $3.3
million for the same period in 1998. Fiscal year to date revenue increased
150% from $6.2 million in fiscal 1998 to $15.6 million. The increase in
revenues for the three and nine month periods in 1999 is due primarily to:
(i) the fact that only eight days of Infotel revenue or $235,000, were
recorded in the three and nine month periods ended June 30, 1998, while all
Infotel revenues or $6.5 million are included in the same fiscal periods in
1999 (Infotel was acquired on June 22, 1998) and (ii) an increase in NHAN
NA's second and third quarter 1999 revenues as the Company refocused on its
core business. NHAN NA's net sales increased 35%, from $3.0 million for the
three months ended June 30, 1998 to $4.1 million for the three months ended
June 30, 1999. On a fiscal year to date basis, NHAN NA's sales increased 52%
from $6.0 million to $9.1 million for the nine-month periods ended June 30,
1998 and 1999. The increase in NHAN NA revenues came from both its existing
customer base and from new customers and includes one-time Year 2000 revenues
of about $650,000 related to upgrades. Almost half of NHAN NA's third quarter
revenue came from its single largest customer, while 13% came from customers
who purchased the new interactive communication systems that merge voice and
data. Infotel's net sales for the third quarter decreased 38% from $4.2
million at June 30, 1998 (pre-acquisition operating results) to $2.6 million
for the same period in 1999. Infotel's project management revenues in the
third fiscal quarter of 1998 were exceptionally high due to the completion of
a $2.0 million project compared to less than $0.1 million for the same
quarter in 1999. On a fiscal year to date basis, Infotel's revenues are down
23% from $8.5 million (includes pre-acquisition operating results) to $6.5
million. The shortfall in fiscal year to date revenue is due to the same
decrease in project management revenues, however management is projecting
substantially higher revenues in the fourth fiscal quarter which are expected
to result in Infotel's fiscal 1999 revenues being about 6% below those in the
previous fiscal year.
Company-wide order backlog at June 30, 1999 reached an all time high of $5.0
million. NHAN NA's order backlog at June 30, 1999 decreased slightly to $2.4
million from $2.9 million the previous quarter however Infotel's backlog
increased to $2.6 million from $1.4 million the previous quarter.
Consequently, management believes that revenues for the fourth fiscal quarter
will continue to be strong.
15
<PAGE>
Based on the estimated future undiscounted operating cash flows of its
related businesses, the Company periodically evaluates the carrying value of
goodwill associated with its subsidiaries. Due to issues not known by
management at the time of the NHAN NA acquisition, the estimated future
undiscounted operating cash flows of NHAN NA were calculated to be less than
those estimated at the time of its acquisition, February 1997, and less than
the period ending carrying amounts 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 NHAN NA goodwill at
September 30, 1998 was reduced to $750,000 and the useful life was reduced to
three years.
Management believes that by the end of calendar 1999 after an initial
increase due to Year 2000 upgrades, revenues for legacy systems will decline
and that NHAN NA revenues will come increasingly from new technologies and
products that have been recently introduced to the marketplace and which
constituted 13% of NHAN NA's third quarter revenue. The Company is in the
process of repositioning its NHAN NA subsidiary to take advantage of the new
trends in the voice processing industry, specifically the migration from
legacy systems to the new interactive communication systems that merge voice
and data communications into a single computer based system.
Management believes that the carrying value of the goodwill resulting
from the Infotel acquisition is recoverable based on Infotel's performance
and management's current estimates of future operating cash flows.
Company-wide gross margins for the three months ended June 30, 1999
declined to 35.2% from 45.7% in the same period in 1998. For the nine months
ended June 30, 1999, company-wide gross margins declined to 34.4% from 39.0%.
NHAN NA's gross margin for the quarter ended June 30, 1999 decreased to 38.8%
from 45.2% as compared to the same period in 1998. NHAN NA's fiscal year to
date gross margin, as a percent of revenues, declined from 39.0% to 36.4%
compared to the same period a year earlier. The decrease in the gross margin
within North American operations was due equally to increased product costs
and increased implementation costs associated with legacy system product
problems during Year 2000 upgrades. While Infotel contributed only eight days
or $113,000 in gross margins during the fiscal 1998 period, its contribution
in fiscal 1999 was over $2 million resulting in a decrease in company-wide
gross margins as Infotel's historical gross margin is significantly below
gross margins attained in North American operations. However, on a standalone
basis, Infotel's gross margin for the quarter (29.7%) and year to date
(34.3%) is virtually unchanged from the same periods a year earlier.
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net sales decreased to 28.6% for the three months ended June
30, 1999 versus 38.8% for the same period in 1998. For the nine months ended
June 30, 1999, SG&A decreased to 38.7% from 57.0% on a company-wide basis.
SG&A for NHAN NA decreased to 19.7% for the third fiscal quarter of 1999
compared to 27.3% for the same three-month period in 1998. For the nine
months ended June 30, 1999 NHAN NA's SG&A expenses as a percentage of
revenues decreased to 25.1% from 39.5% for the same period the prior year.
The decreases in the quarter and fiscal year to date are due primarily to:
(i) a substantial increase in the quarter and fiscal year to date revenue
versus the prior year and (ii) a decrease in expenses, including salaries,
due to a reduction in personnel from the implementation of management's
restructuring and cost reduction plan. Infotel's SG&A as a percent of
revenues increased to 20.5% for the three months ended June 30, 1999 compared
to 15.1% for the three months ended June 30, 1998. On a fiscal year to date
basis, Infotel's SG&A as a percent of revenues increased to 26.6% from 22.3%
a year ago. These percentage increases were due to decreases in the revenue
levels during the periods, as Infotel's actual spending for SG&A during the
quarter and nine month periods was less than the same periods a year ago.
NHancement's corporate overhead costs increased by $77,000 for the three
months ended June 30, 1999 due primarily to an increase in interest expense
related substantially to the note payable to the former
16
<PAGE>
shareholders of Infotel. Fiscal year to date corporate overhead costs
increased by $805,000, of which substantially all occurred in the first
fiscal quarter prior to the cost reductions implemented by current management
or in the second fiscal quarter as part of the restructuring costs. This
increase was primarily due to (i) increased outside services as a result of a
financing that was not completed; (ii) increased costs for audit and legal
services related to the reporting requirements resulting from the acquisition
of Infotel, the preparation of a special proxy statement related to the
Company's Preferred Stock financing, and legal fees associated with the
Nasdaq listing compliance requirements; (iii) relocation and severance
expenses related to the former CEO, and (iv) increased interest expense
related substantially to the note payable to the former shareholders of
Infotel.
At June 30, 1999, 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 Company currently has a $2.65 million
federal net operating loss carryforward available, after considering
limitations on the use of such carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complimentary businesses and products
previously has been an element of the Company's business strategy, the
Company's current ability to engage in acquisitions is subject to limitations
given the Company's present 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, may not be 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. In April, 1998, the Company negotiated a
Series a Convertible Preferred Stock financing for $3.0 million, of which
$1,250,000 was received less $265,300 of stock issuance costs, with
substantially all of the net proceeds having been used for the acquisition of
Infotel. On June 15, 1999 the Company completed the remaining $1,750,000
tranche of Series A Convertible Preferred Stock, less commissions and certain
other costs and expenses of approximately $265,000. This transaction was
accomplished by means of an Amendment dated June 11, 1999 to the Securities
Purchase Agreement dated April 13, 1998 and an Amendment dated June 11, 1999
to the Certificate of Designations as filed with the Delaware Secretary of
State on April 9, 1998, as amended on April 13, 1998.
During the nine months ended June 30, 1999, net cash used by operating
activities was $52,500. Sources of cash consisted primarily of increases in
accounts payable, offset by cash used to fund the Company's net operating
losses and increases in accounts receivable. Since the losses in the first
fiscal quarter, revenues have been increasing and profitability has return
and as such the increase in both accounts payable and accounts receivable are
due to this increased business activity. Net cash provided by investing and
financing activities totaled $1.6 million consisting of: (i) proceeds from
the sale of the second tranche of Series A Convertible Preferred Stock, and
(ii) increased borrowings under the Company's line of credit, offset by
purchases of property and equipment for the Company's internal computer
system. At June 30, 1999, the Company's working capital was $1.8 million, an
improvement of $2.3 million over the quarter ended March 31, 1999 due
primarily to the proceeds from the sale of Preferred Stock, which resulted in
the Company's current ratio improving from less than one to 1.2 to 1.0 at
June 30, 1999. The Company had a cash balance of $3.5 million at June 30,
1999.
In October 1998, the Company through its NHAN NA subsidiary obtained a
$1.0 million accounts receivable credit line with a local finance company
with an advance rate of 80% of eligible receivables at an interest rate of
2.75% per month. In January 1999, the Company's lender increased the credit
line from
17
<PAGE>
$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 (approximately US$2 million) with interest at
1.25% above the bank prime rate to be used for Infotel's overdraft
protection, letters of credit, letters of guarantee, foreign exchange and
revolving credit. The Company had hoped to complete this facility during the
quarter, but because of the extensive amount of information and documentation
required by foreign banks, the facility is expected to be completed during
the fourth fiscal quarter.
The Company's management estimates that it will incur about $500,000 in
capital expenditures during the next 12 months, representing mostly
company-wide business systems hardware and communication systems. The Company
anticipates that all major capital expenditures will be financed through
equipment leases and will not require significant direct outlays of cash.
Pursuant to the Infotel Technologies (Pte) Ltd ("Infotel") acquisition
agreement, the Company was required to pay $1,390,000 to the former Infotel
shareholders 30 days after the filing of the 10-KSB, which was filed on
January 13, 1999. The Company failed to make payment to the former Infotel
shareholders as required by the terms of the acquisition agreement.
Consequently, the former Infotel shareholders had the option of accepting
either NHancement Common Stock or a minority interest in the Common Stock of
Infotel in lieu of cash. The former Infotel shareholders had 45 days after
non-payment by the Company to notify the Company in writing of which option
they had elected. Since the former Infotel shareholders did not elect either
option, the debt began accruing interest on February 15, 1999, daily at the
rate of 3% per year above the prime lending rate of The Development Bank of
Singapore Ltd. and will continue to accrue interest until the date payment in
full is made. Furthermore, based on Infotel's fiscal 1999 performance the
Company has recorded an additional $494,600 due to the former shareholders of
Infotel. These two amounts represent the entire contingent amount of
SD$3,200,000 (or US$1,884,600) which was due to the former shareholders of
Infotel under the terms of the acquisition agreement, upon satisfaction of
all contingencies. On April 29, 1999, the Company negotiated a settlement
agreement with the former Infotel shareholders, contingent on the Company's
continued listing on Nasdaq, to defer $1,250,000 of the cash payment until 60
days after the Company met Nasdaq's requirements for continued listing and to
accept $634,600 of the performance payment in additional shares of the
Company's Common Stock. Subsequently, the Company was successful in meeting
the requirements imposed by Nasdaq for continued listing and the settlement
with Infotel became effective, without contingency. A meeting with the former
Infotel shareholders is scheduled for August 13, 1999 at which the $1.25
million plus accrued interest. The Company will have no further payment
obligations under the terms of the acquisition agreement following delivery
of this amount.
Based upon its present earnings and cost reduction plans, management
believes that operating cash flow, available cash and available credit are
adequate to meet the working capital needs of the Company and its
subsidiaries 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
any acquisition program.
RISK FACTORS
The following risk factors, in addition to the risks described
elsewhere in the description of the Company's business in this report on Form
10-QSB, may cause actual results to differ materially from those in any
forward-looking statements contained in the business description, MD&A or
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 that may cause the actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements.
18
<PAGE>
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. On February 17, 1999, the Company received written
notification from The Nasdaq Stock Market that the Company's Common Stock
would be delisted from the Nasdaq SmallCap Market, effective with the close
of business on February 24, 1999, due to the Company's non-compliance with
the net tangible assets/market capitalization/net income requirement for
continued listing, as set forth under Marketplace Rule 4310(c)(2).
The Company's subsequent request for an oral hearing with the Nasdaq
Listing Qualifications Panel was granted and the Company attended the hearing
on April 29, 1999. On June 3, 1999, the Nasdaq Listing Qualifications Panel
issued a positive determination on the Company's request for continued
inclusion on The Nasdaq SmallCap Market pursuant to an exception to the net
tangible assets/market capitalization/net income requirement. Consequently,
the Company's Common Stock continues to be listed, without interruption, on
the Nasdaq SmallCap Market.
However if the Company's Common Stock were to become delisted from the
Nasdaq SmallCap Market System in the future, the Company would become subject
to the Securities and Exchange Commission's "penny stock" rules. As a result,
an investor would 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 Securities and Exchange Act of 1934
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, if the Company were to be
delisted from the Nasdaq SmallCap Market System and become subject to the
rules on penny stocks, it 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.
Although the Company recorded net income of $251,800 on net revenues of
$6.7 million for the quarter ended June 30, 1999, and net income of $21,900
on revenues of $5.7 million for the second quarter ended March 31, 1999, on a
fiscal year-to-date basis the Company has incurred a loss of $1.1 million on
$15.6 million in revenue. The failure of the Company to produce positive
operating results in the future may affect the future value of its 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, may prevent the Company from engaging in acquisition activity
and could have a material adverse effect on the overall financial condition
of the Company.
19
<PAGE>
VOLATILITY OF STOCK PRICES.
The over-the-counter markets for securities such as the Company's Common
Stock historically have experienced extreme price and volume fluctuations
during certain periods. Other factors that may also adversely affect the
market price of the Common Stock include new product developments, trends in
the Company's industry, trends in the investment markets generally, as well
as economic conditions and quarterly variations in the Company's results of
operations. In addition, there can be no assurance that the Company's Common
Stock will in the future remain eligible for listing on the Nasdaq SmallCap
Market System.
FINANCING RISKS.
Although the acquisition of complimentary businesses and products
previously has been an element of the Company's business strategy, the
Company's current ability to engage in acquisitions is subject to limitations
given the Company's present 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, may not be on terms acceptable to
the Company. 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 curtail its acquisition strategy
altogether. 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 June 30, 1999, of the original
12,500 shares of convertible Preferred Stock sold in April of 1998, all
shares plus accrued dividends were converted into 1,231,180 shares of Common
Stock at an average price per share of about $1.04.
RELIANCE UPON COMPANY'S DISTRIBUTOR AND SUPPLIER RELATIONSHIPS; DEPENDENCE ON
SIGNIFICANT CUSTOMERS.
The Company's business is based upon the integration of hardware,
software, and communications and data processing equipment manufactured by
others into systems designed to meet the needs of its customers. Although the
Company has distributor agreements with a number of equipment manufacturers,
a major portion of its revenue is based upon products manufactured by
Centigram Communications Corporation ("Centigram") or Baypoint Innovations
("Baypoint"), the Mitel Corporation subsidiary which purchased Centigram's
customer premises equipment ("CPE") business. The Company depends upon
Centigram and Baypoint to offer products that are competitive with products
offered by other manufacturers as to technological advancement, reliability
and price. If Centigram's or Baypoint's competitors should surpass them 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 or Baypoint, would
adversely affect the Company's business for an indeterminate period of time
until new supplier relationships could be established. In this regard, 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
20
<PAGE>
honor the NHAN NA 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.
In July 1998, the Company signed a "Premier Partner" distribution
agreement with Interactive Intelligence, Inc. ("I3") for the distribution of
its Enterprise Information Center ("EIC") product, a next generation
communication server which merges voice and data functions into a single
computer-based system. Revenue from this product accounted for 13% of NHAN NA
revenues in the current quarter ended June 30, 1999 and is expected to
increase rapidly in future quarters. Any disruption to this relationship or
to the products supplied by I3 would have a significant adverse impact upon
the Company's business for an indeterminate period of time until a new
supplier relationship could be established.
NHAN NA has distributor agreements with a number of equipment
manufacturers in addition to Centigram, Baypoint and I3. 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 NHAN NA's distributor relationships with its key suppliers or any
interruption of the delivery of equipment to NHAN NA by any of its key
suppliers would have a material adverse effect upon the Company.
Infotel offers a wide range of infrastructure communications equipment
products. Products supported include manufacturers such as Motorola,
Ericsson, Raytheon, Newbridge and Shiva Corp., Rohde & Schwartz Gmbh, and
Siemans. Infotel also has an established business providing test measuring
instrumentation and testing environments. This business grew out of a
communications relationship with a German conglomerate, Rohde & Schwartz
Gmbh, which evolved into a dependency on Infotel to service other Rohde &
Schwarz products such as test instruments. Infotel is now the regional
distributor and test and repair center for Rohde & Schwarz test instruments,
which provides a steady stream of revenues. Infotel has since expanded its
repair capability to include Alcatel mobile telephones. Infotel focuses
principally on large projects in the government and institutional sectors as
well as in the commercial sector. Any material change in Infotel's
relationship with these manufacturers or any interruption to deliveries to
Infotel by any of its key suppliers would have a material adverse effect upon
the Company.
The Company currently services approximately 1000 customers. Revenues
from the Company's single largest customer accounted for approximately 21% of
total revenues during the nine-month period ended June 30, 1999. No other
customer accounted for over 5% of total revenues during this period. While
the Company has broadened its customer base, the concentration of revenues
derived from the Company's single largest customer results in additional risk
to the Company and any disruption of orders from this customer would have an
adverse effect on the Company.
