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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from October 1, 1998 to September 30, 1999
COMMISSION FILE NUMBER 0-21999
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NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3333
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $.01 per share
(Title of class)
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
For the fiscal year ended September 30, 1999, the issuer's revenues totaled
$23 million.
As of December 10, 1999, the aggregate market value of the voting common
equity of NHancement Technologies Inc. held by non-affiliates was approximately
$18.2 million based upon the closing bid price for such common stock on such
date on The Nasdaq SmallCap Market System, of $2.625 per share.
As of December 10, 1999, there were 8,602,630 shares of Common Stock
outstanding.
Documents Incorporated by Reference - None
Transitional Small Business Disclosure Format (check one)
Yes No X
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NHANCEMENT TECHNOLOGIES INC.
TABLE OF CONTENTS
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Page
PART I ----
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Item 1. Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7. Financial Statements 26
Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act 26
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners and Management 30
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits and Reports on Form 8-K 32
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PART I
ITEM 1. BUSINESS
This report includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. Certain statements included in this Form
10-KSB, including, without limitation, statements related to anticipated cash
flow sources and uses under "Liquidity and Capital Resources", the mitigation of
the Year 2000 issue under "Impact of the Year 2000 Issue" and other statements
contained in the "Management's Discussion and Analysis of Financial 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. Although the Company believes that the expectations reflected in any
such forward-looking statements are reasonable it can give no assurances that
such expectations will prove to have been correct. Any forward-looking
statements contained 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, all of which may be beyond the control of the
Company. Any one or more of these factors could cause actual results to differ
materially from those expressed in any forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and elsewhere
in this report.
OVERVIEW
NHancement Technologies Inc.'s ("NHancement" or the "Company") primary
objective is to become a leading provider of communications and data software
products, systems and services for enterprise customers. NHancement believes
that increased competition, shorter time to market trends and the reduced
importance of geographical borders make it imperative that corporations
achieve and maintain state-of-the-art communication and information systems
that provide a unified view of an enterprise's business functions on a
worldwide basis. The Company, through its three main operating subsidiaries,
NHancement Technologies North America, Inc., a California corporation ("NHAN
NA"), Infotel Technologies (Pte) Ltd, a Singapore corporation ("Infotel"),
and NHancement Technologies Software Group, a recently formed California
corporation ("the "Software Group"), provide corporations and other
businesses with communication systems, data products and technological
innovations designed to enhance efficiency. The Company also has a Canadian
subsidiary incorporated under the laws of the Yukon Territory, that was
formed for the purpose of facilitating NHAN NA sales in Canada, and is
headquartered in Montreal, Quebec.
The Company was incorporated in October 1996 to pursue a business
combination opportunity with NHAN NA (then named Voice Plus). NHAN NA was then
engaged in the business of integrating voice processing systems with
telecommunications equipment. NHAN NA was acquired by NHancement on February 3,
1997 along with a development stage company whose operations were later merged
with those of NHAN NA. On February 4, 1997, the Company completed an initial
public offering ("IPO") of shares of its Common Stock.
Infotel was acquired by NHancement on June 22, 1998. Infotel is an
integrator of infrastructure communications equipment products, providing radar
system integration, turnkey project management services and test
instrumentation, as well as a portfolio of communications equipment in Asia. The
operations of the entity are being conducted under the name of "Infotel
Technologies (Pte) Ltd," which is headquartered in Singapore.
On August 31, 1999, the Company acquired the software assets of Eastern
Systems Technology, Inc. ("Eastern"), including the "InfoFast" software search
engine which accesses information contained in multiple corporate databases, in
exchange for shares of its Common Stock. In connection with the acquisition, Ram
V. Mani, the majority owner of Eastern, joined NHancement as its Chief
Technology Officer and as General Manager of the Company's newly formed software
subsidiary, named NHancement Technologies Software Group (the "Software Group").
The Software Group was formed to internally develop the software products that
are critical to the Company's objective of becoming a software products and
services company. The Software Group is
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headquartered at the Company's principal corporate offices, with research and
development facilities in Chenni, India.
Most recently, on December 10, 1999, the Company entered into an agreement
to acquire Trimark Inc. in a merger transaction with a wholly-owned subsidiary
of the Company. Trimark is engaged in the business of licensing profile selling
software and services and conducts business under the name "Triad Marketing." It
is expected that this acquisition will close in early January 2000.
The Company's principal corporate office is located at 6663 Owens Drive,
Pleasanton, California 94588, and its telephone number is 925-251-3333.
STRATEGY
The Company's goal is to become a leading provider of internally developed
software products and services which, when coupled with industry standard
software and infrastructure systems, will provide enhanced communications and
productivity for corporate enterprises. However, during the lasts three quarters
of fiscal 1999, the Company first had to devote its resources to improving the
performance of its domestic operations. With profitability restored during the
last three quarters of fiscal 1999, the principal elements of our strategy for
fiscal 2000 are:
(1) Develop our own suite of software products that enhance the productivity
of business enterprises.
Through the current development efforts of our Software Group and other
strategic acquisition opportunities, the Company plans to release an
impressive suite of productivity products by the end of fiscal 2000.
With these new products, the Company will have completed its
transformation from a systems integrator to a software products and
services company.
(2) Continue to capitalize and expand on our existing sales and support
infrastructure and systems integration capabilities to market our
existing and new products while moving from system sales to a services
revenue model that licenses products for use by corporate enterprises
and services providers.
The Company believes that, by utilizing its sales force and installed
base of over 1,000 client organizations, the Company can continue to
increase revenues by introducing new complementary products and
services to its existing customers. During fiscal 2000, the Company
will endeavor to move away from implementing infrastructure systems
to managing systems for customers and selling metered services in a
recurring revenue model.
(3) Exploit a growing trend towards unified communications by providing
various solution-based, stand-alone network systems and applications.
The Company believes that when implementing any new system or
technology, businesses seek to maximize the use of current resources
and facilities. As a result, previously disparate electronic systems
are being integrated to operate on a unified network. Further, the
continuing trend towards outsourcing of services in an environment of
technological complexities requires vendors to be highly
skilled in integrating telephony technology with LAN and WAN systems.
The Company's goal is to provide integrated communications systems that
achieve these goals. Management believes that its voice processing and
computer telephony integration capabilities will allow it to meet the
communications needs of business enterprises.
(4) Expand product portfolio through partnership agreements.
The Company intends to expand its product portfolio while maximizing
its organizational strength and expertise in marketing and systems
integration. In particular, the Company seeks to develop relationships
with organizations that will expand its geographic coverage or provide
complementary products and
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services. As an example, the Company signed a reseller agreement with
Interactive Intelligence, Inc. ("I3") to sell its call center product
named, Enterprise Information Center ("EIC"). I3 has developed
advanced computer telephony equipment incorporating Internet
capabilities and the Windows NT operating system and CT/telephony
applications developed using the universal JAVA programming language.
I3 has merged two diverse technologies of computer and telephony, and
is seamlessly merging various diverse functions such as advanced PBX,
ACD, IVR, Voice Messaging, FAX Messaging, E-Mail and Call Center
functions, on a single Windows NT server. NHancement received two
awards from I3 for fiscal 1999, one for the most sales of the EIC
products and the other for the highest number of new EIC customers. In
October 1999, the Company became a Global I3 Partner and will
immediately begin to sell the EIC product in India.
THE COMPANY'S PRODUCTS AND SERVICES
The Company's current systems integration businesses include voice
processing, multimedia messaging and infrastructure communications equipment
products. Although the Company believes that its relations are good with all its
vendors, cash flow issues in North America during the 1999 fiscal year put a
strain on these relationships. While cash flow has improved in recent months,
were the Company to again experience cash flow problems, relations with the
Company's vendors could be further damaged and, as a consequence, materially
adversely affect the operations of the Company. Cash flow relationships could
degrade and in extreme instances cause a disruption to our product supply.
Communication and Productivity Software Products
NHancement, through its Software Group, offers integration, application and
software products to its customers worldwide. These internally developed
software products include the "InfoFast" search engine that allows enterprises
to simultaneously access information in multiple databases, integrations that
present data screens in unison with the new NT based communication servers and
custom software applications.
NT Based Communication Servers
NHancement, through its NHAN NA subsidiary, offers the new NT based
communication server named Enterprise Information Center ("EIC"), that is
manufactured by Interactive Intelligence, Inc. ("I3"). These servers allow
multiple integrated forms of communications through a single system. The forms
of communications supported by the EIC system include: voice, data, email,
facsimile, voicemail and interactive voice response. All are web capable.
NHancement is a Premiere Partner of I3 and was the largest worldwide reseller of
the EIC product during 1999.
Voice Processing and Multimedia Messaging
NHancement, through its NHAN NA subsidiary, offers a broad range of products
that support a number of enterprise applications such as voice messaging, text
messaging, LAN messaging and interactive voice response or self-inquiry systems.
The Company's product portfolio includes manufacturers among others, such as
NEC, Centigram Communications Corporation, Digital Speech Systems, Inc., Active
Voice Corporation, Voice Technologies Group, and I3. NHAN NA is a systems
integrator and national distributor of voice processing equipment from several
manufacturers, which equipment enables users to access and interact with a broad
range of information in a variety of formats (including voice, text, data and
facsimile) from a variety of terminals (including touch-tone telephones and
personal computers). NHAN NA offers a broad range of products that support a
number of enterprise applications: Telephone Answering, Automated Attendant,
Voice Messaging, Paging, Facsimile Messaging, Interactive Voice Response, LAN
Integration and Networking, and Technical Support.
Infrastructure Communications Equipment
NHancement, through Infotel in Singapore, offers a wide range of
infrastructure communications equipment
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products and system integration services that satisfy the most demanding
communications project. With over a decade of experience its technical team can
handle any communications project with confidence. NHancement has satisfied many
customers on simple projects of several hundreds of thousands of dollars for
modems and complex multi-million dollar, multi-node turnkey projects, both in
complex radio and networking systems. Products supported include manufacturers
such as Motorola, Ericsson, Raytheon, Newbridge and Shiva Corp., Rohde & Schwarz
Gmbh, and Siemens. NHancement's Infotel subsidiary focuses principally on large
projects in the government and institutional sectors, as well as in the
commercial sector, and targets opportunities for regionalization and
Internetworking.
Turnkey Systems Projects
Customers that award turnkey projects do so only to vendors or systems
integrators that have full capabilities in design, installation, commissioning,
project management and documentation. In such projects, the Company's emphasis
and competitive edge lies in the practice of sourcing the best product that
meets the customer's requirements. Emphasis is placed on design and project
management in which the Company maintains strong technical competency. Other
communications activities include the supply and installation of various voice
and data communications equipment on a tender basis.
Test Measuring Systems
NHancement's Infotel subsidiary also has an established business providing
test measuring instrumentation and testing environments. The business grew out
of a communications relationship with a German conglomerate, Rohde & Schwarz
Gmbh, which evolved into a dependency on Infotel to service other Rohde &
Schwarz products such as test instruments. Infotel is now the regional
distributor and test and repair center for Rohde & Schwarz test instruments,
which provides a steady stream of revenues. Infotel has since expanded its
repair capability to include Alcatel mobile telephones.
MARKETING
The Company has a marketing and distribution infrastructure for its own
software products and services as well as third party voice processing and
multimedia messaging products, which now include other new products, such as
call centers. The Company has marketing personnel, technical assistance centers
(including customer service representatives, system engineers and senior level
field technicians) and a network of service/support dealers to provide its
customers with personalized attention, flexibility, responsiveness and
accountability within the United States and Singapore.
The Company markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific markets,
participation in trade shows, acquisition of databases and inclusion of its
products and services on bidders' lists. The Company focuses on pre-sale
analysis of its customers' needs and the rate-of-return potential of specific
sales opportunities to determine whether they justify the investment of time and
effort of the Company's sales and marketing organization. Typically, the Company
focuses on sales opportunities where the value added from its products and
services provides significant benefits for the customer. The Company also
participates in competitive bidding for government agency work. In evaluating a
prospective sales situation, the Company also considers the lead-time to
revenue, the complexities of the customer's requirements and its ability to
satisfy the customer and provide it with the necessary support.
PRINCIPAL SUPPLIERS
NHAN NA's business is based upon the integration of its internally developed
software products and services with hardware with telecommunications and data
processing equipment manufactured by others, into integrated systems designed to
meet the needs of its customers. Although NHAN NA has distributor agreements
with a number of equipment manufacturers, a substantial portion of its North
American revenue is based upon products manufactured by Centigram Communications
Corporation ("Centigram"). The Company depends upon Centigram to offer products
that are competitive with products offered by other manufacturers as to
technological
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advancement, reliability and price. If Centigram's competitors should surpass
Centigram in any of these qualities, the Company may be required to establish
alternative strategic relationships. Any such development would adversely affect
the Company's voice processing business for an indeterminate period of time
until new supplier relationships could be established.
Pursuant to the Authorized United States Distributor Agreement, which has
been renewed several times over the last nine years, NHAN NA is an independent
distributor of Centigram products in the United States, Puerto Rico and Canada,
and may expand this territory into international locations with written
authorization from Centigram. Under the Distributor Agreement, NHAN NA must
purchase a certain number of products each quarter from Centigram. During each
of the nine years that this distributor relationship has existed, NHAN NA has
exceeded its quotas by significant amounts; NHAN NA is expected to satisfy these
quotas in fiscal 2000. The Distributor Agreement, which last expired on December
31, 1997, is renewable automatically for successive two-year terms until
canceled by either party upon 90 days' notice; effective as of December 31,
1997, the Agreement was automatically renewed for an additional two years,
subject to the termination provisions described in the Distributor Agreement.
The Distributor Agreement also may be terminated for cause in the event (i) NHAN
NA defaults in the payment of any amount due Centigram, and such default
continues unremedied for a period of 60 days after written notice of default;
(ii) NHAN NA breaches certain provisions of the Distributor Agreement concerning
the proprietary rights of Centigram; (iii) NHAN NA is acquired by a business
entity that provides products or services in direct competition with Centigram's
products, and in Centigram's judgment, such acquisition represents a conflict of
interest; (iv) NHAN NA fails to perform any obligation under the Distributor
Agreement and such failure continues for a period of 20 days after written
notice; (v) NHAN NA fails to purchase any Centigram assigned quota for a period
of two consecutive quarters; or (vi) NHAN NA sells a Centigram product outside
NHAN NA's designated territory. In addition, the Distributor Agreement
terminates automatically if NHAN NA becomes insolvent, makes an assignment for
the benefit of its creditors, or if bankruptcy proceedings are commenced by, for
or against NHAN NA. Any controversy or claim related to the Distributor
Agreement must be submitted to final and binding arbitration to be held in San
Jose, California, according to the rules of the American Arbitration
Association. A new Distributor Agreement for 2000 and beyond is currently in
negotiation and is expected to be signed in the near future.
On May 8, 1998, Centigram sold its Customer Premise Equipment ("CPE")
business to Mitel Corporation, which now markets Centigram's products through a
newly formed subsidiary, Baypoint Innovations. Baypoint has elected to honor the
Distributor Agreement under the same terms as apply to the distribution
arrangement with Centigram. Any change in the relationship with Baypoint would
have a material adverse effect on the Company. The Company is currently in
negotiations on a new distribution contract.
On July 8, 1998, the Company signed a reseller agreement with I3 to sell
its call center product. I3 has developed advanced computer telephony equipment
incorporating Internet capabilities and the Windows NT operating system and
CT/telephony applications developed using the universal JAVA programming
language. I3 has merged two diverse technologies of computer and telephony, and
is also seamlessly merging various diverse functions such as advanced PBX, ACD,
Interactive Voice Response, Voice Messaging, FAX Messaging, E-Mail and Call
Center functions, on a single Windows NT server.