COMPETITION IN NHAN NA'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. NHAN NA
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
21
<PAGE>
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, NHAN NA 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.
NHAN NA'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. Although competition has not intensified to the
same extent in the market for the new interactive communication systems,
significant competition from much larger better-financed companies, such as
Lucent and Northern Telecom, is expected within the next few quarters.
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 elsewhere in this report, the acquisition of NHAN NA and Advantis,
prior to its divestiture, have yielded operating results that were
significantly lower than expected. Other acquisitions could generate results
different from our expectations. Accordingly, no assurance can be given that
the future performance of the Company's subsidiaries will be commensurate
with the consideration paid to acquire such companies. If management fails to
establish the needed controls and to manage growth effectively, the Company's
operating results, cash flows and overall financial condition will be
adversely affected.
RISKS INVOLVED IN CHANGES OF MANAGEMENT.
Management changes often have a disruptive effect on businesses and can
lead to the loss of key employees because of the uncertainty inherent in
change. On January 6, 1999, Esmond Goei resigned his position as President
and Chief Executive Officer of the Company. Douglas S. Zorn was promoted from
Executive Vice President and Chief Financial Officer to interim President and
Chief Executive Officer to fill the vacancies created by Mr. Goei's
resignation, and on February 2, 1999 the Board of Directors elected Mr. Zorn
to the offices of President and Chief Executive Officer. On April 20, 1999,
the Board appointed Donna M. Pulvermacher as Acting Chief Financial Officer
and Treasurer, and Linda V. Moore
22
<PAGE>
to the office of Secretary of the Company. Ms. Pulvermacher and Ms. Moore
left the Company in July 1999, to pursue other opportunities. The Company
will be operating without a Chief Financial Officer or General Counsel until
these positions are filled. While hiring efforts are underway, the job market
in the greater San Francisco Bay Area is intensely competitive and there is
no assurance that these posts will be filled in the near future. In the
interim, the Company is conducting a search for a Chief Financial Officer and
will rely on its outside counsel for the performance of legal services. The
loss of these or other key employees of the Company could have a material
adverse effect on the Company's operations. Furthermore, no assurances can be
given that the recent changes in management of the Company will be adequate
to sustain the Company's profitability or to meet future growth targets.
RISKS ASSOCIATED WITH YEAR 2000 ISSUE
The Year 2000 issue 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 has completed its assessment of the Year 2000 problem and
presently believes that, with modifications to or replacement of existing
software, the Year 2000 problem will not pose significant operational
problems for the Company's 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'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. The estimated cost of the new
business systems for North American locations combined is $425,000 of which
$350,000 has been incurred; such systems are needed not only to remedy Year
2000 compliance problems but also to maintain proper controls for management
of the Company. Any remaining changes to be made at North American locations
are expected to be of a routine nature and are not expected to have a
materially adverse effect on the Company. As for Asian operations, management
recently completed its review of the internal computer systems of Infotel and
discovered that Infotel's systems are not Year 2000 compliant. The Company
has identified a package that is Year 2000 compliant and installation of the
system will begin in the fourth fiscal quarter of 1999 and is expected to be
completed by the end of the calendar year. The estimated cost of the new
business systems for Infotel is $180,000.
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 that its domestic subsidiary, NHAN NA, distributes to determine
which, if any, are not capable of recognizing the year 2000. Infotel, the
Company's Singapore subsidiary has recently completed a review of the
products it distributes to determine which, if any, are not capable of
recognizing the year 2000. To determine product compliance, Infotel provides
its customers with the suppliers' compliance information or directs its
customers to the suppliers' websites. Communications were initiated with all
of the manufacturers of the Company's 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
23
<PAGE>
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. 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 believes it has taken reasonable steps to identify and
correct all Year 2000 problems within its control. However, the Company may
suffer business interruptions if customers, vendors and other third parties
with which it conducts business are unsuccessful in remedying their own Year
2000 problems. Further, the Company could be adversely affected by any
widespread economic or financial market disruption. The Company has not
adopted a contingency plan that addresses widespread disruption outside of
its control.
24
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 30, 1998, a case entitled C.C. & Associates, et al. V. NHancement
Technologies, Inc., et al. was filed in Santa Clara County Superior Court.
The complaint was allegedly served in September 1998. The dispute arises out
of the request for payment of legal and accounting expenses pursuant to a
non-binding letter of intent. On December 19, 1998, plaintiff filed with the
court a Request for Entry of Default and Clerk's Judgement ("Request")
against the Company in the amount of $54,722.00. On January 30, 1999,
plaintiff agreed to withdraw the Request and allow the Company to answer the
complaint. The Company is contesting the allegations, in particular, the
amount allegedly owing. The Company cannot presently make any determination
regarding the probable outcome of the litigation; however, the parties have
agreed to mediate the dispute on August 24, 1999 and it is not anticipated
that the resolution will have a material adverse effect on the financial
condition and operations of the Company.
ITEM 2. CHANGES IN SECURITIES
OPTION AND WARRANT GRANTS IN LAST FISCAL QUARTER
<TABLE>
<CAPTION>
CLASS OF DATE OF TITLE OF NUMBER OF SHARES AGGREGATE FORM OF
PURCHASERS(1) SALE NHANCEMENT PURCHASE CONSIDERATION
SECURITIES PRICE
- ------------------------------------ ------------- ---------------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Options granted to five employees 4/19/99 Shares of
(2) Common Stock 135,000 (2) (2)
Warrants granted to Director (3) Shares of
6/7/99 Common Stock 50,000 (3) (3)
Warrants granted to outside Shares of
financial consultant (4) 6/15/99 Common Stock 200,000 (4) (4)
Warrants granted to buyers of Shares of
Preferred Stock (5) 6/15/99 Common Stock 375,000 (5) (5)
</TABLE>
(1) The grant of options and warrants to the individuals identified in the
table above were made in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act"), and/or Regulation D promulgated
thereunder.
(2) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options are incentive stock options,
generally expire ten years from the date of grant and become
exercisable based on the Company and individual performance for 1/3 of
the shares on the first year anniversary of the date of grant, 1/3 on
the second anniversary of the date of grant and 1/3 on the third
anniversary of the date of grant. The exercise price on the date of
grant was equal to or greater than 100% of the fair market value as
determined on the date of grant.
(3) The warrants were granted to a Director of the Company. The terms of
the warrants are for three years. The exercise price on the date of
grant was equal to or greater than 100% of the fair market value as
determined on the date of grant.
(4) The warrants were granted to an outside consultant retained to assist
the Company in acquisitions and financings. The terms of the warrants
are for three years. The exercise price on the date of grant was equal
to or greater than 100% of the fair market value as determined on the
date of grant.
(5) The warrants were granted to the buyers of the Series A Convertible
Preferred Stock issued by the Company pursuant to the terms of the
Amendment dated June 11, 1999 to the Securities Purchase Agreement
dated April 13, 1998. The terms of the warrants are for three years.
The exercise price on the date of grant was equal to or greater than
110% of the fair market value as determined on the date of grant.
200,000 of these warrants may only be exercised if the Company redeems
the Preferred Stock pursuant to the terms of the Securities Purchase
Agreement, as amended, and the Company's Certificate of Designations,
as amended.
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 12, 1999, a Special Meeting of Shareholders of NHancement
Technologies Inc. was held at the Company's offices in Fremont, California.
At the meeting the shareholders approved the following proposals:
<TABLE>
<CAPTION>
FOR WITHHELD
--------- --------
<S> <C> <C>
Ratify and Approve the issuance of 2,441 shares 2,263,939 113,463
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.
To Approve the issuance of an additional 17,500 2,263,939 113,463
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.
</TABLE>
The foregoing matters are described in the Company's definitive proxy
statement dated March 25, 1999.
On April 20, 1999 the 1999 Annual Meeting of Shareholders of NHancement
Technologies Inc. was held at the Company's offices in Fremont, California.
At the meeting the following individuals were elected to serve as directors
until the next Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
NOMINEES FOR WITHHELD
-------- --------- --------
<S> <C> <C>
Douglas S. Zorn 4,537,003 15,104
James S. Gillespie 4,537,003 15,104
Robert J. Schmier 4,537,003 15,104
N. Bruce Walko 4,529,003 23,104
</TABLE>
In addition the shareholders approved the following proposal:
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAINED NOT VOTED
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Ratify the appointment of BDO Seidman as the 4,518,966 26,541 6,100 500
Company's auditors for the fiscal year ending
September 30, 1999.
</TABLE>
The foregoing matters are described in the Company's definitive proxy
statement dated March 26, 1999.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of the Quarterly Report on
Form 10-QSB
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------ --------------------------------------------------------------
<S> <C>
4.10 Form of Warrant dated June 15, 1999, delivered to purchasers
of Series A Convertible Preferred Stock.
4.11 Form of Warrant dated June 15, 1999, delivered to purchasers
of Series A Convertible Preferred Stock (exercise
contingent on redemption of Preferred Stock).
4.12 Warrant Agreement dated June 7, 1999, between the Company and
James S. Gillespie.
4.13 Warrant Agreement dated June 15, 1999, between the Company and
Grady & Hatch and Company, Inc.
10.50 Termination, Consulting and Confidentiality Agreement dated
June 7, 1999 between James S. Gillespie and the Company.
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
A report on Form 8-K dated June 3, 1999 was filed with the Commission
on June 15, 1999 reporting matters under Item 5 (Other Events).
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NHANCEMENT TECHNOLOGIES INC.
By: /s/ Douglas S. Zorn
-------------------------------
Date: July 27, 1999 Douglas S. Zorn
President and Chief Executive Officer
(Acting Principal Accounting Officer)
28
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------ ---------------------------------------------------------------
<S> <C>
4.10 Form of Warrant dated June 15, 1999, delivered to purchasers
of Series A Convertible Preferred Stock.
4.11 Form of Warrant dated June 15, 1999, delivered to purchasers
of Series A Convertible Preferred Stock (exercise
contingent on redemption of Preferred Stock).
4.12 Warrant Agreement dated June 7, 1999, between the Company and
James S. Gillespie.
4.13 Warrant Agreement dated June 15, 1999, between the Company and
Grady & Hatch and Company, Inc.
10.50 Termination, Consulting and Confidentiality Agreement dated
June 7, 1999 between James S. Gillespie and the Company.
27.0 Financial Data Schedule
</TABLE>
29
<PAGE>
Exhibit 4.10
NHANCEMENT TECHNOLOGIES INC.
Issued as of the 15th day (1) Aggregate Price: $_______________
of June, 1999 (2) Initial Warrant Price: $1.37
(3) Number of Shares Initially
Subject to Warrant:______________
NEITHER THIS WARRANT, NOR THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF,
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
SECURITIES ACT"), OR QUALIFIED OR REGISTERED UNDER CALIFORNIA OR OTHER
APPLICABLE SECURITIES LAWS ("STATE SECURITIES LAWS"), AND THIS WARRANT HAS
BEEN, AND THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF WILL BE,
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF. NO SUCH SALE OR OTHER DISPOSITION MAY BE MADE
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 SECURITIES ACT AND
COMPLIANCE WITH THE APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SAID
REGISTRATION IS NOT REQUIRED UNDER THE 1933 SECURITIES ACT AND THAT
APPLICABLE STATE SECURITIES LAWS HAVE BEEN SATISFIED.
COMMON STOCK WARRANT
(IMMEDIATELY EXERCISABLE)
This certifies that_____________,("PURCHASER"), whose address for
notice is located_______________________, or any party to whom this Warrant
is assigned in compliance with the terms hereof (Purchaser and any such
assignee being hereinafter sometimes referenced as "HOLDER"), is entitled to
subscribe for and purchase, subject to Section 2.8 hereof, during the period
commencing at the issue date set forth above and ending at 5:00 p.m.,
California, local time, on the third (3rd) anniversary of such issue date,
the number of shares of fully paid and nonassessable Common Stock ("COMMON
STOCK") of NHANCEMENT TECHNOLOGIES INC, A DELAWARE CORPORATION (the
"COMPANY"), that have an aggregate purchase price equal to the Aggregate
Price as defined below. The purchase price of each such share shall be equal
to the Warrant Price, as defined below. This Warrant has been issued pursuant
to the Amendment to Securities Purchase Agreement dated June 11, 1999 (the
"AMENDMENT") among Purchaser, the Company and certain others which amends the
Securities Purchase Agreement dated April 13, 1998, among the Company and
certain purchasers of the Company's Series A Preferred Stock (such Securities
Purchase Agreement as amended by the Amendment the "Securities Purchase
Agreement").
ARTICLE 1
DEFINITIONS
1.1 "AGGREGATE PRICE" shall be $_____________________.
1.2 "WARRANT PRICE" shall be One Dollar Thirty-Seven Cents ($1.37),
as adjusted herein.
ARTICLE 2
EXERCISE AND PAYMENT
2.1 CASH EXERCISE. The purchase rights represented by this Warrant may be
exercised by Holder, in whole or in part, by the surrender of this Warrant at
the principal office of the Company, located at the address set forth on the
signature page hereof, accompanied by the form
<PAGE>
Common Stock Warrant
Page 2
of Notice of Cash Exercise attached hereto as Exhibit "A-1", and by the
payment to the Company, by cash or by certified, cashier's or other check
acceptable to the Company, of an amount equal to the aggregate Warrant Price
of the shares being purchased.
2.2 NET ISSUE EXERCISE. In lieu of exercising this Warrant pursuant to
Section 2.1, Holder may elect to receive shares of Common Stock equal to the
value of this Warrant determined in the manner described below (or of any
portion thereof remaining unexercised) by surrender of this Warrant at the
principal office of the Company together with the form of Notice of Cashless
Exercise attached hereto as Exhibit "A-2", in which event the Company shall
issue to Holder a number of shares of the Company's Common Stock computed
using the following formula:
X = Y (A-B)
--------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under this Warrant
(at the date of such calculation).
A = the fair market value of one share of the Company's Common Stock
(at the date of such calculation).
B = Warrant Price.
2.3 FAIR MARKET VALUE. For purposes of this Article II, fair market value
of one share of the Company's Common Stock shall mean:
(i) The average of the closing bid prices of the Common Stock
quoted in the Over-The-Counter Market Summary, the last reported sale
price of the Common Stock or the closing price quoted on the Nasdaq
National Market System ("NMS") or on any exchange on which the Common
Stock is listed, whichever is applicable, as reported by Bloomberg, LP,
or, if not so reported, as reported in the Western Edition of The Wall
Street Journal for the last five (5) trading days prior to the date of
determination of fair market value; or
(ii) If the Common Stock is not traded Over-The-Counter, on the NMS
or on an exchange, the per share fair market value of the Common Stock
shall be as determined by mutual agreement of the Company and the
Holder; provided, however that if such agreement cannot be reached
within twenty (20) calendar days, such value shall be determined by an
independent appraiser appointed in good faith by the Company's Board of
Directors. The cost of such appraisal shall be borne equally by the
Company and the Holder. Such appraiser shall meet the following
criteria: (a) it shall not be associated or affiliated with the Company
in any fashion and shall not have previously provided services to the
Company; (b) the appraiser shall have reasonable qualifications to
appraise the value of the Common Stock; (c) it is not (and none of its
affiliates is) a promoter, director or officer of the Company or any of
its affiliates or an underwriter with respect to any of the securities
of the Company; and (d) it does not provide any advice or opinions of
the Company except as an appraiser under this section. In the event
such an appraisal is required it should be conducted under the
following procedures: the Company shall select the appraiser within ten
(10) days of receipt of written notice from the Holder that agreement
cannot be reached and the Company shall submit the name of such
appraiser to Holder. Twenty (20) days after selection of the appraiser,
the Company and the Holder shall each submit to the appraiser a single
value representing such party's contention as to the fair market value
of one share of the Company's Common Stock. Within fifteen (15) days
after receipt of the submission of the Company and the Holder, the
appraiser shall select one of the two values submitted by the parties,
and such value shall be the fair market value of one share of the
Common Stock for purpose of this Warrant. The appraiser shall have no
discretion to take any action other than selection of one of the two
values submitted to the appraiser. The parties may submit to the
appraiser and one another, at the time they submit their respective
single values, such supporting documentation as they
<PAGE>
Common Stock Warrant
Page 3
deem necessary or appropriate. The parties shall have the opportunity
seven (7) business days after receipt of the other party's proposed
valuation and supporting documentation to provide the appraiser and each
other with supplemental written information. The appraiser may, in its
discretion, hold a single six (6) hour hearing on valuation issues. If a
hearing is held, each party shall be allocated three (3) hours. The
appraiser may conduct the hearing in accordance with any rules of procedure
it deems appropriate. The value selected by the appraiser shall be final
and binding upon the parties without any further right of appeal.
2.4 STOCK CERTIFICATES. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Holder within a reasonable time and, unless
this Warrant has been fully exercised or has expired, a new Warrant
representing the remaining unexercised Aggregate Price shall also be issued
to Holder at such time.
2.5 AUTOMATIC EXERCISE. To the extent this Warrant is not previously
exercised, and if the fair market value of one share of the Company's Common
Stock is greater than the Warrant Price, as adjusted, this Warrant shall be
deemed automatically exercised in accordance with Section 2.2 hereof (even if
not surrendered) immediately before its expiration without any further action
by the Holder. For purposes of such automatic exercise, the fair market value
of one share of the Company's Common Stock upon such expiration shall be the
fair market value determined pursuant to Section 2.3 above. To the extent
this Warrant or any portion thereof is deemed automatically exercised
pursuant to this Section 2.5, the Company agrees to notify Holder within a
reasonable period of time of the number of shares of the Company's Common
Stock, if any, Holder is to receive by reason of such automatic exercise.
2.6 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all Common Stock which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof (excluding taxes based on the income of Holder). The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized and reserved for issuance a sufficient number of shares of
its Common Stock or other securities as would be required upon the full
exercise of the rights represented by this Warrant (including conversion of
all such Common Stock issuable hereunder).
2.7 FRACTIONAL SHARES. No fractional share of Common Stock will be issued
in connection with any exercise hereof; in lieu of a fractional share upon
complete exercise hereof, Holder may purchase a whole share by delivering
payment equal to the appropriate portion of the then effective Warrant Price.
2.8 LIMITATION ON EXERCISE. Notwithstanding the provisions of this
Warrant, the Securities Purchase Agreement or of the other Transaction
Agreements (as defined in the Securities Purchase Agreement) or of any other
warrant, right or option now or hereafter held by the Holder, in no event
(except (i) with respect to an automatic conversion, if any, of the Preferred
Stock as provided in its Certificate of Designations or the automatic
exercise of this Warrant as provided in Section 2.5 hereof, (ii) as
specifically provided in this Warrant as an exception to this provision, or
(iii) while there is outstanding a tender offer for any or all of the shares
of the Company's Common Stock) shall the Holder be entitled to exercise this
Warrant, or shall the Company have the obligation to issue shares upon such
exercise of all or any portion of this Warrant, to the extent that, after
such exercise the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder 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 or unexercised portion of the
Warrants), and (2) the number of shares of Common Stock issuable upon the
exercise of the Warrants with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder and
its affiliates of more than 9.99% of the outstanding shares of Common Stock
(after taking into account the shares to be issued to the Holder upon such
exercise). For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in
<PAGE>
Common Stock Warrant
Page 4
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
sentence. The Holder, by its acceptance of this Warrant, further agrees that
if the Holder transfers or assigns any of the Warrants to a party who or
which would not be considered such an affiliate, such assignment shall be
made subject to the transferee's or assignee's specific agreement to be bound
by the provisions of this Section 2.8 as if such transferee or assignee were
the original Holder hereof.
ARTICLE 3
CERTAIN ADJUSTMENTS OF NUMBER OF SHARES PURCHASABLE AND WARRANT PRICE
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time
to time upon the happening of certain events, as follows:
3.1 RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of: (i) any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant; (ii) any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification, change or exchange of outstanding securities issuable upon
exercise of this Warrant); or (iii) any sale or transfer to another
corporation of all, or substantially all, of the property of the Company,
then, and in each such event, the Company or such successor or purchasing
corporation, as the case may be, shall execute a new Warrant of like form,
tenor and effect and which will provide that Holder shall have the right to
exercise such new Warrant and purchase upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of this Warrant
(assuming for such purposes that this Warrant was fully exercisable without
any restrictions or conditions on exercise, provided, however that any such
restrictions or conditions shall continue to remain in effect), the kind and
amount of securities, money and property receivable upon such
reclassification, change, consolidation, merger, sale or transfer by a holder
of one share of Common Stock issuable upon exercise of this Warrant had this
Warrant been exercised immediately prior to such reclassification, change,
consolidation, merger, sale or transfer. Such new Warrant shall be as nearly
equivalent in all substantive respects as practicable to this Warrant and the
adjustments provided in this Article III and the provisions of this Section
3.1, shall similarly apply to successive reclassifications, changes,
consolidations, mergers, sales and transfers.
3.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall at any time
while this Warrant remains outstanding and less than fully exercised: (i)
divide its Company Stock, the Warrant Price shall be proportionately reduced;
or (ii) shall combine shares of its Common Stock, the Warrant Price shall be
proportionately increased.
3.3 STOCK DIVIDENDS. If the Company, at any time while this Warrant is
outstanding and unexpired, shall pay a dividend payable in, or make any other
distribution to holders of, Common Stock (except any distribution described
in Sections 3.1 and 3.2 hereof) then the Warrant Price shall be adjusted to
that price determined by multiplying the Warrant Price then in effect by a
fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution,
and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such dividend or distribution.
3.4 OTHER ACTION AFFECTING COMMON STOCK. If the Company takes any action
affecting its Common Stock after the date hereof (including dividends and
distributions), other than an action described in any of Sections 3.1 and 3.2
hereof, which would have an adverse effect upon Holder's rights hereunder,
the Warrant Price shall be adjusted downward in such manner and at such time
as the Board of Directors of the Company shall in good faith determine to be
equitable under the circumstances.
<PAGE>
Common Stock Warrant
Page 5
3.5 TIME OF ADJUSTMENTS TO THE WARRANT PRICE. All adjustments to the
Warrant Price and the number of shares purchasable hereunder, unless
otherwise specified herein, shall be effective as of the earlier of:
(i) the date of issue of the security causing the adjustment;
(ii) the date of sale of the security causing the adjustment;
(iii) the effective date of a division or combination of shares;
(iv) the record date of any action of holders of any class of the Company's
capital stock taken for the purpose of entitling shareholders to receive a
distribution or dividend payable in equity securities, provided that such
division, combination, distribution or dividend actually occurs.
3.6 NOTICE OF ADJUSTMENTS. In each case of an adjustment in the Warrant
Price and the number of shares purchasable hereunder, the Company, at its
expense, shall cause the Chief Financial Officer of the Company to compute
such adjustment and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based. The Company
shall promptly mail a copy of each such certificate to Holder pursuant to
Section 6.8 hereof.
3.7 DURATION OF ADJUSTED WARRANT PRICE. Following each adjustment of the
Warrant Price, such adjusted Warrant Price shall remain in effect until a
further adjustment of the Warrant Price.
3.8 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price pursuant to this Article III, the number of shares of Common Stock
purchasable hereunder shall be adjusted to the nearest whole share, to the
number obtained by dividing the Aggregate Price by the Warrant Price as
adjusted.
ARTICLE 4
TRANSFER, EXCHANGE AND LOSS
4.1 TRANSFER. This Warrant is transferable on the books of the Company at
its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with federal and state
securities laws. The Company shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any
partial transfer, the Company will issue and deliver to Holder a new Warrant
or Warrants with respect to the Warrants not so transferred. Notwithstanding
the foregoing, Holder shall not be entitled to transfer a number of shares or
an interest in this Warrant representing less than five percent (5%) of the
aggregate shares initially covered by this Warrant (as presently constituted,
with appropriate adjustment being made in the event of stock splits,
combinations, reorganizations and the like occurring after the issue date
hereof). Any transferee shall be subject to the same restrictions on transfer
with respect to this Warrant as the Purchaser.
4.2 SECURITIES LAWS. Upon any issuance of shares of Common Stock upon
exercise of this Warrant, it shall be the Company's responsibility to comply
with the requirements of: (1) the Securities Act of 1933, as amended; (2) the
Securities Exchange Act of 1934, as amended; (3) any applicable listing
requirements of any national securities exchange; (4) any state securities
regulation or "Blue Sky" laws; and (5) requirements under any other law or
regulation applicable to the issuance or transfer of such shares. If required
by the Company, in connection with each issuance of shares of Common Stock
upon exercise of this Warrant, the Holder will give: (i) assurances in
writing, satisfactory to the Company, that such shares are not being
purchased with a view to the distribution thereof in violation of applicable
laws, (ii) sufficient information, in writing, to enable the Company to rely
on exemptions from the registration or qualification requirements of
applicable laws, if available, with respect to such exercise, and (iii) its
cooperation to the Company in connection with such compliance.
<PAGE>
Common Stock Warrant
Page 6
4.3 EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants which represent, in the aggregate, the Aggregate Price
hereof; each new Warrant to represent the right to purchase such portion of
the Aggregate Price as Holder shall designate at the time of such exchange.
Each new Warrant shall be identical in form and content to this Warrant,
except for appropriate changes in the number of shares of Common Stock
covered thereby, the percentage stated in Section 4.1 above, and any other
changes which are necessary in order to prevent the Warrant exchange from
changing the respective rights and obligations of the Company and the Holder
as they existed immediately prior to such exchange.
4.4 LOSS OR MUTILATION. Upon receipt by the Company of evidence
satisfactory to it of the ownership of, and the loss, theft, destruction or
mutilation of, this Warrant and (in the case of loss, theft, or destruction)
of indemnity satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation hereof, the Company will execute and deliver in
lieu hereof a new Warrant.
ARTICLE 5
HOLDER RIGHTS
5.1 NO SHAREHOLDER RIGHTS UNTIL EXERCISE. No Holder hereof, solely by
virtue hereof, shall be entitled to any rights as a shareholder of the
Company. Holder shall have all rights of a shareholder with respect to
securities purchased upon exercise hereof at the time: (i) the cash exercise
price for such securities is delivered pursuant to Section 2.1 hereof and
this Warrant is surrendered, (ii) of delivery of notice of cashless exercise
pursuant to Section 2.2 hereof and this Warrant is surrendered, or (iii) of
automatic exercise hereof (even if not surrendered) pursuant to Section 2.5
hereof.
ARTICLE 6
MISCELLANEOUS
6.1 GOVERNMENTAL APPROVALS. The Company will from time to time take all
action which may be necessary to obtain and keep effective any and all
permits, consents and approvals of governmental agencies and authorities and
securities acts filings under federal and state laws, which may be or become
requisite in connection with the issuance, sale, and delivery of this
Warrant, and the issuance, sale and delivery of the Common Stock or other
securities or property issuable or deliverable upon exercise of this Warrant.
6.2 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT EXCEPT
AS SET FORTH BELOW, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF
THIS WARRANT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND
ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO.
6.3 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise
provided in, this Warrant, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the
benefit of the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
6.4 SEVERABILITY. If any one or more provisions of this Warrant, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further
agree to replace any such void or unenforceable provisions of this Warrant
with valid and enforceable provisions which will achieve, to the extent
possible, the economic, business and other purposes of the void or
unenforceable provisions.
<PAGE>
Common Stock Warrant
Page 7
6.5 DEFAULT, AMENDMENT AND WAIVERS. This Warrant may be amended upon the
written consent of the Company and the holders in the aggregate of the right
to purchase a majority of the number of unexercised shares covered by the
Warrant initially issued by the Company pursuant to the Consulting Agreement.
The waiver by a party of any breach hereof for default in payment of any
amount due hereunder or default in the performance hereof shall not be deemed
to constitute a waiver of any other default or any succeeding breach or
default. The failure to cure any breach of any term of this Warrant within
ten (10) days of written notice thereof shall constitute an event of default
under this Warrant.
6.6 NO WAIVER. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.
6.7 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any
part of this Warrant, the prevailing party shall be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys'
fees to be fixed by the court (including without limitation, costs, expenses
and fees on any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment. A party not entitled to recover its costs shall not be entitled to
recover attorneys' fees. No sum for attorneys' fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
6.8 NOTICES. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Warrant, each such
communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States certified mail,
postage prepaid, return receipt requested, addressed as follows:
Company: NHancement Technologies Inc.
39420 Liberty Street
Suite 250
Fremont, California 94538
Attn: Douglas S. Zorn
Holder: __________________________________
__________________________________
__________________________________
Such communications shall be effective when they are received by the
addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective three (3) business days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
6.9 TIME. Time is of the essence of this Warrant.
6.10 CONSTRUCTION OF AGREEMENT. A reference in this Warrant 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 3 shall include a reference to Sections 3.5 and 3.7).
The titles and headings herein are for reference purposes only and shall not
in any manner affect the interpretation of this Warrant.
6.11 NO ENDORSEMENT. Holder understands that no federal or state securities
administrator has made any finding or determination relating to the fairness
of investment in the Company or purchase of the Common Stock hereunder and
that no federal or state securities administrator has recommended or endorsed
the offering of securities by the Company hereunder.
<PAGE>
Common Stock Warrant
Page 8
6.12 PRONOUNS. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
6.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby, and to carry into effect the
intents and purposes of this Warrant.
NHancement Technologies Inc., a Delaware corporation
By: ___________________________________________
Douglas S. Zorn, Chief Executive Officer
<PAGE>
Common Stock Warrant
Page 9
EXHIBIT A-1
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
BY CASH PAYMENT OF WARRANT PRICE
DATE: _____________
_________________________ Aggregate Price of Warrant
_________________________ Before Exercise: $_______________
_________________________ Aggregate Price
Being Exercised: $_______________
Attention: Chief Financial Officer
Warrant Price: $_______________per share
Number of Shares of Common Stock to be
Issued Under this Notice:_______________
Remainder Aggregate
Price (if any) After Issuance: $_________
CASH EXERCISE
Gentlemen:
The undersigned registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT"), hereby irrevocably exercises such Warrant
for, and purchases thereunder, shares of the Common Stock of NHancement
Technologies, Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $________, thereby leaving a remainder Aggregate Price
(if any) equal to $________. Such exercise shall be pursuant to the cash
exercise provisions of Section 2.1 of the Warrant. Therefore, Holder makes
payment with this Notice of Exercise by way of check payable to the Company
in the amount of $________. Such check is payment in full under the Warrant
for ________ shares of Common Stock based upon the Warrant Price of $________
per share, as currently in effect under the Warrant. Holder requests that the
certificates for the purchased shares of Common Stock be issued in the name
of and delivered to "___________________",___________________. To the extent
the foregoing exercise is for less than the full Aggregate Price, a
Replacement Warrant representing the remainder of the Aggregate Price and
otherwise of like form, tenor and effect should be delivered to Holder along
with the share certificates evidencing the Common Stock issued in response to
this Notice of Exercise.
By:________________________________
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
Common Stock Warrant
Page 10
EXHIBIT A-2
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
[DATE]
___________________________ Aggregate Price of Warrant
___________________________ Before Exercise: $_______________
___________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $_______________
Warrant Price: $_______________per share
Number of Shares of Common Stock to be
Issued Under this Notice:_______________
Remainder Aggregate
Price (if any) After Issuance: $________
CASHLESS EXERCISE
Gentlemen:
The undersigned, registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT", hereby irrevocably exercises such Warrant for,
and purchases thereunder, shares of the Common Stock of NHancement
Technologies Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $________, thereby leaving a remainder Aggregate Price
(if any) equal to $________. Such exercise shall be pursuant to the net issue
exercise provisions of Section 2.2 of the Warrant; therefore, Holder makes no
payment with this Notice of Exercise. The number of shares to be issued
pursuant to this exercise shall be determined by reference to the formula in
Section 2.2 of the Warrant which, by reference to Section 2.3, requires the
use of the current per share fair market value of the Company's Common Stock.
The current fair market value of one share of the Company's Common Stock
shall be determined in the manner provided in Section 2.3, which amount has
been determined or agreed to by Holder and the Company to be $________, which
figure is acceptable to Holder for calculations of the number of shares of
Common Stock issuable pursuant to this Notice of Exercise [SPECIFY ANY
ALTERNATIVE ARRANGEMENTS TO THE FOREGOING, IF NECESSARY OR APPLICABLE]. Holder
requests that the certificates for the purchased shares of Common Stock be
issued in the name of and delivered to "__________________",__________________.
To the extent the foregoing exercise is for less than the full Aggregate Price
of the Warrant, a replacement Warrant representing the remainder of the
Aggregate Price (and otherwise of like form, tenor and effect) shall be
delivered to Holder along with the share certificate evidencing the Common
Stock issued in response to this Notice of Exercise.
By:________________________________
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
Issued as of the 15th day (1) Aggregate Price: SEE
of June, 1999 EXHIBIT "A"
(2) Initial Warrant Price: $1.37
(3) Number of Shares Initially
Subject to Warrant: SEE
EXHIBIT "A"
NEITHER THIS WARRANT, NOR THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF,
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
SECURITIES ACT"), OR QUALIFIED OR REGISTERED UNDER CALIFORNIA OR OTHER
APPLICABLE SECURITIES LAWS ("STATE SECURITIES LAWS"), AND THIS WARRANT HAS
BEEN, AND THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF WILL BE,
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF. NO SUCH SALE OR OTHER DISPOSITION MAY BE MADE
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 SECURITIES ACT AND
COMPLIANCE WITH THE APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SAID
REGISTRATION IS NOT REQUIRED UNDER THE 1933 SECURITIES ACT AND THAT
APPLICABLE STATE SECURITIES LAWS HAVE BEEN SATISFIED.
THE EXERCISABILITY OF THIS WARRANT IS RESTRICTED AND BASED UPON THE
OCCURRENCE OF CERTAIN EVENTS AS SET FORTH IN EXHIBIT "A."