Pursuant to the terms of the Reseller Agreement, NHAN NA is a Premier
Partner of I3 with rights to market, license, install, support and/or deliver
services based on I3 products throughout North America. The Reseller Agreement
is for an initial term of two years and will be automatically extended for
additional one-year terms unless terminated in writing by either party six
months prior to the anniversary date. I3 may assign NHAN NA a revised annual
sales quota for each succeeding one-year term. If NHAN NA does not meet its
sales quota, the Agreement can be terminated; however, NHAN NA will not be
considered to be in breach or default under these circumstances. Either party
can also terminate the Agreement if the other party commits a material breach
that is not cured within 30 days. The Agreement will terminate immediately
without notice if NHAN NA reverse engineers, disassembles or decompiles any I3
product to a source code version or if NHAN NA transfers or assigns it rights
under the Agreement or rights to the I3 products without I3's permission.
NHAN NA has distributor agreements with a number of equipment manufacturers.
In accordance with the terms of such distributor agreements, a manufacturer may
discontinue the distributor relationship because of factors
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related to a particular distributor or because of a manufacturer's decision to
change its method of distributing its products to all or parts of its markets.
In making such a change, a manufacturer of key products sold by a distributor
may effectively become a direct competitor of its former distributor. Moreover,
a manufacturer may reduce its dealer discounts, eliminate exclusive distribution
rights, reduce the manufacturer's support of a distributor or otherwise
adversely affect the competitive environment in which the distributor sells the
manufacturer's products. Any material change in 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. While cash flow has improved in recent months, were the
Company to again experience cash flow problems, relations with the Company's
vendors could be adversely affected, which could result in a material adverse
effect on the Company.
CUSTOMERS
The Company currently services approximately 1000 clients. Revenues from
our two largest customers accounted for approximately 25% and 5% of total net
revenues during the fiscal year ended September 30, 1999. This concentration of
revenues between two customers results in additional risk to the Company and any
disruption of orders from either of these customers would have an adverse effect
on the Company. The Company's order backlog as of September 30, 1999 totaled
approximately $4.5 million.
YEAR 2000 POTENTIAL IMPACT
The Company has completed the tasks required to be performed by the Company
under the plan implemented by the Company to correct internal computer systems
that could be affected by the "Year 2000" problem. The Year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year. Software programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company presently believes that, with the modifications it has made to
its software programs (including replacements of software in some instances),
the Year 2000 problem will not pose significant operational problems for the
Company's domestic or foreign computer systems. Further, the Company's internal
computer systems for North American and Asian operations were purchased from
well recognized companies and are stipulated by the manufacturers to be Year
2000 compliant. However, if the modifications (or replacements) made by the
Company were not made properly or prove to be inadequate, the Company may incur
additional costs, which could be material to the operations of the Company.
The costs incurred to date by the Company in connection with such
modifications and replacements total approximately $605,000, spread over the
last two fiscal years.
The Company distributes products from third party voice product equipment
manufacturers in North America, Europe and Asia, some of which are susceptible
to Year 2000 problems. During fiscal years 1998 and 1999, the Company completed
a review of the products that its domestic and foreign subsidiaries distribute
for the purpose of determining which, if any, of such products were not capable
of recognizing the year 2000. Communications were effected with all of the
manufacturers of such products to determine the nature and extent of any Year
2000 problems. Where potential Year 2000 computer problems were identified, the
manufacturers of these products stated that the upgrades or replacements
recommended by them, if implemented prior to the year 2000, would resolve such
problems. However, there can be no assurances that these manufacturers'
solutions will, in fact, completely resolve all Year 2000 problems. Moreover,
the solutions provided by some manufacturers involved a significant upgrade cost
to the end user, which could give rise to disputes or litigation between the end
user and the manufacturer, which might also involve the Company. We also have
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 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 operation.
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We believe we have taken reasonable steps to identify and correct all Year
2000 problems within our control. However, the Company may suffer business
interruptions if customers, vendors and other third parties with which we
conduct 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 that is outside of our control.
INTELLECTUAL PROPERTY
The Company currently has registered "VOICE PLUS" as a service mark with
respect to its installation, maintenance and distribution services. The Voice
Plus service marks are utilized by NHAN NA, which was formerly named Voice
Plus. In addition, the Company has intellectual property rights related to
the Factor 1000-Registered Trademark- system, an impairment testing system
that measures human sensory motor performance. However, the Company no longer
utilizes this technology and will sell the technology in the event that an
interested buyer can be found. The carrying value of the FACTOR 1000 assets
is insignificant.
Recently, the Company acquired a software technology that allows businesses
to access multiple databases simultaneously. This technology is expected to be
embedded into most future product releases planned by the Company.
GOVERNMENTAL REGULATION
The Telecommunications Act of 1996 eliminated government mandated barriers
between local and long distance calling, cable television, broadcasting and
wireless service. Consequently, local telephone companies, the traditional long
distance carriers and cable television companies may now enter any of these
markets to provide both local telephone and long distance service, as well as
television programming. Such increased competition likely will change the
infrastructure for implementing communications applications, such as voice and
electronic messaging.
INSURANCE
The Company currently maintains director and officer liability insurance of
$5,000,000 per occurrence, $5,000,000 in the aggregate; general liability
insurance, including products liability insurance, of $1,000,000 per occurrence,
$1,000,000 in the aggregate; a general liability umbrella policy with limits of
$5,000,000 per occurrence, $5,000,000 in the aggregate; and products liability
insurance of $2,000,000 per occurrence, $2,000,000 in the aggregate. While there
can be no assurance that the Company will be able to maintain such coverage, or
secure increased coverage if needed, the Company believes that it will be able
to do so. There can be no assurance that any insurance policy will provide
adequate protection against successful claims. A successful claim brought
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company.
The Company plans to obtain key man insurance policies on certain of its
senior executive officers. All policies will name the Company as the sole
beneficiary. The loss of the services of any of the Company's key employees
would have a material adverse effect on the Company.
EMPLOYEES
As of November 30, 1999, the Company employed a total of 97 employees, of
whom 49 were employed by Infotel, the Company's Singapore subsidiary. The
Company has never had a work stoppage and no employee is covered by a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
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COMPETITION
Enterprise Software Services
As the Company moves forward, through its Software Group, with its own
software products and services, competition will increase with other customer
relationship management ("CRM") software companies such as Siebel and Vantive.
Other more Web centric CRM software companies such as Silknet and Broadvision
could also become significant competitors in the future. Further, the Company
believes that computer software vendors, such as Novell, Inc., Lotus Development
Corporation and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications that compete with its own software products and services. A
substantial majority of competitors in the voice-processing field have better
name recognition in this market, a larger installed base of customers and
greater financial, marketing and technical resources than the Company.
Moreover, the Company expects that its principal existing competitors and
new competitors will offer new or enhanced products. In addition, the Company
believes that computer software vendors, such as Novell, Inc., Lotus Development
Corporation and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications.
Voice Processing Products and Services
The voice processing market and customer premises equipment markets, fast
growing segments of the telecommunications industry, are highly competitive and
the Company believes that competition within this industry will continue to
intensify with the introduction of new or enhanced products and new competitors.
A substantial majority of competitors in the voice-processing field have better
name recognition in these markets, a larger installed base of customers and
greater financial, marketing and technical resources than the Company.
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 companies and major PBX
equipment manufacturers, such as Fujitsu Limited and Lucent Technologies Inc.
("Lucent"), formerly a division of AT&T. Additionally, in the customer premises
equipment 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, Digital Sound
Corporation, Active Voice Corporation, Applied Voice Technology, Inc., Glenayre
Technologies, Inc. and Comverse Technology, Inc. PBX providers sell
voice-processing equipment as an integrated solution with their own PBXs and may
have a competitive advantage with respect to those who purchase a voice
processing system at the same time they purchase a new PBX. In addition, in many
situations, the Company is competing with an organization offering the same
product platform. Also, Glenayre Technologies, Inc. and Comverse Technology,
Inc., among others, compete with the Company in the service provider market.
Moreover, the Company expects that its principal existing competitors and
new competitors will offer new or enhanced products. In addition, the Company
believes that computer software vendors, such as Novell, Inc., Lotus Development
Corporation and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications.
NHAN NA believes that its attention to customer service, as well as to the
customer's technical requirements, has resulted in success in competing and
winning sales bids. NHAN NA provides detailed information and support to its
customers beginning at the point of sale and continuing through the
implementation period, as well as ongoing service. Depending on the terms of the
maintenance contract purchased, the Company provides assistance for its
customers up to 24 hours per day, 365 days a year. The Company provides training
for its employees in products, installation, system design and support in order
to assist customers in selecting the right equipment and to provide the quality
of service that is demanded. NHAN NA believes it has a very loyal customer base
founded on satisfaction with its service capabilities and active account
management.
10
<PAGE>
Services Providers
Competitors providing products to various services providers, such as
cellular communications operators, long-distance resellers and local telephone
companies, include several voice processing manufacturers such as Boston
Technology Inc., Octel Communications Corporation, Centigram, Comverse
Technology, Inc., Digital Sound Corp. and Glenayre Technologies, Inc.
Infrastructure Communications Equipment
The Company, through its Singapore subsidiary, sells infrastructure
communications equipment products and system integration services. Generally
Infotel does not compete for business with small companies, competing instead
with larger system integrators and distribution companies.
In the data-communications market, key competitors are Datacraft Asia Ltd,
Teledata Ltd, National Computer Systems Pte Ltd and ST Computer Systems Ltd.
These competitors distribute, among others, products manufactured by Cisco,
Ascend, Fore Systems and others.
In the radio communications market, which largely serves the government,
there are fewer competitors, most of which have ties to the government. CET
Technologies Pte Ltd and Keppel Communications Pte Ltd. are Infotel's main
competitors. In some instances, Infotel works together with these competitors in
fulfilling government contracts.
In the test instrumentation market, Infotel has only one major competitor,
which is Hewlett Packard Singapore (Pte) Ltd, the largest electronic test
equipment manufacturer in the world.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate offices occupy approximately 15,100 square feet of
office space in premises shared with NHAN NA and the Software Group. This
facility is leased pursuant to a lease agreement expiring April 3, 2007. The
lease provides for an approximately 3% escalation in rents during each year of
the lease. Rental payments average $21,100 per month over the term of the lease.
The Company leases office space at several other locations in the United
States under leases which expire in the year 2000. Aggregate space leased at
these facilities totals approximately 5,700 square feet, and total monthly
office rental expense for these facilities is approximately $9,700. In addition,
the Company's Singapore subsidiary, Infotel, leases approximately 8,700 square
feet of office space at a monthly office rental rate of approximately US $12,600
under a lease which expires in October of 2001. The Company believes that leased
office space at market rates is readily available at all such locations.
ITEM 3. LEGAL PROCEEDINGS
In the case of BOWNE OF DALLAS VS. NHANCEMENT TECHNOLOGIES, INC., Cause
No. CC-99-06178-D, Dallas County (Texas) Court, a default judgment was entered
against the Company on November 23, 1999, in the amount of $31,150.46, plus
interest and costs, for printing services provided in 1998 which plaintiff
alleges the Company did not pay. The Company is currently engaged in efforts to
settle the case. Bowne of Los Angeles has also made a claim in the amount of
$33,954.57 against the Company arising out of certain printing services provided
to the Company in 1998 and 1999. No action has been filed. The Company is
currently engaged in efforts to settle the claim.
The case of C.C. AND ASSOCIATES, ET AL VS. NHANCEMENT TECHNOLOGIES,
INC., ET AL, Case No. CV 775656, Santa Clara County Superior Court, was settled
on August 24, 1999, for a total of $42,500, paid in two equal installments. The
last payment was made to plaintiff on or before October 15, 1999.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999, which ended September 30, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the over-the-counter market and
has been quoted on The Nasdaq SmallCap System under the symbol "NHAN" since
the Company's February 4, 1997 initial public offering. As of December 10,
1999 there were approximately 981 shareholders of record. The Company's
Series A Convertible Preferred Stock is not publicly traded; however, the
underlying Common Stock is registered pursuant to two separate Registration
Statements on Form S-3 declared effective by the SEC on June 2, 1998 and
August 31, 1999, respectively. The following table sets forth for the periods
indicated the high and low closing prices for the Company's Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL YEAR 1999 (Year Ended September 30, 1999) HIGH LOW
------------------------------------------------ ------- -------
<S> <C> <C>
First quarter (October 1, 1998 to December 31, 1998).................. $1.7500 $0.5000
Second quarter........................................................ $1.7500 $0.6562
Third quarter......................................................... $1.9688 $1.0000
Fourth quarter........................................................ $2.6250 $1.3750
<CAPTION>
FISCAL PERIOD 1998 (Nine Months Ended September 30, 1998) HIGH LOW
--------------------------------------------------------- ------- -------
<S> <C> <C>
First quarter (January 1, 1998 to March 31, 1998)..................... $3.9375 $2.4375
Second quarter........................................................ $3.4375 $1.6875
Third quarter......................................................... $2.1250 $0.6250
</TABLE>
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, in February 1999 the Company received written
notification from Nasdaq that the Company's Common Stock would be delisted from
the Nasdaq SmallCap Market System. In June 1999, Nasdaq granted an exemption
that allowed the Company a period of time to regain compliance with the Nasdaq
SmallCap listing requirements. In July 1999, the Company was able to regain
compliance with these requirements and continue listing of its shares on the
Nasdaq SmallCap Market without interruption. There can be no assurance that the
Company will in fact meet these requirements in any future period.
DIVIDEND POLICY
The Company's Preferred Stock accumulates dividends at a rate of 5% per
annum until converted into Common Stock by the holders or redeemed by the
Company. Dividends can be paid in additional shares of Common Stock of the
Company in lieu of cash dividends. All dividends paid to date have been in
shares of Common Stock and all dividends as of September 30, 1999 have been
paid or accrued on the financial statements of the Company.
The Company has not paid dividends on its Common Stock since its inception.
NHAN NA, prior to its acquisition by the Company, in February 1997, made
distributions to its sole stockholder. The Company currently intends to retain
earnings for use in the business. Accordingly, the Company does not anticipate
paying any dividends to its common stockholders in the foreseeable future.
12
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
TITLE OF AGGREGATE FORM OF
CLASS OF DATE OF NHANCEMENT NUMBER OF PURCHASE CONSIDER-
PURCHASERS(1) SALE SECURITIES SHARES PRICE ATION
---------- ---- ---------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Shares to a director(2) 06-07-99 Common Stock shares 116,565 2 2
Shares to five individuals(3) 06-15-99 Common Stock shares 559,100 3 3
Options granted to three optionees(4) 07-20-99 Common Stock shares 105,000 4 4
Options granted to six optionees(4) 08-23-99 Common Stock shares 253,500 4 4
Shares to two individuals(5) 08-23-99 Common Stock Shares 675,000 5 5
</TABLE>
- --------------------
(1) The issuance of shares and the grant of options to the individuals
identified in the table above were made in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and/or Regulation D
promulgated thereunder.
(2) The shares were issued at fair market value for the conversion of certain
debt, totaling $116,600, payable to a director.
(3) The shares were issued to former shareholders of Infotel in lieu of
performance payments due per the acquisition agreement to acquire Infotel.
Shares were issued at the then current fair market value.
(4) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options generally expire ten years from the date
of grant and are exercisable after seven years, except that acceleration of
vesting will occur if performance targets are met in the first three years
after 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.