COMMON STOCK WARRANT
(EXERCISABLE ONLY ON REDEMPTION OF COMPANY'S SERIES A PREFERRED STOCK)
This certifies that ___________, ("PURCHASER"), whose address for
notice is located ______________________, or any party to whom this Warrant
is assigned in compliance with the terms hereof (Purchaser and any such
assignee being hereinafter sometimes referenced as "HOLDER"), is entitled to
subscribe for and purchase, subject to Section 2.8 hereof, during the period
set forth on attached Exhibit "A," the number of shares of fully paid and
nonassessable Common Stock ("COMMON STOCK") of NHANCEMENT TECHNOLOGIES INC, A
DELAWARE CORPORATION (the "COMPANY"), that have an aggregate purchase price
equal to the Aggregate Price as defined below. The purchase price of each
such share shall be equal to the Warrant Price, as defined below. This
Warrant has been issued pursuant to the Amendment to Securities Purchase
Agreement dated June 11, 1999 (the "AMENDMENT") among Purchaser, the Company
and certain others which amends the Securities Purchase Agreement dated April
13, 1998, among the Company and certain purchasers of the Company's Series A
Preferred Stock (such Securities Purchase Agreement as amended by the
Amendment the "Securities Purchase Agreement").
ARTICLE 1
DEFINITIONS
1.1 "AGGREGATE PRICE" shall be as set forth on Exhibit "A."
1.2 "WARRANT PRICE" shall be One Dollar Thirty-Seven Cents
($1.37), as adjusted herein.
<PAGE>
Common Stock Warrant
Page 2
ARTICLE 2
EXERCISE AND PAYMENT
2.1 CASH EXERCISE. The purchase rights represented by this Warrant may be
exercised by Holder, in whole or in part, by the surrender of this Warrant at
the principal office of the Company, located at the address set forth on the
signature page hereof, accompanied by the form of Notice of Cash Exercise
attached hereto as Exhibit "B-1", and by the payment to the Company, by cash
or by certified, cashier's or other check acceptable to the Company, of an
amount equal to the aggregate Warrant Price of the shares being purchased.
2.2 NET ISSUE EXERCISE. In lieu of exercising this Warrant pursuant to
Section 2.1, Holder may elect to receive shares of Common Stock equal to the
value of this Warrant determined in the manner described below (or of any
portion thereof remaining unexercised) by surrender of this Warrant at the
principal office of the Company together with the form of Notice of Cashless
Exercise attached hereto as Exhibit "B-2", in which event the Company shall
issue to Holder a number of shares of the Company's Common Stock computed
using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation).
B = Warrant Price.
2.3 FAIR MARKET VALUE. For purposes of this Article II, fair market value
of one share of the Company's Common Stock shall mean:
(i) The average of the closing bid prices of the Common Stock quoted in
the Over-The-Counter Market Summary, the last reported sale price of the
Common Stock or the closing price quoted on the Nasdaq National Market
System ("NMS") or on any exchange on which the Common Stock is listed,
whichever is applicable, as reported by Bloomberg, LP, or, if not so
reported, as reported in the Western Edition of The Wall Street Journal
for the last five (5) trading days prior to the date of determination of
fair market value; or
(ii) If the Common Stock is not traded Over-The-Counter, on the NMS or
on an exchange, the per share fair market value of the Common Stock
shall be as determined by mutual agreement of the Company and the
Holder; provided, however that if such agreement cannot be reached
within twenty (20) calendar days, such value shall be determined by an
independent appraiser appointed in good faith by the Company's Board of
Directors. The cost of such appraisal shall be borne equally by the
Company and the Holder. Such appraiser shall meet the following
criteria: (a) it shall not be associated or affiliated with the Company
in any fashion and shall not have previously provided services to the
Company; (b) the appraiser shall have reasonable qualifications to
appraise the value of the Common Stock; (c) it is not (and none of its
affiliates is) a promoter, director or officer of the Company or any of
its affiliates or an underwriter with respect to any of the securities
of the Company; and (d) it does not provide any advice or opinions of
the Company except as an appraiser under this section. In the event such
an appraisal is required it should be conducted under the following
procedures: the Company shall select the appraiser within ten (10) days
of receipt of written notice from the Holder that agreement cannot be
reached and the Company shall submit the name of such appraiser to
Holder. Twenty (20) days after selection of the appraiser, the Company
and the Holder shall each submit to the appraiser a single value
representing such
<PAGE>
Common Stock Warrant
Page 3
party's contention as to the fair market value of one share of the
Company's Common Stock. Within fifteen (15) days after receipt of the
submission of the Company and the Holder, the appraiser shall select one
of the two values submitted by the parties, and such value shall be the
fair market value of one share of the Common Stock for purpose of this
Warrant. The appraiser shall have no discretion to take any action other
than selection of one of the two values submitted to the appraiser. The
parties may submit to the appraiser and one another, at the time they
submit their respective single values, such supporting documentation as
they deem necessary or appropriate. The parties shall have the
opportunity seven (7) business days after receipt of the other party's
proposed valuation and supporting documentation to provide the appraiser
and each other with supplemental written information. The appraiser may,
in its discretion, hold a single six (6) hour hearing on valuation
issues. If a hearing is held, each party shall be allocated three (3)
hours. The appraiser may conduct the hearing in accordance with any
rules of procedure it deems appropriate. The value selected by the
appraiser shall be final and binding upon the parties without any
further right of appeal.
2.4 STOCK CERTIFICATES. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Holder within a reasonable time and, unless
this Warrant has been fully exercised or has expired, a new Warrant
representing the remaining unexercised Aggregate Price shall also be issued
to Holder at such time.
2.5 AUTOMATIC EXERCISE. To the extent this Warrant is not previously
exercised, and if the fair market value of one share of the Company's Common
Stock is greater than the Warrant Price, as adjusted, this Warrant shall be
deemed automatically exercised in accordance with Section 2.2 hereof (even if
not surrendered) immediately before its expiration without any further action
by the Holder. For purposes of such automatic exercise, the fair market value
of one share of the Company's Common Stock upon such expiration shall be the
fair market value determined pursuant to Section 2.3 above. To the extent
this Warrant or any portion thereof is deemed automatically exercised
pursuant to this Section 2.5, the Company agrees to notify Holder within a
reasonable period of time of the number of shares of the Company's Common
Stock, if any, Holder is to receive by reason of such automatic exercise.
2.6 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all Common Stock which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof (excluding taxes based on the income of Holder). The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized and reserved for issuance a sufficient number of shares of
its Common Stock or other securities as would be required upon the full
exercise of the rights represented by this Warrant (including conversion of
all such Common Stock issuable hereunder).
2.7 FRACTIONAL SHARES. No fractional share of Common Stock will be issued
in connection with any exercise hereof; in lieu of a fractional share upon
complete exercise hereof, Holder may purchase a whole share by delivering
payment equal to the appropriate portion of the then effective Warrant Price.
2.8 LIMITATION ON EXERCISE. Notwithstanding the provisions of this Warrant,
the Securities Purchase Agreement or of the other Transaction Agreements (as
defined in the Securities Purchase Agreement) or of any other warrant, right
or option now or hereafter held by the Holder, in no event (except (i) with
respect to an automatic conversion, if any, of the Preferred Stock as
provided in its Certificate of Designations or the automatic exercise of this
Warrant as provided in Section 2.5 hereof, (ii) as specifically provided in
this Warrant as an exception to this provision, or (iii) while there is
outstanding a tender offer for any or all of the shares of the Company's
Common Stock) shall the Holder be entitled to exercise this Warrant, or shall
the Company have the obligation to issue shares upon such exercise of all or
any portion of this Warrant, to the extent that, after such exercise the sum
of (1) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates (other than shares of Common Stock
<PAGE>
Common Stock Warrant
Page 4
which may be deemed beneficially owned through the ownership of the
unconverted portion of the Preferred Stock or unexercised portion of the
Warrants), and (2) the number of shares of Common Stock issuable upon the
exercise of the Warrants with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder and
its affiliates of more than 9.99% of the outstanding shares of Common Stock
(after taking into account the shares to be issued to the Holder upon such
exercise). 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 sentence. The Holder, by its
acceptance of this Warrant, further agrees that if the Holder transfers or
assigns any of the Warrants to a party who or which would not be considered
such an affiliate, such assignment shall be made subject to the transferee's
or assignee's specific agreement to be bound by the provisions of this
Section 2.8 as if such transferee or assignee were the original Holder hereof.
ARTICLE 3
CERTAIN ADJUSTMENTS OF NUMBER OF SHARES PURCHASABLE AND WARRANT PRICE
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time
to time upon the happening of certain events, as follows:
3.1 RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of: (i) any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant; (ii) any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification, change or exchange of outstanding securities issuable upon
exercise of this Warrant); or (iii) any sale or transfer to another
corporation of all, or substantially all, of the property of the Company,
then, and in each such event, the Company or such successor or purchasing
corporation, as the case may be, shall execute a new Warrant of like form,
tenor and effect and which will provide that Holder shall have the right to
exercise such new Warrant and purchase upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of this Warrant,
(assuming for such purposes that this Warrant was fully exercisable without
any restrictions or conditions on exercise, provided, however that any such
restrictions or conditions shall continue to remain in effect), the kind and
amount of securities, money and property receivable upon such
reclassification, change, consolidation, merger, sale or transfer by a holder
of one share of Common Stock issuable upon exercise of this Warrant had this
Warrant been exercised immediately prior to such reclassification, change,
consolidation, merger, sale or transfer. Such new Warrant shall be as nearly
equivalent in all substantive respects as practicable to this Warrant and the
adjustments provided in this Article III and the provisions of this Section
3.1, shall similarly apply to successive reclassifications, changes,
consolidations, mergers, sales and transfers.
3.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall at any time
while this Warrant remains outstanding and less than fully exercised: (i)
divide its Company Stock, the Warrant Price shall be proportionately reduced;
or (ii) shall combine shares of its Common Stock, the Warrant Price shall be
proportionately increased.
3.3 STOCK DIVIDENDS. If the Company, at any time while this Warrant is
outstanding and unexpired, shall pay a dividend payable in, or make any other
distribution to holders of, Common Stock (except any distribution described
in Sections 3.1 and 3.2 hereof) then the Warrant Price shall be adjusted to
that price determined by multiplying the Warrant Price then in effect by a
fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution,
and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such dividend or distribution.
<PAGE>
Common Stock Warrant
Page 5
3.4 OTHER ACTION AFFECTING COMMON STOCK. If the Company takes any action
affecting its Common Stock after the date hereof (including dividends and
distributions), other than an action described in any of Sections 3.1 and 3.2
hereof, which would have an adverse effect upon Holder's rights hereunder,
the Warrant Price shall be adjusted downward in such manner and at such time
as the Board of Directors of the Company shall in good faith determine to be
equitable under the circumstances.
3.5 TIME OF ADJUSTMENTS TO THE WARRANT PRICE. All adjustments to the
Warrant Price and the number of shares purchasable hereunder, unless
otherwise specified herein, shall be effective as of the earlier of:
(i) the date of issue of the security causing the adjustment;
(ii)the date of sale of the security causing the adjustment;
(iii) the effective date of a division or combination of shares;
(iv)the record date of any action of holders of any class of the Company's
capital stock taken for the purpose of entitling shareholders to receive a
distribution or dividend payable in equity securities, provided that such
division, combination, distribution or dividend actually occurs.
3.6 NOTICE OF ADJUSTMENTS. In each case of an adjustment in the Warrant
Price and the number of shares purchasable hereunder, the Company, at its
expense, shall cause the Chief Financial Officer of the Company to compute
such adjustment and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based. The Company
shall promptly mail a copy of each such certificate to Holder pursuant to
Section 6.8 hereof.
3.7 DURATION OF ADJUSTED WARRANT PRICE. Following each adjustment of the
Warrant Price, such adjusted Warrant Price shall remain in effect until a
further adjustment of the Warrant Price.
3.8 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price pursuant to this Article III, the number of shares of Common Stock
purchasable hereunder shall be adjusted to the nearest whole share, to the
number obtained by dividing the Aggregate Price by the Warrant Price as
adjusted.
ARTICLE 4
TRANSFER, EXCHANGE AND LOSS
4.1 TRANSFER. This Warrant is transferable on the books of the Company at
its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with federal and state
securities laws. The Company shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any
partial transfer, the Company will issue and deliver to Holder a new Warrant
or Warrants with respect to the Warrants not so transferred. Notwithstanding
the foregoing, Holder shall not be entitled to transfer a number of shares or
an interest in this Warrant representing less than five percent (5%) of the
aggregate shares initially covered by this Warrant (as presently constituted,
with appropriate adjustment being made in the event of stock splits,
combinations, reorganizations and the like occurring after the issue date
hereof). Any transferee shall be subject to the same restrictions on transfer
with respect to this Warrant as the Purchaser.
4.2 SECURITIES LAWS. Upon any issuance of shares of Common Stock upon
exercise of this Warrant, it shall be the Company's responsibility to comply
with the requirements of: (1) the Securities Act of 1933, as amended; (2) the
Securities Exchange Act of 1934, as amended; (3) any applicable listing
requirements of any national securities exchange; (4) any state securities
regulation or "Blue Sky" laws; and (5) requirements under any other law or
regulation
<PAGE>
Common Stock Warrant
Page 6
applicable to the issuance or transfer of such shares. If required by the
Company, in connection with each issuance of shares of Common Stock upon
exercise of this Warrant, the Holder will give: (i) assurances in writing,
satisfactory to the Company, that such shares are not being purchased with a
view to the distribution thereof in violation of applicable laws, (ii)
sufficient information, in writing, to enable the Company to rely on
exemptions from the registration or qualification requirements of applicable
laws, if available, with respect to such exercise, and (iii) its cooperation
to the Company in connection with such compliance.
4.3 EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants which represent, in the aggregate, the Aggregate Price
hereof; each new Warrant to represent the right to purchase such portion of
the Aggregate Price as Holder shall designate at the time of such exchange.
Each new Warrant shall be identical in form and content to this Warrant,
except for appropriate changes in the number of shares of Common Stock
covered thereby, the percentage stated in Section 4.1 above, and any other
changes which are necessary in order to prevent the Warrant exchange from
changing the respective rights and obligations of the Company and the Holder
as they existed immediately prior to such exchange.
4.4 LOSS OR MUTILATION. Upon receipt by the Company of evidence
satisfactory to it of the ownership of, and the loss, theft, destruction or
mutilation of, this Warrant and (in the case of loss, theft, or destruction)
of indemnity satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation hereof, the Company will execute and deliver in
lieu hereof a new Warrant.
ARTICLE 5
HOLDER RIGHTS
5.1 NO SHAREHOLDER RIGHTS UNTIL EXERCISE. No Holder hereof, solely by
virtue hereof, shall be entitled to any rights as a shareholder of the
Company. Holder shall have all rights of a shareholder with respect to
securities purchased upon exercise hereof at the time: (i) the cash exercise
price for such securities is delivered pursuant to Section 2.1 hereof and
this Warrant is surrendered, (ii) of delivery of notice of cashless exercise
pursuant to Section 2.2 hereof and this Warrant is surrendered, or (iii) of
automatic exercise hereof (even if not surrendered) pursuant to Section 2.5
hereof.
ARTICLE 6
MISCELLANEOUS
6.1 GOVERNMENTAL APPROVALS. The Company will from time to time take all
action which may be necessary to obtain and keep effective any and all
permits, consents and approvals of governmental agencies and authorities and
securities acts filings under federal and state laws, which may be or become
requisite in connection with the issuance, sale, and delivery of this
Warrant, and the issuance, sale and delivery of the Common Stock or other
securities or property issuable or deliverable upon exercise of this Warrant.
6.2 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT EXCEPT
AS SET FORTH BELOW, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF
THIS WARRANT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND
ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO.
6.3 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise
provided in, this Warrant, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the
benefit of the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
<PAGE>
Common Stock Warrant
Page 7
6.4 SEVERABILITY. If any one or more provisions of this Warrant, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further
agree to replace any such void or unenforceable provisions of this Warrant
with valid and enforceable provisions which will achieve, to the extent
possible, the economic, business and other purposes of the void or
unenforceable provisions.
6.5 DEFAULT, AMENDMENT AND WAIVERS. This Warrant may be amended upon the
written consent of the Company and the holders in the aggregate of the right
to purchase a majority of the number of unexercised shares covered by the
Warrant initially issued by the Company pursuant to the Consulting Agreement.
The waiver by a party of any breach hereof for default in payment of any
amount due hereunder or default in the performance hereof shall not be deemed
to constitute a waiver of any other default or any succeeding breach or
default. The failure to cure any breach of any term of this Warrant within
ten (10) days of written notice thereof shall constitute an event of default
under this Warrant.
6.6 NO WAIVER. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.
6.7 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any
part of this Warrant, the prevailing party shall be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys'
fees to be fixed by the court (including without limitation, costs, expenses
and fees on any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment. A party not entitled to recover its costs shall not be entitled to
recover attorneys' fees. No sum for attorneys' fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
6.8 NOTICES. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Warrant, each such
communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States certified mail,
postage prepaid, return receipt requested, addressed as follows:
Company: NHancement Technologies Inc.