(5) The shares were issued pursuant to an agreement whereby the Company
purchased the software assets of Eastern Systems Technology, Inc. in a
transaction valued at approximately $1.5 million.
USE OF PROCEEDS
In June 1999, the Company received net proceeds from the sale of the
second tranche of its Series A Convertible Preferred Stock of approximately
$1,472,000. Of this amount, $1,250,000 was used to pay the former
shareholders of Infotel pursuant to the agreement whereby the Company
acquired Infotel and the remaining amount was used for general working
capital purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. Certain statements included in this Form
10-KSB, including, without limitation, statements related to anticipated cash
flow sources and uses under "Liquidity and Capital Resources", the mitigation of
the Year 2000 issue under "Impact of the Year 2000 Issue" and other statements
contained in the "Management's Discussion and Analysis of Financial 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. Although the Company believes that the expectations reflected in any
such forward-looking statements are reasonable, it can give no assurances that
such expectations will prove to have been correct. Any forward-looking
statements contained 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, all of which may be beyond the control of the
Company. Any one or more of these factors could cause actual results to differ
materially from those expressed in any forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and elsewhere
in this report. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this Item 6, as well as in Item 1 hereof and
elsewhere in this report.
13
<PAGE>
GENERAL
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"), a Delaware
corporation. On February 3, 1997, prior to the February 4, 1997 consummation of
the initial public offering ("IPO") of the Company's Common Stock, BFI merged
with a subsidiary of NHancement whereupon BFI, as the surviving corporation,
became a wholly-owned subsidiary of NHancement. The BFI merger was accounted for
in a manner similar to a pooling-of-interests. Also, on February 3, 1997, the
Company acquired Voice Plus, Inc., now named NHancement Technologies North
America Inc. ("NHAN NA"), a California corporation, and a systems integrator and
national distributor of voice processing equipment, pursuant to a transaction by
which NHAN NA merged with a subsidiary of NHancement, whereupon NHAN NA, as the
surviving corporation, became a wholly owned subsidiary of NHancement. The NHAN
NA acquisition was accounted for as a purchase, and, accordingly, the results of
NHAN NA's operations were included in the Company's financial statements
commencing February 3, 1997.
For financial accounting purposes, BFI was deemed to be the acquiror of
NHAN NA. However, NHancement is considered to be the successor in interest of
BFI and references herein to the Company signify BFI and its successor
NHancement.
Effective as of November 12, 1997, BioFactors, Inc was merged with and into
NHAN NA (then named Voice Plus, Inc.), in a statutory merger intended to
qualify, for federal income tax purposes, as a reorganization under Section 368
of the Internal Revenue Code of 1986, as amended. Voice Plus was the surviving
corporation in the merger transaction with BioFactors, and the separate
existence of BioFactors ceased on the effective date of the merger. NHAN NA
remains a wholly owned subsidiary of NHancement.
On December 15, 1997, NHancement purchased one hundred percent (100%) of
the shares of Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"). As a result of the acquisition, Advantis became a wholly owned
subsidiary of NHancement. Advantis is a telecommunications systems integrator
located in Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997. On September 30, 1998,
NHancement disposed of Advantis. The Company and three of the former
shareholders of Advantis entered into a guarantee agreement pursuant to which
each such shareholder agreed to guarantee repayment of the outstanding loan made
by the Company to Advantis (together with all the interest accrued through
August 31, 1998) pursuant to a loan agreement and related promissory notes dated
July 7, 1997. In exchange, the Company delivered all of the Advantis shares and
transferred its ownership interest in Advantis to three of the original Advantis
stockholders. The financial effect of this disposition on the balance sheet of
NHancement was to increase the Company's tangible net worth, due to the disposal
of about $1.0 million in goodwill and the Advantis balance sheet, which
contained more liabilities than assets. The results of Advantis' operations have
been classified as discontinued operations in the September 30, 1998 financial
statements and are excluded from the loss from continued operations.
On June 22, 1998, the Company acquired all outstanding shares of the common
stock of Infotel Technologies (Pte) Ltd, a Singapore corporation ("Infotel"). As
a result of the acquisition, Infotel became a wholly owned subsidiary of
NHancement. Infotel is a systems integrator of infrastructure communications
equipment products, providing radar system integration, turnkey project
management services and test instrumentation, as well as a portfolio of
communications equipment in Asia. The acquisition was accounted for as a
purchase, and, accordingly, the results of Infotel's operations were included in
the Company's financial statements commencing June 22, 1998.
On August 31, 1999, the Company acquired the software assets of Eastern
Systems Technology, Inc. ("Eastern"), including the "InfoFast" software search
engine to access information contained in multiple corporate databases, in
exchange for shares of its Common Stock. NHancement Technologies Software Group
(the "Software Group"), a wholly-owned subsidiary of the Company, was formed to
internally develop the software products that are critical to the Company's
strategy to become a software products and services company. The software
14
<PAGE>
subsidiary is headquartered at the Company's principal corporate offices located
in Pleasanton, California with research and development facilities in Chenni,
India.
The ongoing business of NHancement is conducted by its three main
operating company subsidiaries, NHAN NA, Infotel and the "Software Group".
The Company also formed a subsidiary under the laws of the Yukon Territory
late in fiscal year 1999 that is headquartered in Montreal, Quebec, for
the purpose of facilitating NHAN NA sales in Canada. For the nine months
ended September 30, 1997, the historical financial statement information
gives effect to the business combinations of BFI and NHAN NA occurring
immediately prior to the IPO, the IPO and the acquisition of Advantis. For
the nine and twelve month periods ended September 30, 1998, the historical
financial statement information includes the operations of BFI, NHAN NA,
Advantis and the results of Infotel for June 22, 1998 through September 30,
1998. The historical financial statement information presented for the fiscal
year ended September 30, 1999 includes twelve months of NHAN NA and Infotel
operations and the fourth quarter results of the Software Group and the
Company's Canadian subsidiary; the operations of the Software Group and the
Canadian subsidiary were insignificant for the Company's 1999 fiscal year.
During 1998, the Company changed its fiscal year-end from December 31st to
September 30th. As a consequence, management's discussion addresses audited
financial data for the nine-month period ended September 30, 1998 compared to
unaudited financial data for the same period a year earlier. Also, discussed is
the audited financial data for the fiscal year ended September 30, 1999 compared
to the unaudited financial data for the same period the previous year.
In November, 1998, the Company informed Nasdaq that due to continued losses,
it no longer met the requirements for continued listing on the Nasdaq SmallCap
Market System and in February 1999, the Company received written notification
from Nasdaq that the Company's Common Stock would be delisted from the Nasdaq
SmallCap Market System. Specifically, the Company failed to meet the
requirements of Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer
maintain (i) net tangible assets of Two Million Dollars ($2,000,000); (ii)
market capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net
income of Five Hundred Thousand Dollars ($500,000) in the most recently
completed fiscal year or in two of the last three most recently completed fiscal
years. In June 1999, Nasdaq granted an exemption that allowed the Company a
period of time to comply with the Nasdaq SmallCap Marketing listing
requirements. In July 1999, the Company was able to regain compliance with these
requirements and continue listing of its shares on the Nasdaq Small Cap Market
without interruption. Although the Company was able to regain compliance with
Nasdaq's requirements, there can be no assurance that the Company will in fact
meet these requirements in any future period. Future losses from operations
would have a materially adverse effect on the financial condition of the
Company. However, the Company believes that the management changes implemented
in January 1999, the corresponding cost reduction measures and the increase in
revenues that resulted in the Company recording profits in the last three
qarters of fiscal 1999 position the Company to remain profitable in the
near future. Management believes that this return to profitability coupled
with increased credit facilities and financing plans will provide adequate
cash for future operations, although no assurances can be given that current
efforts will be successful. See "Risk Factors"
15
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998 AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine Months Nine Months Twelve Months Twelve Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... 52.3% 62.1% 63.9% 67.7%
Gross margin......................... 47.7% 37.9% 36.1% 32.3%
Research, selling, general and
administration expense, including
goodwill amortization
and impairment loss............... 43.4% 53.1% 91.8% 34.5%
Operating income (loss).............. 4.3% (15.2)% (55.6)% (2.2)%
Other income (expense)............... 0.5% (0.2)% -- (0.7)%
Income (loss) before income taxes.... 4.8% (15.4)% (55.6)% (2.9)%
Income taxes......................... 1.4% 0.7% (0.2)% 0.2%
Net Income (loss) from
continuing operations............. 3.4% (16.1)% (55.4)% (3.1)%
Discontinued operations
(including loss on disposal)......... 0.0% 10.1% (8.2)% 0.0%
Net income (loss).................... 3.4% (26.2)% (63.6)% (3.1)%
</TABLE>
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
The Company's primary focus in the fiscal year ended September 30, 1999 was
as an integrator and distributor of voice processing, data processing and
communications systems. In future years, the Company will concentrate on sales
of its own software products, as well as products of its key suppliers. These
operations were conducted through the Company's NHAN NA and Infotel
subsidiaries, with product development centered in the Software Group.
Company-wide revenue for the fiscal year ended September 30, 1999 increased
$11.9 million to $23.4 million as compared to $11.5 million for the same period
in 1998. The increase in revenues in fiscal 1999 was due primarily to: (i) the
fact that only slightly more than one-quarter of Infotel revenues were recorded
in the fiscal year ended September 30, 1998 while Infotel revenues were included
for the entire fiscal year ended September 30, 1999 and (ii) an increase in NHAN
NA's fiscal year 1999 revenues as the Company refocused on its core business.
NHAN NA's net sales for the fiscal year 1999, as a stand-alone business,
increased 18.1%, from $11.6 million for the twelve months ended September 30,
1998 to $13.7 million for the fiscal year ended September 30, 1999. The increase
in NHAN NA revenues came from increased sales to its existing customer base and
to new customers. 25% percent of consolidated fiscal year revenues came from
NHAN NA's largest customer, while 11% of NHAN NA's fiscal year revenues came
from customers who purchased the I3 communications systems being sold by NHAN
NA. NHAN NA's order backlog at September 30, 1999 increased to $2.4 million from
$1.0 million the previous fiscal year. Infotel's backlog increased to $2.1
million from $1.2 million the previous fiscal year.
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 on February 3, 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
16
<PAGE>
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 during 1999, 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 10% of NHAN NA's fiscal year 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 communications systems that
merge voice and data communications into a single computer based system.
The Company's Infotel subsidiary located in Singapore was acquired on June
22, 1998. Therefore, only one fiscal quarter of revenues and income were
recorded on the Company's financial statements related to this subsidiary for
the fiscal year ended September 30, 1998. On a stand-alone basis, net sales
decreased 16% from $11.5 million for the year ended September 30, 1998
(including preacquisition operating results) to $9.7 million for the same period
in 1999. The decline in revenue occurred within the networking products and
project management services business segments, due to slower than expected
customer acceptance rates resulting from delays in project documentation and
testing. Management anticipates this decline will be reversed during fiscal 2000
as the Singapore economy continues to improve and additional salespersons are
hired.
Company-wide gross margins for the fiscal year ended September 30, 1999
declined to 32.3% from 36.1%. NHAN NA's gross margin on a stand-alone basis
increased slightly to 37.3% from 36.9% for the fiscal year ended September 30,
1999 as compared to the same period of 1998. This increase in gross margin was
due to the economies of scales associated with an increased revenue base, partly
offset by additional overhead spending. Infotel had one-time exceptionally high
margins on network revenue in fiscal 1998 due to special pricing that was
negotiated on a bulk deal for two large orders. As special pricing was not
available during 1999, gross margins on these items returned to historical
levels accounting for a significant portion of the decline in gross margin as a
percent of revenues for the 1999 fiscal year. In addition, during fiscal 1998
commission revenues of $0.2 million were recorded with no offsetting costs,
while no such commission revenues were earned in the same period of 1999.
Infotel earns commissions when its vendors (Motorola and Rhode & Schwartz) sell
directly to end-user customers in Infotel's territory.
Company-wide selling, general and administrative ("SG&A") expenses before
amortization of goodwill as a percentage of net sales for the fiscal year ended
September 30, 1999, decreased to 31.8% from 47.8% on a company-wide basis. SG&A,
excluding corporate overhead charges, for NHAN NA on a stand-alone basis
decreased to 23.7% for the fiscal year 1999 compared to 45.5% for the same
period in 1998. The decreases in the fiscal year were due primarily to: (i) a
substantial increase in the revenues for the 1999 fiscal year as compared to the
1998 fiscal year and (ii) a decrease in salary expenses as a percentage of
revenue due to a reduction in personnel as a result of management's
restructuring plan, as well as reductions in overhead costs as percent of
revenue. On a stand-alone basis, Infotel's SG&A, excluding corporate overhead
charges, as a percent of revenues decreased to 16.5% for the fiscal year ended
September 30, 1999 compared to 28.3% for the fiscal year ended September 30,
1998. Infotel's SG&A, on a dollar basis, for the fiscal year was less than the
same periods a year ago; thus the percentage increase was due to the decrease in
Infotel's revenues during the fiscal year ended September 30, 1999. NHancement's
corporate overhead costs increased by $2.4 million for the fiscal year ended
September 30, 1999. Fiscal year corporate overhead costs increased due to (i)
increased costs for audit and legal services related to the additional reporting
requirements of the Company resulting from its acquisition of Infotel, the
preparation of a special proxy statement related to the Company's Preferred
Stock financing, and legal fees associated with maintenance of the Company's
Nasdaq SmallCap Market listing; (ii) relocation and severance expenses related
to the former CEO, and (iii) bonuses accrued in 1999. Amortization of goodwill
expressed in dollars and as a percentage of net revenues, was $442,600 or 2% and
$423,400 or 3.7% for the years ended September 30, 1999 and 1998, respectively.
During the year ended September 30, 1998 the Company also recorded an impairment
loss of $4.6 million, which represented 40.2% of net revenues. Goodwill
amortization and impairment loss are included in SG&A costs in the accompanying
table on the Results of Operations.
17
<PAGE>
For an analysis of the differences between the Company's effective tax rate
and the statutory rate see Note 10, Income Taxes in the Consolidated Financial
Statements. At September 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 $7.5 million
federal net operating loss carryforward available. The federal net operating
loss carryforwards are subject to an annual limit of approximately $250,000.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
The Company's primary focus in the nine-month periods ended September 30,
1998 and 1997 was as an integrator and distributor of voice processing and
telecommunications systems for businesses, which operations were conducted
through the Company's NHAN NA subsidiary. NHAN NA's revenues for the nine-month
period ended September 30, 1998 totaled $6.4 million as compared to $7.6 million
during the same period a year earlier, which represents a decrease of 15.8%. The
decrease in NHAN NA net revenues between 1998 and 1997 was due primarily to a
slow down in voice processing systems and parts sales. The NHAN NA order backlog
at September 30, 1998 was about $1.0 million or unchanged from the prior year.
NHAN NA revenues in the September quarter of 1998 were slightly below the same
period in 1997.
Based on the estimated future undiscounted operating cash flows of its
related businesses, the Company periodically evaluates the carrying value of
goodwill. 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
and less than the carrying amount of the excess of cost over net assets
acquired. On December 31, 1997 and September 30, 1998, the Company recorded
impairment losses of $4,084,300 and $525,000, representing the difference
between the carrying amounts of goodwill over its estimated fair value. The
remaining balance of the NHAN NA goodwill at September 30, 1998 was $750,000 and
the useful life was reduced from five years to three years. The second write-off
of $525,000 in 1998 was due to lower than projected revenues in the nine-month
period ended September 30, 1998, continued losses in the NHAN NA subsidiary and
changes in the voice processing industry.