39420 Liberty Street
Suite 250
Fremont, California 94538
Attn: Douglas S. Zorn
Holder: ___________________________
___________________________
___________________________
Such communications shall be effective when they are received by the
addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective three (3) business days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
6.9 TIME. Time is of the essence of this Warrant.
6.10 CONSTRUCTION OF AGREEMENT. A reference in this Warrant 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 3 shall include a reference to Sections 3.5 and 3.7).
The titles and headings herein are for reference purposes only and shall not
in any manner affect the interpretation of this Warrant.
<PAGE>
Common Stock Warrant
Page 8
6.11 NO ENDORSEMENT. Holder understands that no federal or state securities
administrator has made any finding or determination relating to the fairness
of investment in the Company or purchase of the Common Stock hereunder and
that no federal or state securities administrator has recommended or endorsed
the offering of securities by the Company hereunder.
6.12 PRONOUNS. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
6.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and
to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described
herein and contemplated hereby, and to carry into effect the intents and
purposes of this Warrant.
NHancement Technologies Inc., a Delaware corporation
By:
--------------------------------------------
Douglas S. Zorn, Chief Executive Officer
<PAGE>
Common Stock Warrant
Page 9
EXHIBIT A
WARRANT TERMS
On even date herewith, Purchaser purchased shares of Series A
Preferred Stock of the Company (the "SERIES A") which, pursuant to Section 7
of the Company's Certificate of Designations relating to the Series A, are
redeemable at the option of the Company. This Warrant shall not be
exercisable unless and until the date (the "REDEMPTION DATE") the Company
redeems such Series A and shall then be exercisable for an aggregate number
of shares of the Company's Common Stock equal to ten thousand shares (10,000)
of Common Stock hereunder for each increment of Eighty Seven Thousand Five
Hundred Dollars ($87,500) in principal amount of shares of Series A issued to
Purchaser on even date herewith so redeemed (subject to pro rata adjustment
for redemptions less than such increments). In such event, this Warrant shall
be exercisable beginning on the Redemption Date and ending at 5:00 p.m.,
California, local time, on the third anniversary of such Redemption Date.
<PAGE>
Common Stock Warrant
Page 10
EXHIBIT B-1
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
BY CASH PAYMENT OF WARRANT PRICE
DATE: ____________
<TABLE>
<S> <C>
_________________________ Aggregate Price of Warrant
_________________________ Before Exercise: $________________
_________________________ Aggregate Price
Being Exercised: $________________
Attention: Chief Financial Officer
Warrant Price: $____________per share
Number of Shares of Common Stock to be Issued
Under this Notice:___________________
Remainder Aggregate
Price (if any) After Issuance: $___________
</TABLE>
CASH EXERCISE
Gentlemen:
The undersigned registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT"), hereby irrevocably exercises such Warrant
for, and purchases thereunder, shares of the Common Stock of NHancement
Technologies, Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $_____ , thereby leaving a remainder Aggregate Price
(if any) equal to $______ . Such exercise shall be pursuant to the cash
exercise provisions of Section 2.1 of the Warrant. Therefore, Holder makes
payment with this Notice of Exercise by way of check payable to the Company
in the amount of $______ . Such check is payment in full under the Warrant
for ______ shares of Common Stock based upon the Warrant Price of
$______ per share, as currently in effect under the Warrant. Holder requests
that the certificates for the purchased shares of Common Stock be issued in
the name of and delivered to "___________", ____________. To the extent the
foregoing exercise is for less than the full Aggregate Price, a Replacement
Warrant representing the remainder of the Aggregate Price and otherwise of
like form, tenor and effect should be delivered to Holder along with the
share certificates evidencing the Common Stock issued in response to this
Notice of Exercise.
By:_____________________
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
Common Stock Warrant
Page 11
EXHIBIT B-2
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
[DATE]
<TABLE>
<S> <C>
___________________________ Aggregate Price of Warrant
___________________________ Before Exercise: $________________
___________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $________________
Warrant Price: $________________per share
Number of Shares of Common Stock to be Issued
Under this Notice:_______________________
Remainder Aggregate
Price (if any) After Issuance: $___________
</TABLE>
CASHLESS EXERCISE
Gentlemen:
The undersigned, registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT", hereby irrevocably exercises such Warrant for,
and purchases thereunder, shares of the Common Stock of _NHancement
Technologies Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $______ , thereby leaving a remainder Aggregate Price
(if any) equal to $______ . Such exercise shall be pursuant to the net issue
exercise provisions of Section 2.2 of the Warrant; therefore, Holder makes no
payment with this Notice of Exercise. The number of shares to be issued
pursuant to this exercise shall be determined by reference to the formula in
Section 2.2 of the Warrant which, by reference to Section 2.3, requires the
use of the current per share fair market value of the Company's Common Stock.
The current fair market value of one share of the Company's Common Stock
shall be determined in the manner provided in Section 2.3, which amount has
been determined or agreed to by Holder and the Company to be $______ , which
figure is acceptable to Holder for calculations of the number of shares of
Common Stock issuable pursuant to this Notice of Exercise [SPECIFY ANY
ALTERNATIVE ARRANGEMENTS TO THE FOREGOING, IF NECESSARY OR APPLICABLE].
Holder requests that the certificates for the purchased shares of Common
Stock be issued in the name of and delivered to
"___________________________", _______________ . To the extent the foregoing
exercise is for less than the full Aggregate Price of the Warrant, a
replacement Warrant representing the remainder of the Aggregate Price (and
otherwise of like form, tenor and effect) shall be delivered to Holder along
with the share certificate evidencing the Common Stock issued in response to
this Notice of Exercise.
By: _________________________
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
EXHIBIT 4.12
NHANCEMENT TECHNOLOGIES INC.
Issued as of the 7TH DAY (1) Aggregate Price: $51,875.00
of June, 1999 (2) Initial Warrant Price: $1.0375
(3) Number of Shares Initially
Subject to Warrant: 50,000
NEITHER THIS WARRANT, NOR THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF,
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
SECURITIES ACT"), OR QUALIFIED OR REGISTERED UNDER CALIFORNIA OR OTHER
APPLICABLE SECURITIES LAWS ("STATE SECURITIES LAWS"), AND THIS WARRANT HAS BEEN,
AND THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF WILL BE, ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. NO SUCH SALE OR OTHER DISPOSITION MAY BE MADE WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 SECURITIES ACT AND COMPLIANCE
WITH THE APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SAID REGISTRATION IS NOT
REQUIRED UNDER THE 1933 SECURITIES ACT AND THAT APPLICABLE STATE SECURITIES LAWS
HAVE BEEN SATISFIED.
COMMON STOCK WARRANT
(IMMEDIATELY EXERCISABLE)
This certifies that James S. Gillespie, ("PURCHASER"), whose address
for notice is located 198 Country Club Drive #35, Incline Village, NV 89451, or
any party to whom this Warrant is assigned in compliance with the terms hereof
(Purchaser and any such assignee being hereinafter sometimes referenced as
"HOLDER"), is entitled to subscribe for and purchase, during the period
commencing at the issue date set forth above and ending at 5:00 p.m.,
California, local time, on the third (3rd) anniversary of such issue date, the
number of shares of fully paid and nonassessable Common Stock ("COMMON STOCK")
of NHANCEMENT TECHNOLOGIES INC, A DELAWARE CORPORATION (the "COMPANY"), that
have an aggregate purchase price equal to the Aggregate Price as defined below.
The purchase price of each such share shall be equal to the Warrant Price, as
defined below.
ARTICLE 1
DEFINITIONS
1.1 "AGGREGATE PRICE" shall be $51,875.00.
1.2 "WARRANT PRICE" shall be $1.0375, as adjusted herein.
ARTICLE 2
EXERCISE AND PAYMENT
2.1 CASH EXERCISE. The purchase rights represented by this Warrant may be
exercised by Holder, in whole or in part, by the surrender of this Warrant at
the principal office of the Company, located at the address set forth on the
signature page hereof, accompanied by the form of Notice of Cash Exercise
attached hereto as Exhibit "A-1", and by the payment to the Company, by cash
or by certified, cashier's or other check acceptable to the Company, of an
amount equal to the aggregate Warrant Price of the shares being purchased.
2.2 NET ISSUE EXERCISE. In lieu of exercising this Warrant pursuant to
Section 2.1, Holder may elect to receive shares of Common Stock equal to the
value of this Warrant determined in
<PAGE>
Common Stock Warrant
Page 2
the manner described below (or of any portion thereof remaining unexercised)
by surrender of this Warrant at the principal office of the Company together
with the form of Notice of Cashless Exercise attached hereto as Exhibit"A-2",
in which event the Company shall issue to Holder a number of shares of the
Company's Common Stock computed using the following formula:
X = Y (A-B)
---------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation).
B = Warrant Price.
2.3 FAIR MARKET VALUE. For purposes of this Article II, fair market value
of one share of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary, the last reported sale price
of the Common Stock or the closing price quoted on the Nasdaq National
Market System ("NMS") or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the trading day prior to the date of determination
of fair market value; or
(ii) If the Common Stock is not traded Over-The-Counter, on the NMS or on
an exchange, the per share fair market value of the Common Stock shall be
as determined by mutual agreement of the Company and the Holder; provided,
however that if such agreement cannot be reached within twenty (20)
calendar days, such value shall be determined by an independent appraiser
appointed in good faith by the Company's Board of Directors. The cost of
such appraisal shall be borne equally by the Company and the Holder. Such
appraiser shall meet the following criteria: (a) it shall not be associated
or affiliated with the Company in any fashion and shall not have previously
provided services to the Company; (b) the appraiser shall have reasonable
qualifications to appraise the value of the Common Stock; (c) it is not
(and none of its affiliates is) a promoter, director or officer of the
Company or any of its affiliates or an underwriter with respect to any of
the securities of the Company; and (d) it does not provide any advice or
opinions of the Company except as an appraiser under this section. In the
event such an appraisal is required it should be conducted under the
following procedures: the Company shall select the appraiser within ten
(10) days of receipt of written notice from the Holder that agreement
cannot be reached and the Company shall submit the name of such appraiser
to Holder. Twenty (20) days after selection of the appraiser, the Company
and the Holder shall each submit to the appraiser a single value
representing such party's contention as to the fair market value of one
share of the Company's Common Stock. Within fifteen (15) days after receipt
of the submission of the Company and the Holder, the appraiser shall select
one of the two values submitted by the parties, and such value shall be the
fair market value of one share of the Common Stock for purpose of this
Warrant. The appraiser shall have no discretion to take any action other
than selection of one of the two values submitted to the appraiser. The
parties may submit to the appraiser and one another, at the time they
submit their respective single values, such supporting documentation as
they deem necessary or appropriate. The parties shall have the opportunity
seven (7) business days after receipt of the other party's proposed
valuation and supporting documentation to provide the appraiser and each
other with supplemental written information. The appraiser may, in its
discretion, hold a single six (6) hour hearing on valuation issues. If a
hearing is held, each party shall be allocated three (3) hours. The
appraiser may conduct the hearing in
<PAGE>
Common Stock Warrant
Page 3
accordance with any rules of procedure it deems appropriate. The value
selected by the appraiser shall be final and binding upon the parties
without any further right of appeal.
2.4 STOCK CERTIFICATES. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Holder within a reasonable time and, unless
this Warrant has been fully exercised or has expired, a new Warrant
representing the remaining unexercised Aggregate Price shall also be issued
to Holder at such time.
2.5 AUTOMATIC EXERCISE. To the extent this Warrant is not previously
exercised, and if the fair market value of one share of the Company's Common
Stock is greater than the Warrant Price, as adjusted, this Warrant shall be
deemed automatically exercised in accordance with Section 2.2 hereof (even if
not surrendered) immediately before its expiration. For purposes of such
automatic exercise, the fair market value of one share of the Company's
Common Stock upon such expiration shall be the fair market value determined
pursuant to Section 2.3 above. To the extent this Warrant or any portion
thereof is deemed automatically exercised pursuant to this Section 2.5, the
Company agrees to notify Holder within a reasonable period of time of the
number of shares of the Company's Common Stock, if any, Holder is to receive
by reason of such automatic exercise.
2.6 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all Common Stock which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof (excluding taxes based on the income of Holder). The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized and reserved for issuance a sufficient number of shares of
its Common Stock or other securities as would be required upon the full
exercise of the rights represented by this Warrant (including conversion of
all such Common Stock issuable hereunder).
2.7 FRACTIONAL SHARES. No fractional share of Common Stock will be issued
in connection with any exercise hereof; in lieu of a fractional share upon
complete exercise hereof, Holder may purchase a whole share by delivering
payment equal to the appropriate portion of the then effective Warrant Price.
ARTICLE 3
CERTAIN ADJUSTMENTS OF NUMBER OF SHARES PURCHASABLE AND WARRANT PRICE
The number and kind of securities purchasable upon the exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
3.1 RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of: (i) any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant; (ii) any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification, change or exchange of outstanding securities issuable upon
exercise of this Warrant); or (iii) any sale or transfer to another
corporation of all, or substantially all, of the property of the Company,
then, and in each such event, the Company or such successor or purchasing
corporation, as the case may be, shall execute a new Warrant of like form,
tenor and effect and which will provide that Holder shall have the right to
exercise such new Warrant and purchase upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of this Warrant, the
kind and amount of securities, money and property receivable upon such
reclassification, change, consolidation, merger, sale or transfer by a holder
of one share of Common Stock issuable upon exercise of this Warrant had this
Warrant been exercised immediately prior to such reclassification, change,
consolidation, merger, sale or transfer. Such
<PAGE>
Common Stock Warrant
Page 4
new Warrant shall be as nearly equivalent in all substantive respects as
practicable to this Warrant and the adjustments provided in this Article III
and the provisions of this Section 3.1, shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
3.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall at any time
while this Warrant remains outstanding and less than fully exercised: (i)
divide its Company Stock, the Warrant Price shall be proportionately reduced;
or (ii) shall combine shares of its Common Stock, the Warrant Price shall be
proportionately increased.
3.3 STOCK DIVIDENDS. If the Company, at any time while this Warrant is
outstanding and unexpired, shall pay a dividend payable in, or make any other
distribution to holders of, Common Stock (except any distribution described
in Sections 3.1 and 3.2 hereof) then the Warrant Price shall be adjusted to
that price determined by multiplying the Warrant Price then in effect by a
fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution,
and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such dividend or distribution.
3.4 OTHER ACTION AFFECTING COMMON STOCK. If the Company takes any action
affecting its Common Stock after the date hereof (including dividends and
distributions), other than an action described in any of Sections 3.1 and 3.2
hereof, which would have an adverse effect upon Holder's rights hereunder,
the Warrant Price shall be adjusted downward in such manner and at such time
as the Board of Directors of the Company shall in good faith determine to be
equitable under the circumstances.
3.5 TIME OF ADJUSTMENTS TO THE WARRANT PRICE. All adjustments to the
Warrant Price and the number of shares purchasable hereunder, unless
otherwise specified herein, shall be effective as of the earlier of:
(i) the date of issue of the security causing the adjustment;
(ii) the date of sale of the security causing the adjustment;
(iii) the effective date of a division or combination of shares;
(iv) the record date of any action of holders of any class of the
Company's capital stock taken for the purpose of entitling shareholders to
receive a distribution or dividend payable in equity securities, provided
that such division, combination, distribution or dividend actually occurs.
3.6 NOTICE OF ADJUSTMENTS. In each case of an adjustment in the Warrant
Price and the number of shares purchasable hereunder, the Company, at its
expense, shall cause the Chief Financial Officer of the Company to compute
such adjustment and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based. The Company
shall promptly mail a copy of each such certificate to Holder pursuant to
Section 6.8 hereof.
3.7 DURATION OF ADJUSTED WARRANT PRICE. Following each adjustment of the
Warrant Price, such adjusted Warrant Price shall remain in effect until a
further adjustment of the Warrant Price.
3.8 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price pursuant to this Article III, the number of shares of Common Stock
purchasable hereunder shall be adjusted to the nearest whole share, to the
number obtained by dividing the Aggregate Price by the Warrant Price as
adjusted.
<PAGE>
Common Stock Warrant
Page 5
ARTICLE 4
TRANSFER, EXCHANGE AND LOSS
4.1 TRANSFER. This Warrant is transferable on the books of the Company at
its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with federal and state
securities laws. The Company shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any
partial transfer, the Company will issue and deliver to Holder a new Warrant
or Warrants with respect to the Warrants not so transferred. Notwithstanding
the foregoing, Holder shall not be entitled to transfer a number of shares or
an interest in this Warrant representing less than five percent (5%) of the
aggregate shares initially covered by this Warrant (as presently constituted,
with appropriate adjustment being made in the event of stock splits,
combinations, reorganizations and the like occurring after the issue date
hereof). Any transferee shall be subject to the same restrictions on transfer
with respect to this Warrant as the Purchaser.