The Company's former subsidiary, Advantis, which was disposed of by the
Company in September 1998, experienced a sharp decline in net revenues, due
mainly to the economic decline in Malaysia and poor local management. Poor
performance, the economic decline and the weakening of the Malaysian currency
combined with weak local management led to the Company's disposal of Advantis in
September 1998. The Company recorded a loss from discontinued Advantis
operations of $581,400 and a one-time charge of $368,600 on the disposal of
Advantis.
The Company's Infotel subsidiary was acquired September 22, 1998 and
added just over three months, or about $3.0 million of revenues during the
fiscal period ended September 30, 1998. On a stand-alone pro forma basis,
Infotel revenues increased $2.7 million or 40.3% from $6.7 million for the
nine-month period ended September 30, 1997 (preacquisition results), compared
to $9.4 million for the same period in 1998. The increase was due primarily
to the sale of several large radio systems ($850,000), increased test
instrumentation sales ($150,000) and several large management contracts ($1.7
million) during the first nine months of 1998.
Gross margins in the nine-month period ended September 30, 1998 decreased by
9.8% to 37.9% from 47.7% in 1997. The gross margin in 1997 was associated almost
exclusively with the Company's NHAN NA subsidiary. No significant 1997 revenues
or gross margin were recorded from FACTOR 1000-Registered Tradmark- systems or
the Company's former Advantis subsidiary. The gross margin in 1998 was
associated with the Company's NHAN NA subsidiary and approximately three months
of Infotel sales in Singapore. NHAN NA's gross margin, as a stand-alone
business, decreased to 39.2% in 1998 compared to 46.6% in the same period of
1997 due primarily to higher product costs as a percentage of revenues and
increased overhead spending within the operations function. Infotel as a
stand-alone business experienced a 6.9% increase in gross margins for the first
nine months of 1998 to 30.4% as compared to 23.5% for the same period the year
before. The increase in Infotel gross margins was due primarily to Infotel's
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<PAGE>
decision in 1997 to terminate its retail modem business and sell all existing
inventory at or below cost, as well as to the introduction of a new high margin
network product in 1998.
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net revenues were abnormally high during the first nine months of
1998 at 53.1% as compared to 43.4% in the same period of 1997. The SG&A expenses
in 1998 included the NHAN NA subsidiary's SG&A expenses and NHancement's
corporate office expenses for the nine months and about three months of
Infotel's SG&A expenses. The majority of SG&A expenses in 1997 were associated
with the Company's NHAN NA subsidiary and the Company's corporate office. For
NHAN NA, as a stand-alone business, SG&A in 1998 increased 28.1% as a percent of
revenues to 58.2% compared to 30.1% in 1997 due to (i) a 1998 impairment loss
and amortization of the excess of cost over net assets acquired of $750,000
which reduced the carrying value of the excess of cost over net assets acquired
relating to the NHAN NA acquisition compared to $400,000 in 1997, (ii) an
increase in corporate allocated expenses of 3.8% to 9.8% is fiscal 1998,
compared to 6% for the same period in fiscal 1997, which was related to the
costs incurred in implementing a new Year 2000 compliance management information
system ("MIS") which included software and hardware, (iii) a 6.3% increase in
expenses associated with the hiring of additional sales and marketing personnel
during 1997, and (iv) an increase in general and administrative expenses of 4.5%
due to increased expenses related to rent and MIS support costs. Infotel added
about $900,000 in SG&A expenses during the three months following its
acquisition in June 1998. On a stand-alone basis, Infotel's SG&A as a percent of
revenues remained constant at approximately 23% for the nine-month period ended
September 30, 1998 and 1997. For an analysis of the differences between the
Company's effective tax rate and the statutory rate see Note 10, Income Taxes in
the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The acquisition of complimentary businesses and products is an element of
the Company's business strategy, although in the recent past the Company's
ability to engage in acquisition activity was subject to severe limitations
given the Company's then 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
Preferred Stock financing for $3.0 million, of which $1,250,000 was received,
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 $278,000).
During the fiscal year ended September 30, 1999, net cash provided by
operating activities was $1.1 million. Sources of cash consist primarily of
increases in accounts payable and accrued expenses; offset by cash used to
fund the Company's net operating losses and increases in accounts receivable
that resulted from strong fourth quarter sales. Net cash used by investing
and financing activities totaled $0.5 million consisting of: (i) proceeds
from the sale of 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, repayment of principal on notes
payable and the purchase of a software asset. At September 30, 1999, the
Company's working capital was $1.8 million, an improvement of $1.4 million
over September 30, 1998. The Company had a cash balance of $2.5 million
(including restricted cash of $190,000) at September 30, 1999. The Company's
current ratio improved to 1.2 at September 30, 1999 from 1.0 a year ago.
Management believes that available cash reserves coupled with additional
available credit facilities, other financing alternatives and improved
earnings will provide adequate funds for next twelve months, although no
assurance can be given that the Company will have adequate funds for future
operations.
In October 1998, the Company through its NHAN NA subsidiary obtained a $1.0
million accounts receivable
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<PAGE>
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 $1.0 million to $1.5 million and
restrictions were eased on the receivables eligible for inclusion in the
Company's borrowing base. In November 1999, the Company, through its Infotel
subsidiary, completed a credit line with a major Singapore bank for S$3.5
million (US$2.1 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's management estimates that it will incur less than $750,000 in
capital expenditures during the next 12 months, primarily representing
workstations for the new headquarters facility and company-wide business systems
hardware and communications 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 acquisition agreement, the Company was required to
pay $1,390,000 and $494,600 to the former Infotel shareholders 30 days after the
filing of the 10-KSB for its 1998 and 1999 fiscal years respectively. 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. Because 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 continued until the date payment
was made. On April 29, 1999 the Company negotiated an agreement with the former
Infotel shareholders to accept $1,250,000 and $634,600 of the payment in shares
of NHancement's Common Stock.
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.
As of September 30, 1999, the outstanding balance on NHAN NA's line of
credit was approximately $0.5 million inclusive of associated accrued interest.
SUBSEQUENT EVENTS
In December 1999, the Company moved its headquarters from Fremont,
California to Pleasanton, California. In conjunction with the move, the Company
entered into commitments to purchase approximately $400,000 of office furniture
and computer equipment including a new server. The Company's lease commitments
disclosed in the accompanying audited financial statements include its
obligations under the Pleasanton lease.
On December 10, 1999, the Company entered into an agreement to acquire
all outstanding shares of the common stock of Trimark, Inc., which does
business as "Triad Marketing" ("Triad"). The consideration to be paid to the
Triad shareholders will consist of 750,000 shares of Common Stock of NHancement
and warrants to purchase 250,000 shares of Common Stock of NHancement at the
closing price of NHancement's Common Stock on December 9, 1999. In the event
the average closing price of NHancement's Common Stock for the five
consecutive trading days ending on the trading day immediately prior to the
first anniversary and second anniversary of the transaction's closing falls
below Four Dollars $4.00 (the "Valuation Formula"), the Triad shareholders
are entitled to additional consideration, at NHancement's option, of cash or
Common Stock. In addition, on the first anniversary date, the Triad
shareholders are entitled to additional consideration equal to one-half of
the unregistered shares of NHancement Common Stock plus all of the registered
shares of NHancement Common Stock they still own, multiplied by the lesser of
Four Dollars $4.00 minus the Valuation Formula or $2.50. On the second year
anniversary of the closing, the Triad shareholders are entitled to additional
consideration equal to 250,000 unregistered shares owned by the Triad
shareholders multiplied by the lesser of Four Dollars $4.00 minus the
Valuation Formula or $2.50.
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ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 2000. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its acquisition of Infotel, management may enter into derivative
contracts to hedge its foreign currency risk in the future. The Company has not
yet evaluated the financial statement impact of adopting this new standard.
RISK FACTORS
The following risk factors, in addition to the risks described
elsewhere in the description of the Company's business in this report on Form
10-KSB, including, without limitation, those under the captions "Strategy,"
"Principal Suppliers," "Marketing," and "Competition," as well as under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may cause actual results to differ materially from those in any
forward-looking statements contained in the business description, the MD&A or
elsewhere in this report or made in the future by the Company or is
representatives. Such forward-looking statements involve known risks, unknown
risks and uncertainties and other factors, which may cause the actual
results, performance or achievements to differ materially from those expressed
or implied by such forward-looking statements.
RISKS ASSOCIATED WITH DELISTING OF COMMON STOCK; PENNY STOCK RULES.
Although the Company's Common Stock was approved for quotation on the
Nasdaq SmallCap Market System in connection with the Company's IPO in February
1997, we cannot assure you that our Common Stock will remain eligible for
listing on the Nasdaq SmallCap Market. In this regard, until recently, the
Company had failed to comply with the net tangible assets/market
capitalization/net income requirements for continued listing on the Nasdaq
SmallCap Market, as required by Nasdaq under Marketplace Rule 4310(c)(2). This
resulted in written notification from Nasdaq in February 1999 that the Company's
Common Stock would be delisted from the Nasdaq SmallCap Market. In July 1999,
following a hearing with the Nasdaq listing qualifications panel, we received a
positive determination on our request for the continued inclusion of our Common
Stock on the Nasdaq SmallCap Market. As a result, our Common Stock has remained
listed to date, without interruption, on the Nasdaq SmallCap Market.
If our Common Stock were to become delisted from the Nasdaq SmallCap
Market, we would become subject to the SEC's "penny stock" rules. Were this to
occur, you would find it difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's Common Stock.
The "penny stock" rules under the Exchange Act impose additional sales
practice and market-making requirements on broker-dealers who sell and/or make a
market in a penny stock. 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 SEC 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. Consequently, if the Company's Common
Stock were to be delisted from the Nasdaq SmallCap Market and became 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, and
your ability
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<PAGE>
to sell, the Company's Common Stock.
VOLATILITY OF STOCK PRICES.
The over-the-counter markets for securities such as our Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. Other factors that also may adversely affect the market price
of our Common Stock include the following:
- New product developments, including proprietary software products
developed by the Company
- Technological and other changes in the voice-messaging and
communications industries
- Fluctuations in the financial markets
- General economic conditions
- Quarterly variations in the Company's results of operations
PRIOR LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.
Although the Company recorded net income of approximately $0.7 million
on net revenues of $20 million for the last three-quarters of its fiscal year
ended September 30, 1999, on a fiscal year-to-date basis, the Company has
incurred a loss of $716,800 on $23.3 million in revenues. Further, the Company
sustained significant losses for the fiscal year ended December 31, 1997, as
well as for the nine-month fiscal year ended September 30, 1998.
While we have recently returned to profitability, our financial
condition and results of operations will be adversely affected if we fail to
continue to produce positive operating results. This could also:
- Adversely affect the future value of our Common Stock
- Result in delisting of our Common Stock on the Nasdaq SmallCap
Market System
- Adversely affect our ability to obtain debt or equity financing
on acceptable terms
- Prevent us from engaging in acquisition activity
FINANCING RISKS.
The acquisition of complementary businesses and products is an element
of our business strategy. Our ability to engage in acquisition activity depends
on our ability to obtain debt or equity financing, neither of which may be
available or, if available, may not be on terms acceptable to us. Our inability
to obtain such financing would have a material adverse effect on our acquisition
strategy.
Both debt and equity financing involve certain risks. Debt financing
may require us to pay significant amounts of interest and principal payments,
reducing the resources available to us to expand our existing businesses.
Equity financing may be dilutive to our stockholders' interest in the assets
and earnings of the Company. For example, of a total of 12,500 shares of
Series A Convertible Preferred Stock sold in April 1998, those shares plus
accrued dividends had been converted into 1,231,180 shares of Common Stock at
an average price per share of approximately $1.04. Prior to the issuance of
such shares of Preferred Stock in April 1998, a total of approximately
4,437,000 shares of Common Stock had been outstanding. The conversion of the
Preferred Stock sold in June 1999 into shares of Common Stock also is
expected to have a dilutive effect on the Company's existing stockholders. As
of September 30, 1999, 6,242 shares of Preferred Stock and dividends on the
Preferred Stock had been converted into 590,673 shares of Common Stock at an
average price per share of $1.06; as of December 10, 1999, 17,200 shares of
Preferred Stock and dividends on the Preferred Stock had been converted into
1,658,979 shares of Common Stock at an average price per share of $1.04. In
addition, Common Stock issued as consideration in an acquisition transaction
may be dilutive under certain circumstances to our existing stockholders.
RELIANCE UPON DISTRIBUTOR AND SUPPLIER RELATIONSHIPS; DEPENDENCE ON SIGNIFICANT
CUSTOMERS.
Our North American operations are based upon the integration of
hardware, software, and communications
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<PAGE>
and data processing equipment manufactured by others with our internally
developed software, into systems designed to meet the needs of our customers.
Although we have distributor agreements with a number of equipment
manufacturers, a major portion of our revenues is based upon products
manufactured by three companies. In this regard, we rely to a significant
extent on products manufactured (and services provided) by Centigram
Communications Corporation, products manufactured by Baypoint Innovations,
the Mitel Corporation subsidiary that purchased the customer premises
equipment ("CPE") business of Centigram, and on products manufactured by
Interactive Intelligence, Inc. ("I3"), principally I3's enterprise
information center ("EIC") product, a next-generation communications server
that merges voice and data functions into a single computer-based system.
Revenues from EIC products accounted for approximately 10% of North American
revenues for the last two quarters of the fiscal year ended September 30,
1999 and are expected to increase rapidly in future quarters. Legacy voice
processing revenues (which includes CPE product revenues), although declining
in importance, accounted for approximately 90% of our revenues for the last
two quarters of the fiscal year ended September 30, 1999. Any disruption to
our relationships with, or to products or services supplied by, Centigram,
Baypoint or I3 would have a significant adverse effect on our business for an
indeterminate period of time until new supplier relationships could be
established. Further, any material change in our other distributor
relationships could adversely affect the Company.
Infotel, our Singapore subsidiary, offers a wide range of
infrastructure communications equipment products. Infotel also has an
established business providing test measuring instrumentation and testing
environments, and is the regional distributor and test and repair center for
Rohde & Schwarz test instruments. Infotel's profitability depends in part on a
steady stream of revenues relating to the services performed for Rohde & Schwarz
test instruments. Since Infotel's revenues comprised approximately 41% of
NHancement's total revenues for the fiscal year ended September 30, 1999, any
material change in Infotel's relationship with its manufacturers, including
Rohde & Schwarz, and any interruption in the delivery of products to Infotel by
its key suppliers, would materially adversely affect NHancement's financial
condition.
We currently service approximately 1,000 customers through the
operations of our two subsidiaries. The revenues from our two largest customer
accounted for approximately 26% and 5% of total revenues during the fiscal year
ended September 30, 1999. No other customers accounted for over 5% of total
revenues during the period. This concentration of revenue results in additional
risk to the Company and its operations, and any disruption of orders from our
single largest customer would have an adverse effect on our financial condition.
INTENSE COMPETITION.
The voice-processing and customer premises equipment markets are highly
competitive and competition in this industry is expected to further intensify
with the introduction of new product enhancements and new competitors. Our North
American subsidiary competes with a number of larger integrated companies that
provide competitive voice-processing products and services as subsets of larger
product offerings. The Company's existing and potential competitors include many
large domestic and international companies that have better name and product
recognition in the market for the Company's products and services, a larger
installed base of customers, and substantially greater financial, marketing and
technical resources than the Company.
Our Singapore subsidiary, Infotel, competes against several large
companies in Singapore that are better capitalized. Although Infotel has in the
past managed to compete successfully against these larger companies on the basis
of its engineering and product management expertise, we cannot assure you that
this expertise will allow Infotel to compete effectively with these larger
companies in the future. Further, various large manufacturers headquartered
outside of Singapore have established their own branch offices in Singapore and
also compete with Infotel.