4.2 SECURITIES LAWS. Upon any issuance of shares of Common Stock upon
exercise of this Warrant, it shall be the Company's responsibility to comply
with the requirements of: (1) the Securities Act of 1933, as amended; (2) the
Securities Exchange Act of 1934, as amended; (3) any applicable listing
requirements of any national securities exchange; (4) any state securities
regulation or "Blue Sky" laws; and (5) requirements under any other law or
regulation applicable to the issuance or transfer of such shares. If required
by the Company, in connection with each issuance of shares of Common Stock
upon exercise of this Warrant, the Holder will give: (i) assurances in
writing, satisfactory to the Company, that such shares are not being
purchased with a view to the distribution thereof in violation of applicable
laws, (ii) sufficient information, in writing, to enable the Company to rely
on exemptions from the registration or qualification requirements of
applicable laws, if available, with respect to such exercise, and (iii) its
cooperation to the Company in connection with such compliance.
4.3 EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants which represent, in the aggregate, the Aggregate Price
hereof; each new Warrant to represent the right to purchase such portion of
the Aggregate Price as Holder shall designate at the time of such exchange.
Each new Warrant shall be identical in form and content to this Warrant,
except for appropriate changes in the number of shares of Common Stock
covered thereby, the percentage stated in Section 4.1 above, and any other
changes which are necessary in order to prevent the Warrant exchange from
changing the respective rights and obligations of the Company and the Holder
as they existed immediately prior to such exchange.
4.4 LOSS OR MUTILATION. Upon receipt by the Company of evidence
satisfactory to it of the ownership of, and the loss, theft, destruction or
mutilation of, this Warrant and (in the case of loss, theft, or destruction)
of indemnity satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation hereof, the Company will execute and deliver in
lieu hereof a new Warrant.
ARTICLE 5
HOLDER RIGHTS
5.1 NO SHAREHOLDER RIGHTS UNTIL EXERCISE. No Holder hereof, solely by
virtue hereof, shall be entitled to any rights as a shareholder of the
Company. Holder shall have all rights of a shareholder with respect to
securities purchased upon exercise hereof at the time: (i) the cash exercise
price for such securities is delivered pursuant to Section 2.1 hereof and
this Warrant is surrendered, (ii) of delivery of notice of cashless exercise
pursuant to Section 2.2 hereof and this Warrant is surrendered, or (iii) of
automatic exercise hereof (even if not surrendered) pursuant to Section 2.5
hereof.
<PAGE>
Common Stock Warrant
Page 6
ARTICLE 6
MISCELLANEOUS
6.1 GOVERNMENTAL APPROVALS. The Company will from time to time take all
action which may be necessary to obtain and keep effective any and all
permits, consents and approvals of governmental agencies and authorities and
securities acts filings under federal and state laws, which may be or become
requisite in connection with the issuance, sale, and delivery of this
Warrant, and the issuance, sale and delivery of the Common Stock or other
securities or property issuable or deliverable upon exercise of this Warrant.
6.2 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT EXCEPT
AS SET FORTH BELOW, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF
THIS WARRANT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND
ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO.
6.3 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise
provided in, this Warrant, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the
benefit of the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
6.4 SEVERABILITY. If any one or more provisions of this Warrant, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further
agree to replace any such void or unenforceable provisions of this Warrant
with valid and enforceable provisions which will achieve, to the extent
possible, the economic, business and other purposes of the void or
unenforceable provisions.
6.5 DEFAULT, AMENDMENT AND WAIVERS. This Warrant may be amended upon the
written consent of the Company and the holders in the aggregate of the right
to purchase a majority of the number of unexercised shares covered by the
Warrant initially issued by the Company pursuant to the Consulting Agreement.
The waiver by a party of any breach hereof for default in payment of any
amount due hereunder or default in the performance hereof shall not be deemed
to constitute a waiver of any other default or any succeeding breach or
default. The failure to cure any breach of any term of this Warrant within
ten (10) days of written notice thereof shall constitute an event of default
under this Warrant.
6.6 NO WAIVER. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.
6.7 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any
part of this Warrant, the prevailing party shall be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys'
fees to be fixed by the court (including without limitation, costs, expenses
and fees on any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment. A party not entitled to recover its costs shall not be entitled to
recover attorneys' fees. No sum for attorneys' fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
6.8 NOTICES. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Warrant, each such
communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States certified mail,
postage prepaid, return receipt requested, addressed as follows:
<PAGE>
Common Stock Warrant
Page 7
Company: NHancement Technologies Inc.
39420 Liberty Street
Suite 250
Fremont, California 94538
Attn: Douglas S. Zorn
Holder: James S. Gillespie
198 Country Club Drive #35
Incline Village, Nevada 89451
Such communications shall be effective when they are received by the
addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective three (3) business days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
6.9 TIME. Time is of the essence of this Warrant.
6.10 CONSTRUCTION OF AGREEMENT. A reference in this Warrant 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 3 shall include a reference to Sections 3.5 and 3.7).
The titles and headings herein are for reference purposes only and shall not
in any manner affect the interpretation of this Warrant.
6.11 NO ENDORSEMENT. Holder understands that no federal or state securities
administrator has made any finding or determination relating to the fairness
of investment in the Company or purchase of the Common Stock hereunder and
that no federal or state securities administrator has recommended or endorsed
the offering of securities by the Company hereunder.
6.12 PRONOUNS. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
6.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and
to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described
herein and contemplated hereby, and to carry into effect the intents and
purposes of this Warrant.
NHancement Technologies Inc., a Delaware corporation
By: /s/ DOUGLAS S. ZORN
--------------------------------------------
Douglas S. Zorn, Chief Executive Officer
<PAGE>
Common Stock Warrant
Page 8
EXHIBIT A-1
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
BY CASH PAYMENT OF WARRANT PRICE
DATE: ____________
<TABLE>
<S> <C>
___________________________ Aggregate Price of Warrant
___________________________ Before Exercise: $________________
___________________________ Aggregate Price
Being Exercised: $________________
Attention: Chief Financial Officer
Warrant Price: $________________per share
Number of Shares of Common Stock to be Issued
Under this Notice:_______________________
Remainder Aggregate
Price (if any) After Issuance: $___________
</TABLE>
CASH EXERCISE
Gentlemen:
The undersigned registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT"), hereby irrevocably exercises such Warrant
for, and purchases thereunder, shares of the Common Stock of NHancement
Technologies, Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $______, thereby leaving a remainder Aggregate Price
(if any) equal to $______. Such exercise shall be pursuant to the cash
exercise provisions of Section 2.1 of the Warrant. Therefore, Holder makes
payment with this Notice of Exercise by way of check payable to the Company
in the amount of $______. Such check is payment in full under the Warrant for
______ shares of Common Stock based upon the Warrant Price of $______ per
share, as currently in effect under the Warrant. Holder requests that the
certificates for the purchased shares of Common Stock be issued in the name
of and delivered to "__________________", __________________. To the extent
the foregoing exercise is for less than the full Aggregate Price, a
Replacement Warrant representing the remainder of the Aggregate Price and
otherwise of like form, tenor and effect should be delivered to Holder along
with the share certificates evidencing the Common Stock issued in response to
this Notice of Exercise.
By:
---------------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
Common Stock Warrant
Page 9
EXHIBIT A-2
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
[DATE]
<TABLE>
<S> <C>
___________________________ Aggregate Price of Warrant
___________________________ Before Exercise: $________________
___________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $________________
Warrant Price: $________________per share
Number of Shares of Common Stock to be Issued
Under this Notice:_______________________
Remainder Aggregate
Price (if any) After Issuance: $___________
</TABLE>
CASHLESS EXERCISE
Gentlemen:
The undersigned, registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT", hereby irrevocably exercises such Warrant for,
and purchases thereunder, shares of the Common Stock of NHancement
Technologies Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $_____, thereby leaving a remainder Aggregate Price (if
any) equal to $_____. Such exercise shall be pursuant to the net issue
exercise provisions of Section 2.2 of the Warrant; therefore, Holder makes no
payment with this Notice of Exercise. The number of shares to be issued
pursuant to this exercise shall be determined by reference to the formula in
Section 2.2 of the Warrant which, by reference to Section 2.3, requires the
use of the current per share fair market value of the Company's Common Stock.
The current fair market value of one share of the Company's Common Stock
shall be determined in the manner provided in Section 2.3, which amount has
been determined or agreed to by Holder and the Company to be $_____, which
figure is acceptable to Holder for calculations of the number of shares of
Common Stock issuable pursuant to this Notice of Exercise [SPECIFY ANY
ALTERNATIVE ARRANGEMENTS TO THE FOREGOING, IF NECESSARY OR APPLICABLE].
Holder requests that the certificates for the purchased shares of Common
Stock be issued in the name of and delivered to "__________________",
__________________. To the extent the foregoing exercise is for less than the
full Aggregate Price of the Warrant, a replacement Warrant representing the
remainder of the Aggregate Price (and otherwise of like form, tenor and
effect) shall be delivered to Holder along with the share certificate
evidencing the Common Stock issued in response to this Notice of Exercise.
By:
---------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
EXHIBIT 4.13
NHANCEMENT TECHNOLOGIES INC.
Issued as of the 15th day (1) Aggregate Price: $274,000.00
of June, 1999 (2) Initial Warrant Price: $1.37
(3) Number of Shares Initially Subject
to Warrant: 200,000
NEITHER THIS WARRANT, NOR THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF,
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
SECURITIES ACT"), OR QUALIFIED OR REGISTERED UNDER CALIFORNIA OR OTHER
APPLICABLE SECURITIES LAWS ("STATE SECURITIES LAWS"), AND THIS WARRANT HAS BEEN,
AND THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF WILL BE, ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. NO SUCH SALE OR OTHER DISPOSITION MAY BE MADE WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 SECURITIES ACT AND COMPLIANCE
WITH THE APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SAID REGISTRATION IS NOT
REQUIRED UNDER THE 1933 SECURITIES ACT AND THAT APPLICABLE STATE SECURITIES LAWS
HAVE BEEN SATISFIED.
COMMON STOCK WARRANT
(IMMEDIATELY EXERCISABLE)
This certifies that Grady & Hatch and Company, Inc., ("PURCHASER"),
whose address for notice is located at Wall Street Tower, 20 Exchange Place,
49th floor, New York, NY 10005 or any party to whom this Warrant is assigned in
compliance with the terms hereof (Purchaser and any such assignee being
hereinafter sometimes referenced as "HOLDER"), is entitled to subscribe for and
purchase, during the period commencing at the issue date set forth above and
ending at 5:00 p.m., California, local time, on the third (3rd) anniversary of
such issue date, the number of shares of fully paid and nonassessable Common
Stock ("COMMON STOCK") of NHANCEMENT TECHNOLOGIES INC, A DELAWARE CORPORATION
(the "COMPANY"), that have an aggregate purchase price equal to the Aggregate
Price as defined below. The purchase price of each such share shall be equal to
the Warrant Price, as defined below.
ARTICLE 1
DEFINITIONS
1.1 "AGGREGATE PRICE" shall be $274,000.
1.2 "WARRANT PRICE" shall be One Dollar Thirty-Seven Cents
($1.37), as adjusted herein.
ARTICLE 2
EXERCISE AND PAYMENT
2.1 CASH EXERCISE. The purchase rights represented by this Warrant may be
exercised by Holder, in whole or in part, by the surrender of this Warrant at
the principal office of the Company, located at the address set forth on the
signature page hereof, accompanied by the form of Notice of Cash Exercise
attached hereto as Exhibit "A-1", and by the payment to the Company, by cash
or by certified, cashier's or other check acceptable to the Company, of an
amount equal to the aggregate Warrant Price of the shares being purchased.
<PAGE>
Common Stock Warrant
Page 2
2.2 NET ISSUE EXERCISE. In lieu of exercising this Warrant pursuant to
Section 2.1, Holder may elect to receive shares of Common Stock equal to the
value of this Warrant determined in the manner described below (or of any
portion thereof remaining unexercised) by surrender of this Warrant at the
principal office of the Company together with the form of Notice of Cashless
Exercise attached hereto as Exhibit "A-2", in which event the Company shall
issue to Holder a number of shares of the Company's Common Stock computed
using the following formula:
X = Y (A-B)
---------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation).
B = Warrant Price.
2.3 FAIR MARKET VALUE. For purposes of this Article II, fair market value
of one share of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary, the last reported sale price
of the Common Stock or the closing price quoted on the Nasdaq National
Market System ("NMS") or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the trading day prior to the date of determination
of fair market value; or
(ii) If the Common Stock is not traded Over-The-Counter, on the NMS or on
an exchange, the per share fair market value of the Common Stock shall be
as determined by mutual agreement of the Company and the Holder; provided,
however that if such agreement cannot be reached within twenty (20)
calendar days, such value shall be determined by an independent appraiser
appointed in good faith by the Company's Board of Directors. The cost of
such appraisal shall be borne equally by the Company and the Holder. Such
appraiser shall meet the following criteria: (a) it shall not be associated
or affiliated with the Company in any fashion and shall not have previously
provided services to the Company; (b) the appraiser shall have reasonable
qualifications to appraise the value of the Common Stock; (c) it is not
(and none of its affiliates is) a promoter, director or officer of the
Company or any of its affiliates or an underwriter with respect to any of
the securities of the Company; and (d) it does not provide any advice or
opinions of the Company except as an appraiser under this section. In the
event such an appraisal is required it should be conducted under the
following procedures: the Company shall select the appraiser within ten
(10) days of receipt of written notice from the Holder that agreement
cannot be reached and the Company shall submit the name of such appraiser
to Holder. Twenty (20) days after selection of the appraiser, the Company
and the Holder shall each submit to the appraiser a single value
representing such party's contention as to the fair market value of one
share of the Company's Common Stock. Within fifteen (15) days after receipt
of the submission of the Company and the Holder, the appraiser shall select
one of the two values submitted by the parties, and such value shall be the
fair market value of one share of the Common Stock for purpose of this
Warrant. The appraiser shall have no discretion to take any action other
than selection of one of the two values submitted to the appraiser. The
parties may submit to the appraiser and one another, at the time they
submit their respective single values, such supporting documentation as
they deem necessary or appropriate. The parties shall have the opportunity
seven (7) business days after receipt of the other party's proposed
valuation and supporting documentation to provide the appraiser and each
other with supplemental written information. The appraiser may, in its
discretion, hold a single six (6) hour hearing on valuation issues. If a
hearing is
<PAGE>
Common Stock Warrant
Page 3
held, each party shall be allocated three (3) hours. The appraiser may
conduct the hearing in accordance with any rules of procedure it deems
appropriate. The value selected by the appraiser shall be final and binding
upon the parties without any further right of appeal.
2.4 STOCK CERTIFICATES. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Holder within a reasonable time and, unless
this Warrant has been fully exercised or has expired, a new Warrant
representing the remaining unexercised Aggregate Price shall also be issued
to Holder at such time.
2.5 AUTOMATIC EXERCISE. To the extent this Warrant is not previously
exercised, and if the fair market value of one share of the Company's Common
Stock is greater than the Warrant Price, as adjusted, this Warrant shall be
deemed automatically exercised in accordance with Section 2.2 hereof (even if
not surrendered) immediately before its expiration. For purposes of such
automatic exercise, the fair market value of one share of the Company's
Common Stock upon such expiration shall be the fair market value determined
pursuant to Section 2.3 above. To the extent this Warrant or any portion
thereof is deemed automatically exercised pursuant to this Section 2.5, the
Company agrees to notify Holder within a reasonable period of time of the
number of shares of the Company's Common Stock, if any, Holder is to receive
by reason of such automatic exercise.
2.6 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all Common Stock which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof (excluding taxes based on the income of Holder). The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times
have authorized and reserved for issuance a sufficient number of shares of
its Common Stock or other securities as would be required upon the full
exercise of the rights represented by this Warrant (including conversion of
all such Common Stock issuable hereunder).
2.7 FRACTIONAL SHARES. No fractional share of Common Stock will be issued
in connection with any exercise hereof; in lieu of a fractional share upon
complete exercise hereof, Holder may purchase a whole share by delivering
payment equal to the appropriate portion of the then effective Warrant Price.
ARTICLE 3
CERTAIN ADJUSTMENTS OF NUMBER OF SHARES PURCHASABLE AND WARRANT PRICE
The number and kind of securities purchasable upon the exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
3.1 RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of: (i) any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant; (ii) any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification, change or exchange of outstanding securities issuable upon
exercise of this Warrant); or (iii) any sale or transfer to another
corporation of all, or substantially all, of the property of the Company,
then, and in each such event, the Company or such successor or purchasing
corporation, as the case may be, shall execute a new Warrant of like form,
tenor and effect and which will provide that Holder shall have the right to
exercise such new Warrant and purchase upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of this Warrant, the
kind and amount of securities, money and property receivable upon such
reclassification, change, consolidation, merger, sale or transfer by a holder
of one share of Common Stock issuable upon exercise of this Warrant had this
Warrant been exercised
<PAGE>
Common Stock Warrant
Page 4
immediately prior to such reclassification, change, consolidation, merger,
sale or transfer. Such new Warrant shall be as nearly equivalent in all
substantive respects as practicable to this Warrant and the adjustments
provided in this Article III and the provisions of this Section 3.1, shall
similarly apply to successive reclassifications, changes, consolidations,
mergers, sales and transfers.
3.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall at any time
while this Warrant remains outstanding and less than fully exercised: (i)
divide its Company Stock, the Warrant Price shall be proportionately reduced;
or (ii) shall combine shares of its Common Stock, the Warrant Price shall be
proportionately increased.
3.3 STOCK DIVIDENDS. If the Company, at any time while this Warrant is
outstanding and unexpired, shall pay a dividend payable in, or make any other
distribution to holders of, Common Stock (except any distribution described
in Sections 3.1 and 3.2 hereof) then the Warrant Price shall be adjusted to
that price determined by multiplying the Warrant Price then in effect by a
fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution,
and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such dividend or distribution.
3.4 OTHER ACTION AFFECTING COMMON STOCK. If the Company takes any action
affecting its Common Stock after the date hereof (including dividends and
distributions), other than an action described in any of Sections 3.1 and 3.2
hereof, which would have an adverse effect upon Holder's rights hereunder,
the Warrant Price shall be adjusted downward in such manner and at such time
as the Board of Directors of the Company shall in good faith determine to be
equitable under the circumstances.
3.5 TIME OF ADJUSTMENTS TO THE WARRANT PRICE. All adjustments to the
Warrant Price and the number of shares purchasable hereunder, unless
otherwise specified herein, shall be effective as of the earlier of:
(i) the date of issue of the security causing the adjustment;
(ii) the date of sale of the security causing the adjustment;
(iii) the effective date of a division or combination of shares;
(iv) the record date of any action of holders of any class of the
Company's capital stock taken for the purpose of entitling shareholders to
receive a distribution or dividend payable in equity securities, provided
that such division, combination, distribution or dividend actually occurs.
3.6 NOTICE OF ADJUSTMENTS. In each case of an adjustment in the Warrant
Price and the number of shares purchasable hereunder, the Company, at its
expense, shall cause the Chief Financial Officer of the Company to compute
such adjustment and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based. The Company
shall promptly mail a copy of each such certificate to Holder pursuant to
Section 6.8 hereof.
3.7 DURATION OF ADJUSTED WARRANT PRICE. Following each adjustment of the
Warrant Price, such adjusted Warrant Price shall remain in effect until a
further adjustment of the Warrant Price.
3.8 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price pursuant to this Article III, the number of shares of Common Stock
purchasable hereunder shall be adjusted to the nearest whole share, to the
number obtained by dividing the Aggregate Price by the Warrant Price as
adjusted.
<PAGE>
Common Stock Warrant
Page 5
ARTICLE 4
TRANSFER, EXCHANGE AND LOSS
4.1 TRANSFER. This Warrant is transferable on the books of the Company at
its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with federal and state
securities laws. The Company shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any
partial transfer, the Company will issue and deliver to Holder a new Warrant
or Warrants with respect to the Warrants not so transferred. Notwithstanding
the foregoing, Holder shall not be entitled to transfer a number of shares or
an interest in this Warrant representing less than five percent (5%) of the
aggregate shares initially covered by this Warrant (as presently constituted,
with appropriate adjustment being made in the event of stock splits,
combinations, reorganizations and the like occurring after the issue date
hereof). Any transferee shall be subject to the same restrictions on transfer
with respect to this Warrant as the Purchaser.
4.2 SECURITIES LAWS. Upon any issuance of shares of Common Stock upon
exercise of this Warrant, it shall be the Company's responsibility to comply
with the requirements of: (1) the Securities Act of 1933, as amended; (2) the
Securities Exchange Act of 1934, as amended; (3) any applicable listing
requirements of any national securities exchange; (4) any state securities
regulation or "Blue Sky" laws; and (5) requirements under any other law or
regulation applicable to the issuance or transfer of such shares. If required
by the Company, in connection with each issuance of shares of Common Stock
upon exercise of this Warrant, the Holder will give: (i) assurances in
writing, satisfactory to the Company, that such shares are not being
purchased with a view to the distribution thereof in violation of applicable
laws, (ii) sufficient information, in writing, to enable the Company to rely
on exemptions from the registration or qualification requirements of
applicable laws, if available, with respect to such exercise, and (iii) its
cooperation to the Company in connection with such compliance.
4.3 EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants which represent, in the aggregate, the Aggregate Price
hereof; each new Warrant to represent the right to purchase such portion of
the Aggregate Price as Holder shall designate at the time of such exchange.
Each new Warrant shall be identical in form and content to this Warrant,
except for appropriate changes in the number of shares of Common Stock
covered thereby, the percentage stated in Section 4.1 above, and any other
changes which are necessary in order to prevent the Warrant exchange from
changing the respective rights and obligations of the Company and the Holder
as they existed immediately prior to such exchange.
4.4 LOSS OR MUTILATION. Upon receipt by the Company of evidence
satisfactory to it of the ownership of, and the loss, theft, destruction or
mutilation of, this Warrant and (in the case of loss, theft, or destruction)
of indemnity satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation hereof, the Company will execute and deliver in
lieu hereof a new Warrant.
ARTICLE 5
HOLDER RIGHTS
5.1 NO SHAREHOLDER RIGHTS UNTIL EXERCISE. No Holder hereof, solely by
virtue hereof, shall be entitled to any rights as a shareholder of the
Company. Holder shall have all rights of a shareholder with respect to
securities purchased upon exercise hereof at the time: (i) the cash exercise
price for such securities is delivered pursuant to Section 2.1 hereof and
this Warrant is surrendered, (ii) of delivery of notice of cashless exercise
pursuant to Section 2.2 hereof and this Warrant is surrendered, or (iii) of
automatic exercise hereof (even if not surrendered) pursuant to Section 2.5
hereof.
<PAGE>
Common Stock Warrant
Page 6
ARTICLE 6
MISCELLANEOUS
6.1 GOVERNMENTAL APPROVALS. The Company will from time to time take all
action which may be necessary to obtain and keep effective any and all
permits, consents and approvals of governmental agencies and authorities and
securities acts filings under federal and state laws, which may be or become
requisite in connection with the issuance, sale, and delivery of this
Warrant, and the issuance, sale and delivery of the Common Stock or other
securities or property issuable or deliverable upon exercise of this Warrant.
6.2 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT EXCEPT
AS SET FORTH BELOW, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF
THIS WARRANT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND
ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO.
6.3 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise
provided in, this Warrant, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the
benefit of the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
6.4 SEVERABILITY. If any one or more provisions of this Warrant, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further
agree to replace any such void or unenforceable provisions of this Warrant
with valid and enforceable provisions which will achieve, to the extent
possible, the economic, business and other purposes of the void or
unenforceable provisions.
6.5 DEFAULT, AMENDMENT AND WAIVERS. This Warrant may be amended upon the
written consent of the Company and the holders in the aggregate of the right
to purchase a majority of the number of unexercised shares covered by the
Warrant initially issued by the Company pursuant to the Consulting Agreement.
The waiver by a party of any breach hereof for default in payment of any
amount due hereunder or default in the performance hereof shall not be deemed
to constitute a waiver of any other default or any succeeding breach or
default. The failure to cure any breach of any term of this Warrant within
ten (10) days of written notice thereof shall constitute an event of default
under this Warrant.
6.6 NO WAIVER. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.
6.7 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any
part of this Warrant, the prevailing party shall be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys'
fees to be fixed by the court (including without limitation, costs, expenses
and fees on any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment. A party not entitled to recover its costs shall not be entitled to
recover attorneys' fees. No sum for attorneys' fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
6.8 NOTICES. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Warrant, each such
communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States certified mail,
postage prepaid, return receipt requested, addressed as follows:
<PAGE>
Common Stock Warrant
Page 7
Company: NHancement Technologies Inc.
39420 Liberty Street
Suite 250
Fremont, California 94538
Attn: Douglas S. Zorn
Holder: Grady & Hatch and Company, Inc.
Wall Street Tower
20 Exchange Place, 49th floor
New York, New York 10005
Attn: John M. Black
Such communications shall be effective when they are received by the
addressee thereof; but if sent by certified mail in the manner set forth
above, they shall be effective three (3) business days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity with
this Section.
6.9 TIME. Time is of the essence of this Warrant.
6.10 CONSTRUCTION OF AGREEMENT. A reference in this Warrant 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 3 shall include a reference to Sections 3.5 and 3.7).
The titles and headings herein are for reference purposes only and shall not
in any manner affect the interpretation of this Warrant.
6.11 NO ENDORSEMENT. Holder understands that no federal or state securities
administrator has made any finding or determination relating to the fairness
of investment in the Company or purchase of the Common Stock hereunder and
that no federal or state securities administrator has recommended or endorsed
the offering of securities by the Company hereunder.
6.12 PRONOUNS. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
6.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and
to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described
herein and contemplated hereby, and to carry into effect the intents and
purposes of this Warrant.
NHancement Technologies Inc., a Delaware corporation
By: /s/ DOUGLAS S. ZORN
------------------------------------------
Douglas S. Zorn, Chief Executive Officer
<PAGE>
Common Stock Warrant
Page 8
EXHIBIT A-1
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
BY CASH PAYMENT OF WARRANT PRICE
DATE: ____________
_________________________ Aggregate Price of Warrant
_________________________ Before Exercise: $________________
_________________________ Aggregate Price
Being Exercised: $________________
Attention: Chief Financial Officer
Warrant Price: $____________per share
Number of Shares of Common Stock to be Issued
Under this Notice:___________________
Remainder Aggregate
Price (if any) After Issuance: $___________
CASH EXERCISE
Gentlemen:
The undersigned registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT"), hereby irrevocably exercises such Warrant
for, and purchases thereunder, shares of the Common Stock of NHancement
Technologies, Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $_____, thereby leaving a remainder Aggregate Price (if
any) equal to $_____. Such exercise shall be pursuant to the cash exercise
provisions of Section 2.1 of the Warrant. Therefore, Holder makes payment
with this Notice of Exercise by way of check payable to the Company in the
amount of $_____. Such check is payment in full under the Warrant for
__________ shares of Common Stock based upon the Warrant Price of $_____ per
share, as currently in effect under the Warrant. Holder requests that the
certificates for the purchased shares of Common Stock be issued in the name
of and delivered to "_______________", _______________. To the extent the
foregoing exercise is for less than the full Aggregate Price, a Replacement
Warrant representing the remainder of the Aggregate Price and otherwise of
like form, tenor and effect should be delivered to Holder along with the
share certificates evidencing the Common Stock issued in response to this
Notice of Exercise.
By:
-------------------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
Common Stock Warrant
Page 9
EXHIBIT A-2
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
[DATE]
<TABLE>
<S> <C>
___________________________ Aggregate Price of Warrant
___________________________ Before Exercise: $________________
___________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $________________
Warrant Price: $________________per share
Number of Shares of Common Stock to be Issued
Under this Notice:_______________________
Remainder Aggregate
Price (if any) After Issuance: $___________
</TABLE>
CASHLESS EXERCISE
Gentlemen:
The undersigned, registered Holder of the Common Stock Warrant
delivered herewith ("WARRANT", hereby irrevocably exercises such Warrant for,
and purchases thereunder, shares of the Common Stock of NHancement
Technologies Inc., a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Aggregate Price (as defined in the
Warrant) to be applied toward the purchase of Common Stock pursuant to this
Notice of Exercise is $_____, thereby leaving a remainder Aggregate Price (if
any) equal to $_____. Such exercise shall be pursuant to the net issue
exercise provisions of Section 2.2 of the Warrant; therefore, Holder makes no
payment with this Notice of Exercise. The number of shares to be issued
pursuant to this exercise shall be determined by reference to the formula in
Section 2.2 of the Warrant which, by reference to Section 2.3, requires the
use of the current per share fair market value of the Company's Common Stock.
The current fair market value of one share of the Company's Common Stock
shall be determined in the manner provided in Section 2.3, which amount has
been determined or agreed to by Holder and the Company to be $_____, which
figure is acceptable to Holder for calculations of the number of shares of
Common Stock issuable pursuant to this Notice of Exercise [SPECIFY ANY
ALTERNATIVE ARRANGEMENTS TO THE FOREGOING, IF NECESSARY OR APPLICABLE].
Holder requests that the certificates for the purchased shares of Common
Stock be issued in the name of and delivered to "_______________",
_______________. To the extent the foregoing exercise is for less than the
full Aggregate Price of the Warrant, a replacement Warrant representing the
remainder of the Aggregate Price (and otherwise of like form, tenor and
effect) shall be delivered to Holder along with the share certificate
evidencing the Common Stock issued in response to this Notice of Exercise.
By:
-------------------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly
correspond to the name of the Holder on the Warrant.
<PAGE>
Exhibit 10.50
TERMINATION, CONSULTING AND CONFIDENTIALITY AGREEMENT
THIS TERMINATION, CONSULTING AND CONFIDENTIALITY AGREEMENT (the
"AGREEMENT") is made effective as of the 7th day of June, 1999 ("EFFECTIVE
DATE"), by and between NHancement Technologies Inc., a Delaware corporation
(the "COMPANY"), and James S. Gillespie, a resident of the State of Nevada
("CONSULTANT").
R E C I T A L S
A. The Company and Consultant are parties to an employment
agreement dated October 25, 1996, in which the Company and consultant agreed
to an employment term starting on February 3, 1997 and ending on February 3,
2000. As of April 17, 1998 Consultant terminated his employment with the
Company ("RESIGNATION DATE").
B. NHancement wishes to retain Consultant as a consultant to
provide consulting services to NHancement starting from the Resignation Date
until February 3, 2000 ("TERM"). The scope and duties of Consultant will be
mutually agreed to by Consultant and the Chief Executive Officer of
NHancement from time to time.
NOW, THEREFORE, in consideration of the foregoing recitals and in
consideration of the mutual covenants contained herein, the parties agree as
follows:
A G R E E M E N T
1. RESIGNATION. Effective as of the Resignation Date, (i)
Consultant resigned as Vice President of Sales of the Company and the
President of VoicePlus, Inc. ("VPI"), a wholly-owned subsidiary of the
Company, (ii) the Company removed Consultant as the responsible party on all
matters related to the Company, including without limitation, Consultant's
capacities as guarantor on a loan subsequently used to purchase an
automobile, 1005 Volvo sedan, for use by VPI and as trustee of VPI's 401(k)
Plan, adopted and implemented by VPI on January 1, 1991, (iii) Consultant
returned his office keys, security card, card credit(s), any and all records,
documents, notes, memoranda specifications, devices and any and all other
Company property or material relating to the Company's business in his
possession.
2. SEVERANCE PAYMENT. As of the Resignation Date Consultant
was entitled to and subsequently received a one-time payment for Consultant's
Thirty-Two and One-Half (32 1/2) days of accrued vacation days which equals
an aggregate of Thirty-Nine Thousand Five Hundred Dollars ($39,000).
3. ADJUSTMENT TO UNSECURED NOTE. The Company has executed and
delivered to Consultant a Non-Negotiable Unsecured Promissory, No. B-02,
dated February 3, 1997, ("UNSECURED NOTE"), pursuant to the terms of that
certain Agreement and Plan of Merger, dated October 25, 1996, and entered
into by and among the Company, Consultant, VPI and VPI Acquisition
Corporation, a wholly-owned subsidiary of the Company ("MERGER AGREEMENT").
As of the Effective Date, the Company owes Consultant $143,750 on the
Unsecured Note. Consultant has agreed to accept a cash payment of $27,114 and
the balance in Common Stock of the Company, based on the closing bid price of
the Common Stock on the last trading day prior to the Effective Date of this
Agreement. As of June 4, 1999 the closing bid price of the Common Stock was
$1.00 per share. The Unsecured Note shall be cancelled upon receipt of the
cash payment and issuance of the Common Stock.
4. CONTINUATION OF BENEFITS. As of the Resignation Date,
Consultant ceased to be covered by the Company's medical plans and group
insurance in which Consultant was enrolled. Consultant was entitled to elect
his COBRA right to extend coverage and expense and the Company provided
Consultant with the necessary forms to make his election. As of the Effective
Date of this Agreement, Consultant will be insured under Company's health
insurance policies, if allowed by Company's insurance carrier.
5. CONSULTING SERVICES. The scope and duties of Consultant's
services will be mutually agreed upon, from time to time, by the Chief
Executive Officer of the Company and Consultant (the "SERVICES"). Consultant
will perform such Services in a diligent and workmanlike manner and in
accordance with the best practices of Consultant's industry. All Services
will be performed at a mutually agreed upon site.
<PAGE>
6. RELATIONSHIP OF THE PARTIES. Consultant enters into this
Agreement as, and shall continue to be, an independent contractor and
consultant. Under no circumstances shall Consultant or any of Consultant's
employees or agents, look to NHancement as his employer, or as a partner,
agent or principal. Neither Consultant nor any of Consultant's employees or
agents shall be entitled to any benefits accorded to NHancement's employees,
including, without limitation, worker's compensation, disability insurance,
vacation or sick pay. Consultant shall be responsible for providing, at
Consultant's expense, and in Consultant's name, disability, worker's
compensation and other insurance as well as licenses and permits usual or
necessary for conducting the Services.