The software products and services markets are highly competitive and
competition in this industry is expected to further intensify with the
introduction of new products, product enhancements as well as new competitors.
Our Software Group competes with a number of larger software/middleware
companies that provide competitive products and services on a standalone basis
and as subsets of larger product offerings. The Company's existing and potential
competitors include many large domestic and international companies that have
better name and product recognition in the market for the Company's products and
services, a larger installed base of customers,
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and substantially greater financial, marketing and technical resources than the
Company.
RISKS INVOLVED IN DEVELOPING SOFTWARE PRODUCTS
There are significant risks involved in the development of software
technologies, including suitability for intended uses, economic viability and
obsolesce due to the introduction of new technologies. There are, in addition,
risks associated with product development including feasibility, performance,
cost and quality issues. In this regard, although the Company has added
personnel with software product development experience, the Company has no prior
experience with software product development or new product rollouts. Also,
there is the risk that the Company will not have sufficient resources or be able
to obtain any necessary financing to develop such technologies. Further, there
can be no assurances that a viable market will exist for new products that are
successfully developed by the Company. New technology and products
developed by competitors could also render the Company's products and
technology obsolete.
RISKS IN INTEGRATING ACQUIRED COMPANIES.
We have in the past pursued, and plan to continue to pursue,
acquisition opportunities. Acquisitions involve a number of special risks,
including among others:
- Adverse short-term effects on our operating results
- The disruption of our ongoing business
- The risk of reduced management attention to normal daily
operations
- Our dependence on the retention, hiring and training of key
personnel and the potential risk of loss of such personnel
- Our potential inability to successfully integrate the personnel,
operations, technology and products of acquired companies
- Unanticipated problems or unknown legal liabilities
- Adverse tax or financial consequences
The Company has made several significant acquisitions since its
formation as a holding company in 1996. Two of these acquisitions, namely the
acquisition of NHAN NA (formerly named Voice Plus) and Advantis Network &
Systems Sdn Bhd, a Malaysian company, in the past yielded operating results that
were significantly lower than expected. In fact, the poor performance of
Advantis led to its divestiture less than one year after the company was
acquired by NHancement. Accordingly, we cannot assure you that the future
performance of our subsidiaries will be commensurate with the consideration paid
to acquire these companies. If we fail to establish the needed controls and to
manage growth effectively, our operating results, cash flows and overall
financial condition will be adversely affected.
RISKS PERTAINING TO INTERNATIONAL OPERATIONS.
Infotel, our Singapore subsidiary, accounted for approximately 41% of
our revenues for the fiscal year ended September 30, 1999. There are risks
associated with our international operations, including:
- Our dependence on members of management of Infotel and the risk
of loss of customers in the event of the departure of key
personnel
- Unexpected changes in or impositions of legislative or regulatory
requirements
- Potentially adverse taxes and adverse tax consequences
- The burdens of complying with a variety of foreign laws
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- Political, social and economic instability
- Potential hostilities
- Changes in diplomatic and trade relationships
- Potential restrictions on cash transfers
Any one or more of these factors could negatively affect the
performance of Infotel and result in a material adverse change in the business,
operations and financial condition of NHancement.
RISKS INVOLVED IN CHANGES IN 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. In early January 1999, the President and Chief Executive Officer of
NHancement resigned his position and, more recently, the Company's Chief
Financial Officer and the Secretary and General Counsel of NHancement left
the Company to pursue other opportunities. Douglas S. Zorn, the former Chief
Financial Officer of the Company, was promoted to President and Chief
Executive Officer to fill the vacancies created by the resignation of the
former President and Chief Executive Officer. While hiring efforts are
underway to fill the vacancies created by the departure of these and other
key employees, there is no assurance that these posts will be filled in the
near future since the job market in the greater San Francisco Bay Area is
intensely competitive. The loss of these or other key employees of the
Company could have a material adverse effect on the Company's operations.
Furthermore, the recent changes in management may not be adequate to sustain
the Company's profitability or to meet its future growth targets.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant seasonal
variations, although net sales may be affected in the future by overall
hiring trends and the concentration of vacations of key employees of client
companies during the summer months or during holiday periods, which can delay
product installations resulting in the postponement. of the recognition of
revenues.
YEAR 2000 DISCLOSURE
The Company has completed the tasks required to be performed by the
Company under the plan implemented by the Company to correct internal computer
systems that could be affected by the "Year 2000" problem. The Year 2000 problem
is the result of computer programs being written using two digits (rather than
four) to define the applicable year. Software programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Company presently believes that, with the modifications it has made
to its software programs (including replacements of software in some instances),
the Year 2000 problem will not pose significant operational problems for the
Company's domestic or foreign computer systems. Further, the Company's internal
computer systems for North American and Asian operations were purchased from
well recognized companies and are stipulated by the manufacturers to be Year
2000 compliant. However, if the modifications (or replacements) made by the
Company were not made properly or prove to be inadequate, the Company may incur
additional costs, which could be material to the operations of the Company.
The costs incurred to date by the Company in connection with such
modifications and replacements total approximately $605,000, spread over the
last two fiscal years.
The Company distributes products from third party voice product
equipment manufacturers in North America, Europe and Asia, some of which are
susceptible to Year 2000 problems. During fiscal years 1998 and 1999, the
Company completed a review of the products that its domestic and foreign
subsidiaries distribute for the
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purpose of determining which, if any, of such products were not capable of
recognizing the year 2000. Communications were effected with all of the
manufacturers of such products to determine the nature and extent of any Year
2000 problems. Where potential Year 2000 computer problems were identified, the
manufacturers of these products stated that the upgrades or replacements
recommended by them, if implemented prior to the year 2000, would resolve such
problems. However, there can be no assurances that these manufacturers'
solutions will, in fact, completely resolve all Year 2000 problems. Moreover,
the solutions provided by some manufacturers involved a significant upgrade cost
to the end user, which could give rise to disputes or litigation between the end
user and the manufacturer, which might also involve the Company. We also have
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 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 operation.
We believe we have taken reasonable steps to identify and correct all
Year 2000 problems within our control. However, the Company may suffer business
interruptions if customers, vendors and other third parties with which we
conduct 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 that is outside of our control.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1 of this
report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information in Form 8-K filed on December 23, 1999, as amended by the
Form 8-K/A filed on December 29, 1999.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to each of
the directors, executive officers and significant employees of the Company and
its subsidiaries as of December 15, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Douglas S. Zorn ................... 50 Chairman, Chief Executive Officer, President, Acting Chief
Financial Officer, Secretary and Director
James Linkous ..................... 43 Vice President of Sales; President of NHancement Technologies North
America, Inc.
James Han ......................... 50 Managing Director, Infotel Technologies (Pte) Ltd
Ram V. Mani ....................... 51 Chief Technology Officer; President of NHancement Technologies
Software Group
James S. Gillespie ................ 46 Director
Robert Schmeir .................... 46 Director
N. Bruce Walko .................... 44 Director
</TABLE>
Douglas S. Zorn. Effective January 6, 1999 Mr. Zorn became President and CEO
to fill the vacancy created by Mr. Goei's resignation from these offices on the
same date. On August 23, 1999, Mr. Zorn was appointed Chairman of the Board of
Directors. Mr. Zorn had served as Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a director of the Company since its
incorporation in October 1996. Mr. Zorn also had held the title of Chief
Operating Officer of the Company since its incorporation, but resigned from this
position in October 1997. He is currently serving as the Acting Chief Financial
Officer of the company until a replacement can be found to fill the vacancy
created by the departure of the Company's Chief Financial Officer in October
1999. Mr. Zorn served as Executive Vice President, Secretary and Treasurer and
Chief Financial and Operating Officer of BFI from
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December 1993 until the merger of BFI into NHAN NA in November 1997. From 1991
until he joined BFI, Mr. Zorn was Chief Financial Officer of Monterey
Telecommunications Corporation, an OEM wireless switch manufacturer for
Motorola, Inc. From 1983 to 1991, he was employed by Centigram Communications
Corporation where he last served as Vice President of Finance and
Administration. Prior to joining Centigram, Mr. Zorn held various positions with
Gould, Inc., including Operation Controller of the Biomation Division, a
manufacturer of sophisticated logic test instruments. Mr. Zorn is a licensed
certified public accountant.
James B. Linkous. Mr. Linkous has served as Vice President of Sales and
President of NHAN NA since April 1998. Mr. Linkous has worked for several key
telecommunications distributors, including most recently COM-AID/NEXUS
Integrated Solutions, where he was Vice President and General Manager. Mr.
Linkous helped position COM-AID as the largest independent NEC dealer in the
Western U.S. Previously he was National and Major Accounts Manager for U.S. WEST
Communications. He also has extensive background in Call Center and CTI
applications, which are future target markets for NHancement Technologies Inc.
James Han. Mr. Han is a founding member of Infotel and has served as General
Manager since the company started operation in 1984. Prior to joining Infotel,
he was with an Australian company, Associated Technical Services Pte. Ltd.
(ATS), from 1977 to 1984 and was the General Manager at the time of his
departure. ATS is a wholly owned subsidiary of Elders IXL, an Australian public
company. ATS was involved in distribution and support of telecommunication
products, marine communication and navigational equipment and medical and
analytical instruments.
Ram V. Mani. Mr. Mani joined the Company in June 1999 as its Chief
Technology Officer and President of the NHancement Technologies Software
Group. Mr. Mani has been an independent software consultant for more than ten
years.
James S. Gillespie. Mr. Gillespie currently serves as a Director of and a
Consultant to the Company. Mr. Gillespie had served as Vice President of Sales
of the Company and President of NHAN NA until he resigned from these positions
in fiscal 1998. Mr. Gillespie was the founded NHAN NA and served as its
President from its inception until his resignation in April 1998. Mr. Gillespie
was with Centigram Communications Corporation from 1983 to 1986, during which
time he held a number of positions, with his final position being Director of
National Sales. On January 6, 1999, Mr. Gillespie was appointed to fill a
vacancy on the Board of Directors.
N. Bruce Walko. Mr. Walko is currently a consultant for several
telemanagement corporations. He previously served as Vice President of Marketing
for MTC NetSource, an international long distance and Internet services
provider. Prior to MTC he was the Southeast Regional General Manager, NextWave
Telecom (1994-1997). Before joining NextWave, Mr. Walko served as Regional
General Manager for CellularOne, (McCaw, now AT&T Wireless) in Central and
Northern Florida (1993-1994). In addition, he managed McCaw's advanced cellular
system tests (at MGM Studios, Walt Disney World). Before joining McCaw, he was
the Southwest Region General Manager of US West Cellular (1989-1993). Mr. Walko
has a B.S. degree in Computer Science from Purdue University and a M.B.A. in
Finance and Marketing from the University of Southern California.
Robert Schmier. Mr. Schmier has been President and general partner of
Schmier & Feurring Properties, Inc. since 1981. Mr. Schmier has also served as
owner, developer, and property manager of shopping centers and office buildings
in Palm Beach County, Florida. From 1974 through 1981, he was President of Abbey
Homes, Inc., a developer of single-family lots and custom homebuilder in Oakland
County, Michigan. Mr. Schmier has a B.A. from the University of Michigan and a
J.D. from the University of Michigan, Law School.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company for the fiscal year ended September 30, 1999,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table, and the accompanying explanatory footnotes, include
annual and long-term compensation information for services rendered in all
capacities during the fiscal years ended December 31, 1997, September 30, 1998
and September 30, 1999 by (i) the Company's Chief Executive Officer and (ii) the
other highly compensated executive officers of the Company (or its subsidiaries)
at September 30, 1999, who received compensation of at least $100,000 during the
fiscal year ended September 30, 1999 (collectively, the "Named Executive
Officers"). Mr. Goei is included in the table since he served as Chief Executive
Officer of the Company until his departure on January 6, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#)
----------------- ---- ---------- --------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei............... 1999 $70,000 $-- $131,336 (1) $-- --
Former Chairman of the 1998(2) 157,500 -- 9,700 (3) -- --
Board, President and Chief 1997 163,750 -- 38,000 (4) -- 100,000 (5)
Executive Officer
Douglas S. Zorn............... 1999 $178,327 $-- $12,600 (6) $-- 325,000 (7)
Chairman of the Board, 1998(2) 112,500 -- 8,400 (3) -- --
President and Chief Executive 1997 150,000 -- 86,000 (8) -- 100,000 (5)
Officer
James B. Linkous.............. 1999 $150,000 $-- $78,353 (9) $-- 75,000 (7)
Vice President of Sales and 1998(10) 65,400 36,000 13,650 (11) -- 100,000(12)
President of NHAN NA
James Han 1999(13) $142,500 $62,236 $-- $-- --
Managing Director of Infotel
Subsidiary
</TABLE>
- -----------------
(1) Represents $124,336 in severance and $7,000 of company paid automobile
charges.
(2) Represents the nine-month period ended September 30, 1998.
(3) Automobile allowance for the nine-month period ended September 30, 1998.
(4) Mr. Goei was reimbursed $25,000 by the Company in fiscal 1997 for previous
years vacation accrued but not taken and automobile expenses.
(5) These options were granted on March 18, 1997 under the Company's Equity
Incentive Plan (the "Plan"). The options become exercisable as to 25%
after one year with the remaining vesting on a monthly basis over 36
months.
(6) Represents automobile expenses reimbursed by the Company.
(7) These options were granted on February 2, 1999 under the Plan. The
options become exercisable after seven years, except vesting can be
accelerated to two years (505 per year) if performance targets are met.
(8) Mr. Zorn was reimbursed by the Company in fiscal 1997 for $55,000 in moving
expenses and $25,000 for previous year vacation accrued but not taken and
automobile expenses.
(9) Represents sales commissions of $71,228 and $7,125 in automobile
reimbursement.
(10) Represents the period from Mr. Linkous' hire date of April 18, 1998 through
September 30, 1998, including a signing bonus of $36,000.
(11) Represents commissions of $10,900 and automobile allowance of $2,750.
(12) These options were granted on July 2, 1998 under the Plan. The options
become exercisable ratably on a monthly basis over 36 months.
(13) Represents Singapore dollar payments converted at a translation rate of
SD$1.7 to US$1.00.
Additionally, Mr. Zorn and Mr. Linkous have bonus plans based on fiscal 1999
performance with targeted bonus amounts of $180,000 and $75,000 respectively.
The actual amount of the bonuses has not yet been calculated.
28
<PAGE>
OPTION GRANTS IN FISCAL 1999
The following option grants were made to the Named Executive Officers during
the fiscal year ended September 30, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/Shr) (1) Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas S. Zorn, Chairman, Chief Executive 325,000 26.2% $1.125/share 2/2/2009
Officer and President(2)
James B. Linkous, Vice President of Sales and 75,000 6.0% $1.125/share 2/2/2009
President of NHAN NA(3)
</TABLE>
(1) The exercise price was deemed to be equal to 100% of the fair market value
on the date immediately preceding the date of the grant, as determined by
the closing price as reported on the Nasdaq SmallCap Market.
(2) These options were granted on February 2, 1999 under the Plan. The options
become exercisable immediately as to 225,000 shares and the remaining in
seven years except vesting on this portion can be accelerated if
performance targets are met.
(3) These options were granted on February 2, 1999 under the Plan. The options
become exercisable in seven years except vesting can be accelerated if
performance targets are met.
The following table sets forth certain information regarding option
exercises during fiscal year 1999 and the number of shares covered by both
exercisable and unexercisable stock options as of September 30, 1999 for each of
the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
acquired September 30, 1999 September 30, 1999
on Value ------------------ ------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas S. Zorn -- -- 275,000 50,000 $103,125 $18,750
James B. Linkous -- -- 77,083 97,917 $14,063 $14,063
</TABLE>
COMPENSATION OF DIRECTORS
Directors are not separately compensated for serving on the Board of
Directors. Directors are reimbursed for reasonable travel-related expenses for
attendance at meetings.
On February 2, 1999, the Company granted to N. Bruce Walko, Robert J.
Schmier and James S. Gillespie, in connection with their appointment to the
Board of Directors of the Company, non-qualified stock options to each
purchase 25,000 shares of Common Stock at a price per share of $1.125, one
half of which vests on the two succeeding anniversary dates of the grant. As
of September 30, 1999, none of these options had vested. Under the Company's
Equity Incentive Plan, each outside director who has served for a full fiscal
year will be granted annually a non-qualified stock options to purchase 2,000
shares of Common Stock, which will vest one-third on each of the first,
second and third anniversaries of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has a three-year employment agreement with Douglas S. Zorn, as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company, and a two-year employment agreement with Ram V. Mani, as Chief
Technology Officer of the Company. Messrs. Zorn's and Mani's base salary may be
adjusted from time to time by mutual agreement between each such officer and the
Board of Directors. The base salaries for
29
<PAGE>
calendar year 1999 of Messrs. Zorn and Mani are $180,000 and $150,000
respectively. The agreements provide, subject to their terms, for an annual
bonus to be paid to these officers pursuant to a written bonus plan to be
approved by the Board of Directors. The agreements provide that the officers are
entitled to reasonable expense reimbursements, four weeks paid vacation per year
and participation in any of the Company's benefit and deferred compensation
plans. In fiscal 1999, Messrs. Zorn and Mani received a $1,100 and $650 monthly
automobile allowance. On the annual anniversary date of Mr. Zorn's agreement,
the period of employment is extended automatically for one year unless the
officer is notified in writing. The agreements also provide for payments in the
event of termination prior to the end of the term, as follows: if Mr. Zorn is
terminated without cause, then base salary will be paid for the greater of two
years or the balance of the term plus a bonus for each such year equal to the
average bonus for the two preceding years while Mr. Mani will receive his base
salary for six months; if the officers are terminated upon a change of control,
then compensation equal to two times the sum of the base salary plus average
bonus will be paid for one year. In the event of termination (except termination
without cause), the officer is subject to a two-year non-competition agreement.
On January 7, 1999, Mr. Goei resigned his position as President and Chief
Executive Officer of the Company pursuant to a Separation Agreement, which
modified his Employment Agreement. The Agreement provided for Mr. Goei to
receive 6 1/2 months' severance pay, payment for all accrued vacation time and
provided for benefits coverage for the first three months following his
departure from the Company. In addition, Mr. Goei received warrants to purchase
50,000 Shares of the Company's Common Stock at a per share exercise price of
$1.00.
The Company and Mr. Gillespie, a director of the Company, are parties to a
consulting agreement, which provides for annual payments to Mr. Gillespie of
$150,000. The agreement also contains provisions for confidentiality, and
convenants not to compete, to solicit customers or hire employees for two years
after the expiration of this consulting agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 10, 1999, by (a) each
person known to the Company to own beneficially more than 5% of any class of
the Company's capital stock, (b) each of the Company's directors and Named
Executive Officers, and (c) all executive officers and directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ ---------------
BENEFICIALLY OWNERSHIP BENEFICIALLY OWNERSHIP
NAMES AND ADDRESSES OWNED (1) %(1) OWNED (1) %(1)
------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
James S. Gillespie
198 Country Club Drive 857,065 (2) 9.9% -- --
Incline Village, Nevada 89451
Douglas S. Zorn
c/o NHancement Technologies Inc.
6663 Owens Drive
Pleasanton, California 94588 475,744 (3) 5.3% -- --
Ram V. Mani
c/o NHancement Technologies Inc.
6663 Owens Drive
Pleasanton, California 94588 450,000 (4) 5.2% -- --
James Han
c/o Infotel Technologies (Pte) Ltd.
19 Tai Seng Drive #06-00
Singapore 535222 292,325 3.4% -- --
Esmond T. Goei
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538 139,047 (5) 1.6% -- --
30
<PAGE>
James Linkous
c/o NHancement Technologies Inc.
6663 Owens Drive
Pleasanton, California 94588 77,083 (6) * -- --
Robert Schmier
c/o Schmier & Feurring Properties, Inc.
7777 Glades Road, Suite 310
Boca Raton, FL 33434-4195 37,500 (7) * -- --
N. Bruce Walko
5107 Timberview Terrace
Orlando, FL 32818 12,500 (8) * -- --
The Endeavour Capital Fund S.A.
c/o Endeavour Management Inc.
14/14 Divrei Chaim St.
Jerusalem 94479 85,094 (9) 1.0% 300 100.0%
Directors and executive officers
as a group (8 persons) 2,341,264 (10) 25.6% 300 100.0%
--------- ----- ------ ------
--------- ----- ------ ------
</TABLE>
--------------------------------
* Less than 1%
(1) Based on 8,602,630 shares of Common Stock and 300 shares of Preferred
Stock issued and outstanding as of December 10, 1999.
(2) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 12,500 shares of Common Stock at an
exercise price of $1.125 per share and warrants to purchase 27,500 shares
of Common Stock.
(3) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 275,000 shares of Common Stock at
an exercise price of $1.125 per share and warrants to purchase 61,375
shares of Common Stock.
(4) Includes warrants to purchase 50,000 shares of Common Stock.
(5) Includes warrants to purchase 101,518 shares of Common Stock.
(6) Represents options that are presently exercisable or that will become
exercisable within 60 days to purchase 39,583 shares of Common Stock at an
exercise price of $2.0625 per share and to purchase 37,500 shares of Common
Stock at an exercise price of $1.125 per share.
(7) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 12,500 shares of Common Stock at an
exercise price of $1.125 per share.
(8) Represents options that are presently exercisable or that will become
exercisable within 60 days to purchase 12,500 shares of Common Stock at an
exercise price of $1.125 per share.
31
<PAGE>
(9 ) Includes 15,094 shares of Common Stock receivable upon conversion of
Preferred Stock assuming conversion as of December 10, 1999 (based on
the average of the closing bid price on the Nasdaq Small Cap Market for
the five consecutive trading days preceding the assumed conversion date)
and warrants to purchase 70,000 shares of Common Stock.
(10) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 389,583 shares of Common Stock and
warrants to purchase 240,393 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Gillespie agreed to convert $116,636 of debt payable, including accrued
interest, into 116,565 shares of the Company's Common Stock in a transaction in
which he also received warrants to purchase 50,000 shares.
The Company entered into a bridge loan with the holders of the Series A
Convertible Preferred Stock (the "Preferred Stockholders") and certain
management stockholders. Two of these Preferred Stockholders presently hold more
than 5% of the issued and outstanding Preferred Stock of the Company (on an as
converted basis more than 5% of Common Stock of the Company). NHancement
Technologies Inc. used the funds in the aggregate amount of $1,400,000 to
complete the acquisition of Infotel. Interest is payable on the promissory notes
at a rate of 10% per annum. Funds loaned to the Company by the preferred
Stockholders totaled $750,000. The notes payable to the Preferred Stockholders
provided for repayment on the earlier of the closing of the next tranche of the
Company's Preferred Stock in accordance with the terms of the Securities
Purchase Agreement, as amended, or 90 days from the date of issuance. The
Company amended the agreement in September of 1998 limiting further dilutive
issuances under the financing agreement, except by mutual consent of the
parties. Additionally, the notes payable to the preferred Stockholders, which
were originally to be applied against the purchase price of additional Preferred
Stock available for purchase under the Securities Purchase Agreement, subject to
receipt by the Company of certain stockholder approvals, and all accrued
interest and a $135,000 premium, were on September 30, 1998.
In June 1999, the Company completed a second tranche of its Series A
Convertible Preferred Stock of $1.75 million in which the purchasers received in
total warrants to purchase 175,000 shares of the Company's Common Stock at a per
share price of $1.37.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Annual Report on Form
10-KSB:
1. Financial Statements
See Index to Financial Statements on page F-1 of this Form 10-KSB
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
<S> <C>
2.3 -- Plan and Agreement of Reorganization, dated December 10, 1999, by and among
Trimark Inc., d.b.a. Triad Marketing, Greg Darling, Richard Glover and the
Company.
3.1 -- Amended and Restated Certificate of Incorporation, as filed with the Delaware
Secretary of State on January 27, 1997, as amended by Certificate of
Designations, as filed with the Delaware Secretary of State on April 9, 1998, as
further amended by Amended Certificate of Designations, as filed with the
Delaware Secretary of State on April 13, 1998, as further amended by Amended
Certificate of Designations, as filed with the Delaware Secretary of State on
June 11, 1999. (1)
3.2 -- Amended and Restated Bylaws. (2)
4.1 -- Form of Common Stock Certificate. (3)
4.2 -- Form of Underwriter Warrant. (4)
4.3 -- Registration Rights Agreement, dated September 1, 1996, between BioFactors, Inc.
("BFI") and (i) a majority of the holders of securities pursuant to the Secured
Note and Warrant Purchase Agreement dated December 1, 1994, as amended; (ii) a
majority of the holders of securities issued pursuant to the Secured Note and
Stock Purchase Agreement, dated December 1, 1995, as amended; (iii) a majority of
the holders of securities issued pursuant to the Unsecured Note and Stock
Purchase Agreement, dated February 1, 1996, as amended; (iv) a majority of the
holders of securities issued pursuant to the Unit Subscription Agreement, dated
May 17, 1996, as amended; (v) the purchasers of securities issued pursuant to the
Unit Subscription Agreement dated October 3, 1996; and (vi) the former holders of
BFI's Series A Preferred Stock. (4)
4.4 -- Registration Rights Agreement, dated October 25, 1996, between the Company and
James S. Gillespie. (3)
4.5 -- Form of Series A Preferred Stock Certificate. (5)
4.6 -- Registration Rights Agreement, dated as of April 13, 1998, among the Company, The
Endeavour Capital Fund S.A. and AMRO INTERNATIONAL S.A. (5)
4.7 -- Warrant Agreement dated February 2, 1999 between the Company and JWGenesis
Capital Markets LLC. (6)
4.8 -- Warrant Agreement dated February 2, 1999 between the Company and Kenneth L.
Greenberg. (6)
4.9 -- Warrant Agreement dated February 2, 1999 between the Company and Mark Goldberg.
(6)
4.10 -- Form of Warrant dated June 15, 1999 delivered to purchasers of Series A
Convertible Preferred Stock. (7)
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). (7)
4.12 -- Warrant Agreement dated June 7, 1999 between the Company and James S. Gillespie.
(7)
4.13 -- Warrant Agreement dated June 15, 1999 between the Company and Grady & Hatch and
Company, Inc. (7)
10.1 -- Formation Agreement, dated as of October 15, 1996, between BFI and Voice Plus,
Inc. ("Voice Plus"). (3)
10.2 -- Agreement and Plan of Merger, dated as of October 30, 1996, between the Company,
BFI Acquisition Corporation and BFI. (4)
10.3 -- Agreement and Plan of Merger, dated as of October 25, 1996, between the Company,
Voice Plus Acquisition Corporation, Voice Plus and James S. Gillespie, together
with Forms of Promissory Notes. (8)
10.4 -- Agreement of Merger between Voice Plus and BFI dated as of October 10, 1997. (5)
10.5 -- License Agreement, dated November 24, 1988, by and between BFI and Systems
Technology, Inc., as amended by Addendum to License Agreement, dated May 19,
1994, as amended by Second Addendum to License Agreement, dated November 18, 1996.
(4)
10.6 -- Sublicense Agreement, dated August 30, 1995, between BFI and SportsTrac, Inc., as
amended by Addendum to Sublicense Agreement, dated July 31, 1996. (3)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
10.7 -- Secured Note and Warrant Purchase Agreement, dated December 1, 1994, between BFI
and the purchasers listed therein, as amended by the First Amendment to Secured
Note and Warrant Purchase Agreement, dated July 1995, as amended by Amendment to
Secured Note and Warrant Purchase Agreement, dated December 1, 1995, as amended
by Third Amendment to Secured Note and Warrant Purchase Agreement, dated March 1,
1996, and as amended by Fourth Amendment to Secured Note and Warrant Purchase
Agreement, dated October 1, 1996, together with Amended and Restated Security
Agreement and Form of Secured Promissory Note. (4)
10.8 -- Secured Note and Stock Purchase Agreement, dated December 1, 1995, between BFI
and the purchasers listed therein, as amended by the First Amendment to Secured
Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second
Amendment to Secured Note and Stock Purchase Agreement, dated July 1, 1996, and
as amended by Third Amendment to Secured Note and Stock Purchase Agreement, dated
October 1, 1996, together with Form of Secured Promissory Note. (4)
10.9 -- Unsecured Note and Stock Purchase Agreement, dated February 1, 1996, between BFI
and the purchasers listed therein, as amended by the First Amendment to Unsecured
Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second
Amendment to Unsecured Note and Stock Purchase Agreement, dated July 1, 1996, and
as amended by Third Amendment to Unsecured Note and Stock Purchase Agreement,
dated October 1, 1996, together with Form of Unsecured Promissory Note. (4)
10.10 -- Unit Subscription Agreement, dated May 17, 1996, between BFI and the purchasers
listed therein, as amended by First Amendment to Unit Subscription Agreement,
dated October 1, 1996, together with Form of Promissory Note. (4)
10.11 -- Unit Subscription Agreement, dated October 1, 1996, between BFI and the
purchasers listed therein, together with Form of Promissory Note and Form of
Warrant. (2)
10.12 -- Equity Incentive Plan. (2)
10.13 -- Employment Agreement, dated as of October 30, 1996, between Douglas S. Zorn and
the Company. (2)
10.14 -- Employment Agreement, dated as of October 25, 1996, between James S. Gillespie
and the Company. (3)
10.15 -- Employment Agreement, dated as of October 30, 1996, between Esmond T. Goei and
the Company. (3)
10.16 -- Form of FACTOR 1000-Registered Trademark- Service Contract. (3)
10.17 -- Office Building Lease, dated April 8, 1996, between BFI and Denver West Office
Building No. 21 Venture. (4)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16, 1996, between Centigram
Communications Corporation and Voice Plus. (3)
10.19 -- Office Lease, dated October 16, 1995, between AJ Partners Limited Partnership and
Voice Plus. (4)
10.20 -- Agreement, dated October 16, 1995, between BFI, Burton Kanter and Elliot
Steinberg, as amended by Amendment dated July 16, 1996, between BFI, Esmond Goei,
Douglas Zorn, Burton Kanter and Elliot Steinberg. (4)
10.21 -- Stockholder Agreement, dated October 25, 1996, between the Company and James D.
Gillespie. (4)
10.22 -- 1997 Management and Company Performance Bonus Plan. (4)
10.23 -- Employment Agreement, dated as of November 1, 1996, between Diane E. Nowak and
Voice Plus. (2)
10.24 -- Employment Agreement, dated as of November 1, 1996, between Bradley Eickman and
Voice Plus.(2)
10.25 -- Promissory Note Payable to the Company by Esmond T. Goei. (5)
10.26 -- Agreement for the Sale of Shares in Advantis Network & System Sdn Bhd dated
June 20, 1997, between the Company and the shareholders of Advantis, as amended
by the Supplemental Agreement to the Agreement dated November 26, 1997, and the
Second Supplemental Agreement dated November 26, 1997. (9)
10.27 -- Building Lease dated June 9, 1997 by and between the Company, as Tenant and El
Dorado Holding Company, Inc., as Landlord. (10)
10.28 -- Form of Lock Up Agreement between the Company and the former shareholders of
Advantis. (11)
10.29 -- Securities Purchase Agreement, dated as of April 13, 1998, by and among the
Company, the Endeavour Capital Fund S.A. and AMRO INTERNATIONAL S.A. (5)
10.30 -- Form of Escrow Instructions related to Securities Purchase Agreement, dated as of
April 13, 1998. (5)
10.31 -- Form of Reseller Agreement between Interactive Intelligence Inc. and the Company
dated July 8, 1998. (12)
10.32 -- Form of Associate Agreement between NEC, Inc. and the Company dated May 26, 1998.