7. COMPENSATION AND REIMBURSEMENT. From April 18, 1998 through
February 2, 1999, Consultant shall receive One Hundred Fifteen Thousand
Dollars ($115,000) per calendar year or a portion thereof for a period less
than a calendar year, payable in equal monthly installments on the first day
of each month, as his compensation for the Services rendered to the Company
provided, however, that the compensation due Consultant for the months of
June, July and August, 1998 shall be two-thirds (2/3) of such amount.
Notwithstanding the Term of this Agreement as defined above, from February 2,
1999 through February 2, 2001, Consultant shall receive One Hundred Fifty
Thousand Dollars ($150,000) per calendar year or a portion thereof, payable
in equal monthly installments due on the first day of each month, as his
compensation for the Services rendered to the Company during the Term of this
Agreement. As of June 1, 1999, the Company owes Consultant $133,364 in
accumulated consulting compensation and interest. As of the Effective Date,
Consultant has agreed to forgive this debt and, in consideration therefore,
the Company shall issue 50,000 warrants to Consultant. The warrants shall
have an expiration date of June 7, 2002 and shall have an exercise price of
$1.0375 per share which is the average closing bid price of the stock for the
five (5) trading days immediately preceding the Effective Date of this
Agreement.
The Company, at its own discretion, will reimburse any reasonable
expenses incurred by Consultant in connection with the performance of the
Services herein. Consultant shall be solely responsible for any and all
taxes, social security contributions or payments, disability insurance,
unemployment taxes, and other payroll type taxes applicable to such
compensation. Consultant hereby indemnifies the Company and holds the Company
harmless from, any claims, losses, costs, fees, liabilities, damages or
injuries suffered by the Company arising out of Consultant's failure to
perform its obligations in this Section 7.
8. PERSONNEL. Consultant represents and warrants to NHancement
that Consultant's personnel will have sufficient expertise, training and
experience to accomplish the Services. Consultant agrees that all his
personnel shall be compensated, taxes withheld, and other benefits made
available as required by applicable law and regulations.
9. TERMINATION OF CONSULTING SERVICES.
9.1 Notwithstanding any other provision of this Agreement,
the Consultant's Services may be terminated:
9.1.1 By NHancement for "Cause" (defined
below), upon forty-five (45) days' notice to Consultant setting forth in
writing NHancement's election to terminate this Agreement and the specific
reasons for termination, and if, within such forty-five (45) days, Consultant
was given the right to present his position regarding the termination to the
NHancement's Board of Directors ("BOARD") and after such hearing a majority
of the Board ratified the decision to terminate his Services. For purposes of
this Agreement, "CAUSE" justifying the termination of this Agreement by
NHancement is defined as: (1) willful dishonesty towards, fraud upon, crime
against, misrepresentation, embezzlement, deliberate or attempted injury or
bad faith action with respect to NHancement; (2) willful failure or refusal
to perform the Services required of him hereby; or (3) Consultant's
conviction of any felony (whether in connection with Consultant's affairs or
otherwise).
9.1.2 By either party for any material breach
of any of the terms of this Agreement, if such material breach has not been
substantially cured within thirty (30) days following written notice of such
breach from the party aggrieved to the other specifying the breach relied on
for such termination, and failure of such party to cure such breach within
such period or, if cure cannot reasonably be effected within such thirty (30)
day period, if the party does not commence to cure the breach within such
thirty (30) day period and thereafter pursue such cure continuously and with
due diligence, until cure has been fully effected. The parties hereby agree
that NHancement's failure to make any payment due hereunder within five (5)
business days after receipted notice from Consultant of default shall be
deemed to be a material breach of this Agreement.
9.1.3 In the event of Consultant's death during
the term of his Services.
<PAGE>
9.1.4 By Consultant upon sixty (60) days notice
to the Company.
9.2 In the event of termination of this Agreement by Consultant
upon material breach by the Company, NHancement's obligation to pay One
Hundred percent (100%) of the Compensation pursuant to Section 7 hereunder
shall continue for the duration of the remaining Term; all other obligations
of the parties hereunder shall terminate except for the obligations set forth
in Section 11 (Confidentiality).
9.3 In the event of termination of this Agreement by the
Company without cause, NHancement's obligation to pay One Hundred percent
(100%) of the Compensation pursuant to Section 7 hereunder shall continue for
the duration of the remaining Term; all other remaining obligations of the
parties hereunder shall terminate except for the obligations set forth in
Section 11 (Confidentiality).
10. ASSIGNMENT OF INVENTIONS: WORK PRODUCT.
10.1 If at any time during the Term of this Agreement,
Consultant shall (either alone or with others) make, conceive, discover or
reduce to practice any invention, modification, discovery, design,
development, improvement, process, software program, work of authorship,
documentation, formula, data, technique, know-how, secret or intellectual
property right whatsoever or any interest therein (whether or not patentable
or registrable under copyright or similar statutes or subject to analogous
protection) (each, "DEVELOPMENT" and collectively "DEVELOPMENTs") that (i)
relates in any way to the business of the Company or any of its subsidiaries,
or any of the products or services being developed, manufactured or sold by
the Company or its subsidiaries as of the Effective Date of this Agreement
and of which Consultant would reasonably be aware, or (ii) results from tasks
assigned to him by the Company or its subsidiaries, or (iii) results from the
use of premises on personal property (whether tangible or intangible) owned,
leased or contracted for by the Company or its subsidiaries, such
Developments and the benefits thereof shall immediately become the sole and
absolute property of the Company and its assigns.
10.2 Consultant shall promptly disclose to NHancement
(or any persons designated by it) each such Development and hereby assigns
any rights he may have or acquire in the Developments and benefits and/or
rights resulting therefrom to NHancement and its assigns without further
compensation and shall communicate, without cost or delay, and without
publishing the same, all available information relating thereto (with all
necessary plans and models) to the Company.
10.3 Consultant hereby represents and warrants that all
Developments by him during the time he worked or was associated with VPI
became assets of, and were owned by VPI; and he hereby assigns any rights he
may have or acquire in such Developments and benefits and/or rights resulting
therefrom to the Company and its assigns without further compensation and
shall communicate, without cost or delay, and without publishing the same,
all available information relating thereto (with all necessary plans and
models) to the Company.
10.4 Upon disclosure of each Development to NHancement,
Consultant will, during his Services and at any time thereafter, at the
request and cost of NHancement, sign execute, make and do all such deeds,
documents, acts and things as NHancement and its duly authorized agents may
reasonably require too apply for, obtain and vest in the name of the Company
letters patent, copyrights or other analogous protection in any country
throughout the world and when so obtained or vested to renew and restore the
same; and to defend any opposition proceedings in respect of such
applications and any opposition proceedings or petitions or applications for
revocation of such letters patent, copyright or other analogous protection.
10.5 In the event the Company is unable, after
reasonable effort, to secure Consultant's signature on any letters patent,
copyright or other analogous protection relating to a Development whether
because of any physical or mental incapacity or for any other reason
whatsoever, Consultant hereby irrevocably designates and appoints NHancement
and its duly authorized officers and agents as his agent and
attorney-in-fact, to act for and in his behalf and stead to execute and file
any such application or applications and to do all other lawfully permitted
acts to further the prosecution and issuance of letters patent, copyright or
other analogous protection thereon with the same legal force and effect as if
executed by Consultant.
11. NON-COMPETITION; CONFIDENTIALITY.
11.1 NO COMPETITION. Consultant will not, anywhere in
the world, without the prior written approval of the Company, during the Term
of the Agreement engage, directly or indirectly, in a "Competing Business,"
as defined below, whether as a sole proprietor, partner, employee, director,
consultant, independent contractor, or in any other manner by which
Consultant holds any beneficial interest in a Competing Business, derives any
income from a Competing Business, or provides any service to a Competing
Business. "COMPETING BUSINESS" shall mean the design,
<PAGE>
development, manufacture or marketing of products in any line of business in
which the Company or its subsidiaries is, or has in the past been, involved,
or is or has planned or considered involvement in, of which Consultant,
acting in his capacity as either Consultant or Director of the Company during
the Term of this Agreement, would be reasonably expected to have knowledge;
PROVIDED, HOWEVER, that Consultant's activities in connection with his
ownership and operation of Intermedia Technologies Inc. and Consultant's
employment by a manufacturer of voice processing or telecommunications
equipment not manufactured by the Company or its subsidiaries ("TELCO") shall
be excluded from such definition, to the extent that such Telco is not
engaged in Competing Business. In the event that Telco enters into Competing
Business after Consultant accepts his engagement or relationship with Telco,
within a reasonable time of learning of such event by Consultant (but in no
event longer than 30 days), Consultant shall notify the Company and request a
written approval from the Company for Consultant's continued engagement or
relationship with Telco, which approval shall not be unreasonably withheld.
If such written approval is denied by NHancement (the "DENIAL"), Consultant
shall terminate his engagement or relationship with Telco within a reasonable
time agreed upon between the Company and Consultant. Failing to terminate
such engagement or relationship by Consultant after the Denial shall
constitute a material breach of this Section. The provisions of this Section
will not, however, restrict Consultant from owing less than One percent (1%)
of the outstanding stock of a publicly-traded corporation engaged in a
Competing Business.
11.2 NO SOLICITATION OF CUSTOMERS. Consultant will not,
directly or indirectly, until the lapse of expiration of the Term of this
Agreement, without the prior written approval of NHancement which consent
shall not be unreasonably withheld, call upon, cause to be called upon,
solicit or assist in the solicitation of, any customer or potential customer
of the Company or its subsidiaries for the purpose of interfering with
Company's contractual relationship with its customer or attempt diverting any
existing or future business of such customers to a Competing Business.
11.3 NO HIRING OF EMPLOYEES. Consultant will not,
directly or indirectly, during the Term of this Agreement, without the prior
written approval of the Company which approval shall not be unreasonably
withheld, employ, engage, or seek to employ or engage, directly or
indirectly, any employee of the Company or its subsidiaries in a Competing
Business.
11.4 CONFIDENTIALITY. Consultant will not, without the
Company's prior written approval, which approval shall not be unreasonably
withheld reveal to any person or entity any of the trade secrets or
confidential information concerning the organization, business or finances of
the Company or its subsidiaries or of any third party which the Company or
its subsidiaries is under an obligation to keep confidential (including, but
not limited to, trade secrets or confidential information respecting
inventions, products, designs, methods, know-how, techniques, systems,
processes, software programs, works of authorship, customer lists, projects,
plans and proposals), except as may be required in the ordinary course of
performing his duties as a Consultant of NHancement, and he shall keep secret
all matters entrusted to him and shall not use or attempt to use any such
information in any manner which may injure or cause loss or may be calculated
to injure or cause loss whether directly or indirectly to he Company or its
subsidiaries.
11.5 EQUITABLE REMEDIES. The Services to be rendered by
Consultant and the information disclosed to Consultant prior to and during
the Term hereof are of a unique and special character, and any breach of
Section 3 or 4 hereof will cause the Company immediate and irreparable injury
and damage, for which monetary relief would be inadequate or difficult to
quantify. Therefore, the Company will be entitled to, in addition to all
other remedies available to it, injunctive relief and specific performance to
prevent a breach and to secure the enforcement of all provisions of Sections
10 and 11 hereof. Injunctive relief may be granted immediately upon the
commencement of any such action.
12. MISCELLANEOUS PROVISIONS.
12.1 MUTUAL RELEASE. The parties hereby mutually
release and discharge the other party from any and all debts, demands,
actions, causes of action, suits, claims or liabilities of any kind, both at
law and in equity, arising from or in any manner related to Consultant's
employment prior to the Resignation Date or the termination of such
employment. This release includes any claim for wrongful discharge, breach of
the covenant of good faith and fair dealing, defamation, interference, fraud
or misrepresentation, benefits, vacation pay, severance or other compensation
of any sort, harassment or discrimination on the basis of race, color,
national origin, religion, age, sex, sexual orientation, disability or
marital status, and/or violation of any and all statutes, rules, regulations
or ordinances whether state, federal or local, including without limitation
the Fair Employment and Housing Act, as amended, Title VII or the Civil
Rights Act, as amended, the Age Discrimination in Employment Act of 1967, as
amended and the Americans with Disabilities Act. The parties agree that this
waiver and release do not apply to any rights or claims that may arise from
events occurring after the date the parties sign this Agreement.
<PAGE>
12.2 FREE NEGOTIATION OF AGREEMENT. The parties
acknowledge that this Agreement was freely entered into and negotiated and
that both parties had the opportunity to make proposals, counter proposals
and to exchange information and that neither party took a fixed position in
regard to reaching this Agreement.
12.3 LEGAL AND FINANCIAL ADVICE. Consultant further
acknowledges that he has been advised to consult an attorney and a financial
advisor for advice regarding the effect of this Agreement and that he was
advised to take at least twenty-one (21) days to consider it before signing
it. Consultant understands that he has the right to revoke this Agreement for
seven (7) days after signing and this Agreement shall not be effective until
the revocation period has expired. Consultant understands that if he revokes
this Agreement within seven (7) days after signing, he shall not receive the
independent contractor position with the Company and the Addendum in Exhibit
A and other benefits provided for in the preceding sections of this
agreement. The Company agrees to pay for Consultant's legal and financial
advisor fees related to this Agreement, up to a maximum of $10,000.
12.4 WAIVER. The parties have read and fully understand
the statutory language of Section 1542 of the Civil Code of the State of
California and, having been so apprised, and except as provided herein, agree
nevertheless to waive any and all rights or benefits which they may now have,
or in the future may have, under the terms of Section 1542 of the California
Civil Code which states:
"SECTION 1542. GENERAL RELEASE; EXTENT. A general
release does not extend to claims which the creditor
does not know or suspect to exist in his favor at
the time of executing the Release, which if known by
him must have materially affected his settlement
with the debtor."
12.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement
constitutes the entire understanding between the parties with respect to the
subject matter contained herein and supersedes any prior understandings and
agreements among them respecting such subject matter. This Agreement may be
amended, supplemented, or terminated only by a written instrument duly
executed by both parties.
12.6 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not affect its interpretation.
12.7 GENDER; NUMBER. Words of gender may be read as
masculine, feminine, or neuter, as required by context. Words of number may
be read as singular or plural, as required by context.
12.8 SEVERABILITY. If any provision of this Agreement
is held illegal, invalid, or unenforceable, such illegality, invalidity, or
unenforceability shall not affect any other provisions hereof. This Agreement
shall, in such circumstances, be deemed modified to the extent necessary to
render enforceable the provisions hereof.
12.9 NOTICES. All notices, requests, demands, waivers,
consents, approvals, or other communications required or permitted hereunder
shall be in writing and shall be deemed to have been given if delivered
personally, sent by receipted delivery by facsimile transmission, telegram or
telex, or sent by certified or registered mail or same day or overnight
courier service, postage prepaid, return receipt requested, to the following
addresses:
NHancement: NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, CA 94538
Attention: Mr. Douglas S. Zorn
Consultant: Mr. James S. Gillespie
198 Country Club Drive #35
Incline Village, NV 89451
Notice of any change in any such address shall also be given in the
manner set forth above. Whenever the giving of notice is required, the giving
of such notice may be waived by the party entitled to receive such notice.
12.10 WAIVER. The failure of any party to insist upon
strict performance of any of the terms or conditions of this Agreement shall
not constitute a waiver of any of his rights hereunder.
12.11 ASSIGNMENT. Consultant may not assign any of his
rights or delegate any of his obligations hereunder, and such purported
assignment or delegation shall be void.
<PAGE>
12.11 GOVERNING LAWS. THIS AGREEMENT SHALL BE GOVERNED
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
REGARD TO ITS CHOICE OF LAW PRINCIPLES.
12.12 ATTORNEYS' FEES. In the event it becomes necessary
for either party hereunder to employ an attorney to enforce or interpret the
Agreement, the prevailing party, if any, shall be entitled to recover
reasonable attorneys' fees, costs and necessary disbursements from the
opposing party.
12.13 BINDING EFFECT. This Agreement shall be binding
upon, and inure to the benefit of, the successors, executors, heirs,
representatives, administrators and permitted assigns of the parties hereto.
Consultant shall have no right to assign this Agreement, by operation of law
or otherwise. Any such purported assignment shall be void.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURES APPEAR ON THE NEXT
PAGE.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first above written.
CONSULTANT:
/s/ JAMES S. GILLESPIE
--------------------------------------
James S. Gillespie
Date: June 7, 1999
NHANCEMENT TECHNOLOGIES INC.
By: /s/ DOUGLAS S. ZORN
--------------------------------------
Douglas S. Zorn
Its: President and Chief Executive Officer
Date: JUNE 7, 1999
-------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,211
<SECURITIES> 0
<RECEIVABLES> 5,958
<ALLOWANCES> 228
<INVENTORY> 1,495
<CURRENT-ASSETS> 11,488
<PP&E> 2,007
<DEPRECIATION> 857
<TOTAL-ASSETS> 15,572
<CURRENT-LIABILITIES> 9,721
<BONDS> 0
0
1,342
<COMMON> 69
<OTHER-SE> 4,370
<TOTAL-LIABILITY-AND-EQUITY> 15,572
<SALES> 15,629
<TOTAL-REVENUES> 15,629
<CGS> 10,252
<TOTAL-COSTS> 10,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> (1,141)
<INCOME-TAX> 1
<INCOME-CONTINUING> (1,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,142)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
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