(12)
10.33 -- Form of Loan and Security Agreement between AEROFUND FINANCIAL and the Company
dated October 9, 1998. (12)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
10.34 -- Form of Guaranty from Lee Giam Teik, Man Yiew Ming and Ng Kok Wah dated September
30, 1998. (12)
10.35 -- Letter Agreement between Lee Giam Teik, Man Yiew Ming and Ng Kok Wah and the
Company dated September 30, 1998. (12)
10.36 -- Agreement relating to the sale and purchase of 500,000 ordinary shares in the
Capital of Infotel Technologies (Pte) Ltd ("Infotel"), dated as of January 19,
1998, by and between the Company and the stockholders of Infotel (the "Sale
Agreement"). (13)
10.37 -- Letter Agreement amending the Sale Agreement, dated as of April 2, 1998, by and
between the Company and the stockholders of Infotel ("Supplement No. 1"). (14)
10.38 -- Form of letter agreement amending the Sale Agreement, as amended by Supplement
No. 1, dated as of April 22, 1998, by and between the Company and the
stockholders of Infotel ("Supplement No. 2"). (15)
10.39 -- Letter agreement amending the Sale Agreement, as amended by Supplement No. 1 and
Supplement No. 2, dated as of June 22, 1998, by and between the Company and
stockholders of Infotel. (16)
10.40 -- Promissory Note, dated as of June 15, 1998, in the original principal amount of
$375,000, payable by the Company to AMRO International S.A. ("AMRO"). (17)
10.41 -- Promissory Note, dated as of June 15, 1998, in the original principal amount of
$375,000, payable by the Company to Endeavour Capital Fund S.A. ("Endeavour").
(18)
10.42 -- Letter agreement, dated as of June 15, 1998, amending Securities Purchase
Agreement, dated as of April 13, 1998, by and among the Company, AMRO and
Endeavour. (19)
10.43 -- Letter agreement, dated as of June 12, 1998, by and among the Company, Esmond T.
Goei, Douglas S. Zorn and James S. Gillespie. (20)
10.44 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$125,000 payable by the Company to Esmond T. Goei. (21)
10.45 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$225,000 payable by the Company to Douglas S. Zorn. (22)
10.46 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$300,000 payable by the Company to James S. Gillespie. (23)
10.47 -- Separation Agreement dated January 13, 1999 between Esmond T. Goei and the
Company. (24)
10.48 -- Letter Agreement dated February 2, 1999 between the Company and JWGenesis Capital
Markets LLC. (6)
10.49 -- Amendment dated June 11, 1999, to Securities Purchase Agreement dated April 13,
1998. (1)
10.50 -- Termination, Consulting and Confidentiality Agreement dated June 7, 1999 between
James S. Gillespie and the Company. (7)
10.51 -- Loan and Security Agreement, dated as of August 31, 1999, by and among Eastern Systems
Technology, Inc. ("Eastern"), Ram V. Mani ("Mani"), Front-End Technolgies, Srini
Ramakrishnan ("Ramakrishnan") and the Company. (25)
10.52 -- Secured Promissory Note, dated as of August 31, 1999, in the principal amount of
$250,000, payable by Eastern to the Company. (25)
10.53 -- Employment Agreement, dated as of August 31, 1999, by and between Mani and the
Company. (25)
10.54 -- Plan and Agreement of Reorganization, dated August 31, 1999, among Eastern, Mani
and the Company. (26)
10.55 -- Form of Ratification Agreement, dated September ___, 1999, by the Company,
Eastern, Mani and Ramakrishnan. (27)
21 -- Subsidiaries.
23 Consent of BDO Seidman, LLP.
24 -- Power of Attorney (included on signature page to this Report on Form 10-KSB).
27 -- Financial Data Schedule for the nine months ended September 30, 1998 and the
twelve months ended September 30, 1999.
-----------------
</TABLE>
(1) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Report on Form 8-K, as filed with the
Securities and Exchange Commission on June 15, 1999.
(2) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 2 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on January 13, 1997.
<PAGE>
(3) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Registration Statement on Form SB-2,
File Number 333-15563, as filed with the Securities and Exchange Commission
on November 5, 1996.
(4) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 1 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on December 20, 1996.
(5) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission on April 15, 1998.
(6) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on February 16, 1999.
(7) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on July 28, 1999.
(8) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 3 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on January 28, 1997.
(9) Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K, as
filed with the Securities and Exchange Commission on December 30, 1997.
(10) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on November 14, 1997.
(11) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, as
filed with the Securities and Exchange Commission on December 30, 1997.
(12) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Annual Report, as amended, on Form
10-KSB/A, as filed with the Securities and Exchange Commission on
January 29, 1999.
(13) Incorporated by reference to Exhibit 2.1 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(14) Incorporated by reference to Exhibit 2.2 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(15) Incorporated by reference to Exhibit 2.3 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(16) Incorporated by reference to Exhibit 2.4 contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(17) Incorporated by reference to Exhibit 10.1 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(18) Incorporated by reference to Exhibit 10.2 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(19) Incorporated by reference to Exhibit 10.3 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(20) Incorporated by reference to Exhibit 10.4 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(21) Incorporated by reference to Exhibit 10.5 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(22) Incorporated by reference to Exhibit 10.6 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(23) Incorporated by reference to Exhibit 10.7 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(24) Incorporated by reference to the document bearing the same exhibit
number as contained on Form 8-K, as filed with the Securities and Exchange
Commission on February 12, 1999.
(25) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Report on Form 8-K, as filed with the
Securities and Exchange Commission on September 15, 1999.
<PAGE>
(26) Incorporated by reference to Exhibit 2.1 to Registrant's Report on
Form 8-K, as filed with the Securities and Exchange Commission on September
15, 1999.
(27) Incorporated by reference to Exhibit 2.2 to Registrant's Report on
Form 8-K, as filed with the Securities and Exchange Commission on September
15, 1999.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on September 15, 1999 regarding
its acquisition of certain assets of Eastern Systems Technology, Inc.,
a company engaged in the business of software development. The Report
included an Unaudited Pro Form Balance Sheet of NHancement Technologies
Inc. and Subsidiaries as of June 30, 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NHANCEMENT TECHNOLOGIES INC.
By /s/ Douglas S. Zorn
----------------------------------
Douglas S. Zorn, Chairman of the Board,
Chief Executive Officer, President
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Douglas S. Zorn, his true and lawful
attorneys-in-fact, with full power of substitution, for him in any and all
capacities, to sign any amendments to this report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes may do or cause
to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
-------------------------- --------------------------------------------- -----------
<S> <C> <C>
/s/ Douglas S. Zorn Chairman of the Board, Chief Executive Officer,
- -------------------------- President and Director
Douglas S. Zorn (Principal Executive and Financial Officer Dec. 29, 1999
--------------------------
James S. Gillespie Director Dec. __, 1999
/s/ Robert Schmier
--------------------------
Robert Schmier Director Dec. 29, 1999
/s/ N. Bruce Walko
--------------------------
N. Bruce Walko Director Dec. 29, 1999
</TABLE>
37
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDING SEPTEMBER 30, 1998 AND FISCAL YEAR ENDED SEPTEMBER 30, 1999
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheet as of September 30, 1999 F-3 - F-4
Consolidated statements of operations for the nine months
ended September 30, 1998 and fiscal year ended September
30, 1999 F-5
Consolidated statements of stockholders' equity for the nine
months ended September 30, 1998 and fiscal year ended
September 30, 1999 F-6
Consolidated statements of cash flows for the nine months
ended September 30, 1998 and fiscal year ended September
30, 1999 F-7 - F-8
Summary of accounting policies F-9 - F-12
Notes to the consolidated financial statements F-13 - F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and the Stockholders of
NHancement Technologies Inc. and Subsidiaries
Pleasanton, California
We have audited the accompanying consolidated balance sheet of NHancement
Technologies Inc. and Subsidiaries as of September 30, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fiscal year ended September 30, 1999, and the nine months ended September
30, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 9 in the consolidated financial statements, the Company
has two significant vendors that supply inventory.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NHancement
Technologies Inc. and Subsidiaries at September 30, 1999 and the results of
their operations and their cash flows for the fiscal year ended September 30,
1999 and the nine months ended September 30, 1998 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
San Francisco, California
December 14, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents (Note 9) $2,329,100
Restricted cash 190,000
Accounts receivable, less allowance for doubtful accounts of
$157,800 (Notes 4 and 9) 5,721,800
Inventory 1,594,200
Current portion of notes receivable from related parties (Notes 2 and 3) 479,500
Prepaid expenses and other 212,700
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,527,300
- ------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Office equipment 1,106,600
Computers and software for internal use 849,300
Automobiles 138,000
Furniture and fixtures 112,000
- ------------------------------------------------------------------------------------------------------------------
2,205,900
Less accumulated depreciation 1,050,900
- ------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 1,155,000
- ------------------------------------------------------------------------------------------------------------------
Excess of cost over net assets acquired of NHAN NA, net of
accumulated amortization of $250,000 500,000
Excess of cost over net assets acquired of Infotel, net of
accumulated amortization of $240,200 (Note 2) 2,182,000
Computer software (Note 2) 1,511,500
Long-term portion of notes receivable from related parties (Note 3) 94,400
Other assets 50,300
- ------------------------------------------------------------------------------------------------------------------
$16,020,500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Lines of credit (Note 4) $539,600
Accounts payable 4,492,200
Accrued compensation 861,100
Accrued liabilities 638,000
Deferred revenue 1,607,800
Additional purchase consideration (Note 2) 400,000
Income tax payable 79,100
Dividends payable 21,800
Capital lease obligations, current portion (Note 7) 83,300
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,722,900
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (NOTE 7) 61,700
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,784,600
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
(Notes 2, 7, 9 and 17)
STOCKHOLDERS' EQUITY (Notes 5 and 6)
Convertible preferred stock, $0.01 par value, 2,000,000 shares authorized,
11,300 shares issued and outstanding at September 30, 1999 854,800
Common stock, $0.01 par value, 20,000,000 shares authorized,
8,219,700 shares issued and outstanding at September 30, 1999 82,200
Additional paid-in capital 24,472,800
Accumulated deficit (17,965,300)
Cumulative translation loss, net of tax (208,600)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,235,900
- ------------------------------------------------------------------------------------------------------------------
$16,020,500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS FISCAL YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET REVENUES (NOTE 9) $9,442,200 $23,339,900
Cost of sales 5,863,300 15,799,200
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,578,900 7,540,700
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 4,211,500 7,420,700
Restructuring charges (Note 8) -- 189,000
Amortization of excess of cost over net assets acquired, including
impairment loss of $525,000 in 1998 797,600 442,600
- --------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,009,100 8,052,300
- --------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,430,200) (511,600)
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 76,900 107,500
Interest expense (138,900) (413,600)
Other income 39,800 134,800
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (22,200) (171,300)
- ---------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes (1,452,400) (682,900)
Income taxes (Note 10) 70,800 33,900
- --------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (1,523,200) (716,800)
- ---------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations of Advantis (Note 16) (581,400) --
Loss from disposal of Advantis (Note 16) (368,600) --
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS (2,473,200) (716,800)
PREFERRED DIVIDENDS (435,700) (738,400)
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ($2,908,900) ($1,455,200)
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS FROM CONTINUING OPERATIONS PER
COMMON SHARE (NOTE 13) ($0.41) ($0.23)
- --------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS FROM DISCONTINUED OPERATIONS PER
COMMON SHARE (NOTE 13) ($0.20) --
- --------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE (NOTE 13) ($0.61) ($0.23)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
Par Value Par Value
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 -- -- 4,437,000 $44,400
Issuance of Preferred Stock, net of stock issuance costs of
$265,300 (Note 5) 12,500 $ 984,700 -- --
Deemed dividend on Preferred Stock convertible at a discount -- -- -- --
Dividends on Preferred Stock converted into Common Stock -- -- 8,400 100
Dividends Payable on Preferred Stock -- -- -- --
Preferred Stock converted into Common Stock (Note 5) (9,300) (732,500) 700,835 7,000
Common Stock issued for Infotel acquisition (Note 2) -- -- 433,000 4,300
Issuance of Common Stock options for payment of outside service fees -- -- -- --
Comprehensive loss:
Net loss -- -- -- --
Cumulative translation loss -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 3,200 $ 252,200 5,579,235 $55,800
Additional Common Stock issued for Infotel acquisition -- -- 177,200 1,800
Issuance of Preferred Stock, net of cash stock issuance costs
of $278,000 (Note 5) 17,500 1,472,000 -- --
Issuance of warrants for Preferred Stock financing -- (143,200) -- --
Deemed dividend on Preferred Stock convertible at a discount -- -- -- --
Dividends on Preferred Stock converted into Common Stock -- -- 21,900 200
Dividends Payable on Preferred Stock -- -- -- --
Compensation related to grant of stock options -- -- -- --
Preferred Stock converted into Common Stock (Note 5) (9,400) (726,200) 1,090,700 10,900
Infotel debt converted to equity -- -- 559,100 5,600
Common Stock issued for purchase of software assets -- -- 675,000 6,700
Stockholder debt converted to equity -- -- 116,565 1,200
Comprehensive loss:
Net loss -- -- -- --
Cumulative translation loss -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative
Paid-in Accumulated Translation
Capital Deficit loss Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ 18,020,600 $(13,601,200) $ 11,300 $ 4,475,100
Issuance of Preferred Stock, net of stock issuance costs of
$265,300 (Note 5) -- -- -- $ 984,700
Deemed dividend on Preferred Stock convertible at a discount 416,700 (416,700) -- --
Dividends on Preferred Stock converted into Common Stock 11,400 -- -- 11,500
Dividends Payable on Preferred Stock -- (19,000) -- (19,000)
Preferred Stock converted into Common Stock (Note 5) 725,500 -- -- --
Common Stock issued for Infotel acquisition (Note 2) 1,836,100 -- -- 1,840,400
Issuance of Common Stock options for payment of outside service fees 10,600 -- -- 10,600
Comprehensive loss:
Net loss -- ($ 2,473,200) -- (2,473,200)
Cumulative translation loss -- -- ($186,200) ($ 186,200)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- ($2,659,400)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 21,020,900 ($16,510,100) ($174,900) $ 4,643,900
Additional Common Stock issued for Infotel acquisition (1,800) -- -- --
Issuance of Preferred Stock, net of cash stock issuance costs
of $278,000 (Note 5) -- -- -- 1,472,000
Issuance of warrants for Preferred Stock financing 143,200 -- -- --
Deemed dividend on Preferred Stock convertible at a discount 708,500 (708,500) -- --
Dividends on Preferred Stock converted into Common Stock 15,300 -- -- 15,500
Dividends Payable on Preferred Stock -- (29,900) -- (29,900)
Compensation related to grant of stock options 104,500 -- -- 104,500
Preferred Stock converted into Common Stock (Note 5) 715,300 -- -- --
Infotel debt converted to equity 629,000 -- -- 634,600
Common Stock issued for purchase of software assets 1,022,500 -- -- 1,029,200
Stockholder debt converted to equity 115,400 -- -- 116,600
Comprehensive loss:
Net loss -- (716,800) -- (716,800)
Cumulative translation loss -- -- (33,700) (33,700)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (750,500)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1999 11,300 $ 854,800 8,219,700 $82,200
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1999 $ 24,472,800 ($17,965,300) ($208,600) $ 7,235,900
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
NINE MONTHS FISCAL YEAR
ENDED ENDED
Increase (decrease) in cash and cash equivalents SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,473,200) ($716,800)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Loss from discontinued operations 581,400 --
Depreciation and other amortization 260,600 405,200
Amortization of excess cost over net assets acquired, including
impairment loss 723,000 442,600
Compensation related to grant of stock options and common stock 10,600 104,500
Gain of sale of fixed assets -- (12,000)
Other (25,000) (28,700)
Loss on sale of Advantis, net of cash of $1,000 367,600 --
Changes in operating assets and liabilities:
Accounts receivable (542,500) (1,146,100)
Inventory 653,200 (47,800)
Prepaid expense and other (41,000) 130,800
Other assets (89,500) 235,000
Income tax payable 64,000 (252,900)
Accounts payable and other current liabilities 337,100 2,007,700
- --------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (173,700) 1,121,500
CASH PROVIDED BY DISCONTINUED OPERATIONS (307,600) --
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash (369,000) 179,000
Advantis acquisition costs (196,400) --
Cash purchase price of Infotel, net of cash acquired of
$2,366,000 (30,300) --
Payment received on receivable from related party -- 12,100
Proceeds loaned to related party -- (250,000)
Purchase of software assets -- 82,100
Proceeds from sale of fixed assets 16,200 159,000
Purchases of property and equipment (360,500) (340,500)
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (940,000) (158,300)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-7
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
NINE MONTHS FISCAL YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under line of credit 263,200 308,600
Principal payments on capital leases (27,500) (92,500)
Proceeds from notes payable 1,400,000 --
Principal payment on notes payable to Stockholders (837,800) (1,990,400)
Proceeds from sale of Preferred Stock, net of offering
costs 984,700 1,472,000
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,782,600 (302,300)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (47,300) (9,000)
NET INCREASE IN CASH AND CASH EQUIVALENTS 314,000 651,900
CASH AND CASH EQUIVALENTS, beginning of year 1,363,200 1,677,200
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,677,200 $ 2,329,100
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Interest paid $ 119,900 $ 413,600
Income taxes paid -- $ 315,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-8
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
NHancement Technologies Inc., a Delaware corporation headquartered in
Pleasanton, 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 Technologies (Pte)
Ltd. ("Infotel"). NHAN NA, a California corporation headquartered in
Pleasanton, California, is a systems integrator and national distributor of
voice processing and multimedia messaging equipment. NHAN NA maintains
offices in the states of California, New York, Georgia, Arizona, Utah and
Texas. Revenues for NHAN NA represented 59% and 68% of consolidated net
revenues during 1999 and 1998 respectively. Infotel, a Singapore corporation
acquired on June 22, 1998, provides systems and services in the
telecommunications and information technology markets. The Company also
provides technical services in a range of coordinated multidisciplinary
services, including radio communications, computer networking, electronic
test and measuring equipment and turn-key projects. Revenues for Infotel
represented 41% and 32% of consolidated net revenues during 1999 and 1998. On
August 31, 1999, the Company acquired substantially all the assets of Eastern
Systems Technology, Inc. ("Eastern"), including the "InfoFast" software
search engine to access information contained in multiple corporate
databases. NHancement has formed a new software subsidiary late in fiscal
1999 named NHancement Technologies Software Group ("NHAN SWG"). The software
subsidiary will internally develop the software products that are critical to
the Company's strategy to become a software products and services company.
Late in fiscal 1999, the Company formed a Canadian subsidiary for the purpose
of facilitating NHAN NA sales to Canadian customers. The consolidated
financial statements include the results of the operations of NHancement and
its NHAN NA subsidiary for both periods presented and those of Infotel for
the three months ended September 30, 1998 and the year ended September 30,
1999. The operations of the NHAN SWG subsidiary and the Canadian subsidiary
were also included although negligible during fiscal 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.
CHANGE IN FISCAL YEAR-END
On July 30, 1998, the Board of Directors of NHancement Technologies Inc.
approved a resolution to change the Company and its Subsidiaries fiscal year-end
to September 30. As a result, a transition period for the nine months ended
September 30, 1998, is presented herein. Consequently, the Consolidated
Statement of Operations and Cash Flows present audited information for the nine
months ended September 30, 1998 and the year ended September 30, 1999. In
addition, unaudited information for the nine months ended September 30, 1997 is
included in Note 12 to the financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its wholly-owned subsidiaries NHAN NA, Infotel
Technologies (Pte) Ltd. and NHAN SWG since their respective dates of acquisition
(see Note 2). The results of operations related to Advantis have been reported
as discontinued operations in 1998. Significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue under several methods as dictated by the nature
of the service or product provided and the terms of the sales agreement.
Generally, system sales are recognized when all significant uncertainties about
customer acceptance of the system have been resolved. Once system installation
is complete, seller obligations, including estimated future technical support
costs, are immaterial. Revenue from maintenance contracts is prorated over the
life of the contract, normally one year, although the entire amount of the
contract is collected at the beginning of the term. Services, labor and the sale
of parts, upgrades, moves, adds and changes are
F-9
<PAGE>
recorded in the period shipped or provided. Revenues under fixed price contracts
in progress are recognized under the percentage-of-completion method of
accounting in which the estimated sales value is determined on the basis of
physical completion to date (the total contract amount multiplied by percent of
performance to date less sales value recognized in previous periods). Claims for
extra work are included in revenues when collection is probable.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
RESTRICTED CASH
The Company's Infotel subsidiary maintains fixed deposits to secure bankers'
guarantees of its performance on radar system integration projects. The
restrictions on these funds are released when the projects are completed.
Guaranteed work secured by these deposits is expected to be completed within one
year.
INVENTORY
Inventory consists primarily of systems and system components and is valued at
the lower of cost (first-in, first-out method) or market.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or their estimated
useful life. Maintenance and repairs are expensed as incurred and improvements
are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired ("goodwill"), which relates to
the Company's acquisitions of NHAN NA and Infotel are being amortized over a
three to ten year period using the straight-line method.
LONG-LIVED ASSETS
Long-lived assets are evaluated for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed of
are not subject to further depreciation or amortization. In determining whether
impairment exists, the Company compares undiscounted future cash flows to the
carrying value of the asset.
COMPUTER SOFTWARE
The Company has capitalized the cost of acquired software (See Note 2) that it
plans to integrate into existing and new product offerings. The Company will
amortize the software over its useful life once product sales commence.
F-10
<PAGE>
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Deferred income tax assets and liabilities are recognized
based on the temporary differences between the financial statement and income
tax bases of assets, liabilities and carryforwards using enacted tax rates.
Valuation allowances are established for deferred tax assets when realization is
not deemed more likely than not.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used in preparing these consolidated
financial statements include those assumed in computing the fair value of
goodwill. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". Under this
standard, companies are encouraged, but not required, to adopt the fair value
method of accounting for employee stock-based transactions. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Companies are permitted to continue to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose pro
forma net income (loss) and earnings (loss) per share as if the fair value
method had been adopted. The Company has elected to continue to account for
stock-based compensation under APB No. 25.
NET LOSS PER SHARE
The Company has adopted the provisions of SFAS No. 128, "Earnings per Share".
SFAS No. 128 provides for the calculation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiary are translated at
the exchange rate on the balance sheet date, while revenues and expenses are
translated at average rates prevailing during the period. Translation
adjustments are reported as a component of stockholders' equity.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable and
debt. The carrying value of cash and accounts receivable approximate fair value
based upon the liquidity and short-term nature of the assets. The carrying value
of short-term and long-term debt approximates the fair value based upon
short-term and long-term borrowings at market rate interest.
F-11
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition as the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 2000. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its recent acquisition of Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LIQUIDITY
The Company has incurred losses from continuing operations for the year ended
September 30, 1999 and the nine months ended September 30, 1998 of $0.7 million
and $1.5 million. Working capital at September 30, 1999 was $1.8 million.
Although no assurance can be given, management believes its cash balance as of
September 30, 1999 of $2.3 million and continued profitability (the last
three-quarters were profitable) will provide sufficient cash flow for the next
twelve months. However, if the Company fails to maintain profitable operations,
the Company will need to obtain additional financing. If additional financing is
necessary, there is no assurance that the Company will be able to obtain the
necessary funds, resulting in an adverse effect on the Company's financial
condition.
2. BUSINESS AND ASSET ACQUISITIONS
On June 22, 1998, the Company acquired all outstanding shares of the common
stock of Infotel. The consideration paid to the Infotel shareholders in
connection with the acquisition consisted of cash of S$3,780,000 (US$2,356,300
at a translation rate of 1.62) and approximately 433,000 shares of Common Stock
of NHancement ("Acquisition Shares"). Further, the Infotel shareholders had the
opportunity to receive S$3,200,000 (approximately US$1,884,000 at current rates)
in additional cash payments if Infotel exceeded certain minimum profit levels
totaling S$1.6 million (US$922,000) during the two year period ending June 30,
1999. Infotel exceeded these minimum profit levels and on April 29, 1999, the
Company negotiated a settlement agreement with the former Infotel shareholders
to accept $634,600 of the performance payment in additional shares of the
Company's Common Stock and $1,250,000 in cash. In August 1999, the Company paid
the $1.25 million plus accrued interest. The Company has no further cash payment
obligations under the terms of the acquisition agreement. If the price per share
of the Company's Common Stock is less than $5.00 on the first anniversary of the
Infotel acquisition, 50% of the initial shares issued to the Infotel
shareholders are subject to adjustment and likewise 50% are subject to
adjustment on the second anniversary if the per share price is less than $5.00.
Should the Company's Common Stock price be below $5.00 per share on either of
these dates, the Infotel shareholders would be entitled to receive that number
of shares equal to the lesser of (i) one-half the initial shares valued at $5.00
per share divided by the fair market value per share minus one-half of the
initial shares or (ii) one-half the initial shares valued at $5.00 per share
divided by $2.75 (subject to adjustment for stock splits and the like). On the
first anniversary of the closing, the Company's Common Stock was less then $5.00
and the Company issued approximately 177,000 additional shares of the Company's
Common Stock.
On August 31, 1999, the Company acquired certain assets of Eastern Systems
Technology, Inc., a company engaged in the business of software development
("Eastern"). Eastern's significant asset is a software program known as
"InfoFast." Under the agreement with Eastern, the Company acquired the software
assets from Eastern in exchange for initial consideration of 675,000 shares of
the Company's Common Stock, the transfer of which is restricted for at least one
year, and accrued additional consideration which consists of the future issuance
of shares of Common Stock (the "Additional Shares"), in an amount equal to
$400,000 divided by the closing bid price of shares of Common Stock as quoted on
the Nasdaq SmallCap Market on the date prior to the effectiveness of a
registration statement on Form S-3 providing for the registration of the
Additional Shares. The Company's Board of Directors preliminarily determined
that the fair value of the software assets acquired from Eastern approximated
the consideration to be paid to Eastern in connection with this transaction. The
Company is in the process of obtaining an independent valuation of the software
asset.
Simultaneously with the closing of the asset acquisition, the Company loaned
Eastern $250,000 secured by the Additional Shares. The loan bears interest at a
rate equal to 7% per annum and is payable in full on the earlier of (i) one year
following the closing of the asset acquisition (August 31, 2000) or (ii) within
30 days following the effective date of the registration statement covering the
Additional Shares. If the Company fails to cause this
F-13
<PAGE>
registration statement to become effective within a one-year period of time, or
if no public market exists for the Additional Shares as of the first year
anniversary of the purchase of Eastern's assets, the Company will not issue the
Additional Shares. Rather the Company will then pay Eastern $400,000 in cash
less the aggregate amount of principal and interest then due on the $250,000
loan, thereby extinguishing the loan.
The carrying value of goodwill is periodically evaluated by the Company based on
the estimated future undiscounted operating cash flows of the related business.
At September 30, 1998, the Company's evaluation of its NHAN NA subsidiary, which
was acquired in 1997, indicated that the estimated future undiscounted operating
cash flows of NHAN NA were less than those estimated at the time of its
acquisition and less than the carrying amount of the excess of cost over net
assets acquired. This impairment was attributed to continued changes in voice
processing technology and NHAN NA's operating losses. As such, the Company has
recorded an impairment loss of $525,000, representing the difference between the
carrying amount of goodwill over its estimated fair value. Fair value was based
on estimated future cash flows of NHAN NA using a 20% discount rate. In
addition, the useful life of the $750,000 balance of the goodwill of NHAN NA at
September 30, 1998 was reduced from five years to three years.
The following unaudited pro forma financial data consolidates the results of
operations of the Company, NHAN NA and Infotel as if the acquisition of Infotel
had occurred January 1, 1998. The pro forma information gives effect to certain
adjustments, including the amortization of excess cost over net assets acquired,
and interest expense on notes payable to related parties. This pro forma summary
does not necessarily reflect results of operations as they would have been if
the Company, NHAN NA and Infotel had constituted a single entity during such
periods and is not necessarily indicative of results that may be obtained in the
future.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------------------------------------------------------------------------------
<S> <C>
Net revenues $15,788,200
Loss before income taxes (895,600)
Net loss (1,150,400)
Preferred dividends (435,700)
Loss applicable to common stockholders (1,586,100)
------------------------------------------------------------------------------------------
Basic and diluted loss per share:
------------------------------------------------------------------------------------------
Net loss per common share ($0.33)
Weighted average shares 4,867,000
------------------------------------------------------------------------------------------
</TABLE>
In March 1998, the Company formalized a plan to exit from the business
related to its FACTOR 1000-Registered Trademark- product, which measures
human sensorimotor skills to determine an individual's performance readiness.
The carrying value of the remaining assets associated with the FACTOR
1000-Registered Trademark- product at September 30, 1999 are insignificant
and management does not expect to incur a loss on the disposition of the
FACTOR 1000-Registered Trademark- product.
F-14
<PAGE>
3. NOTES RECEIVABLE FROM RELATED PARTIES
At September 30, 1999, notes receivable from stockholders consisted of the
following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
<S> <C>
Note receivable from Advantis guaranteed by the shareholders of
Advantis with payments due monthly from January 1, 1999 through June
1, 2001, bearing interest at 7%. $323,900
Note receivable from Eastern, interest at 7%, with principal and
unpaid interest due by August 31, 2000 or within 30 days following
the effective date of a registration statement filed with the SEC to
register shares issued to Eastern, whichever is earlier. (Note 2) 250,000
--------------------------------------------------------------------------------------------------
573,900
Less current portion (479,500)
--------------------------------------------------------------------------------------------------
$94,400
--------------------------------------------------------------------------------------------------
</TABLE>
4. LINES OF CREDIT
The Company's NHAN NA subsidiary maintains a line of credit bearing interest at
2.75% per month collateralized by the assets of the subsidiary. This agreement
provides for borrowings up to 80% of eligible receivables not to exceed $1.5
million. The agreement expires in March 2000.
In November 1999, the Company's Infotel subsidiary entered into a line of
credit agreement providing for advances up to S$3,500,000 (US$2,058,825),
bearing interest at the Singapore prime rate plus 1.25%, collateralized by
the assets of the subsidiary and the guarantee of NHancement Technologies Inc.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of preferred stock with
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which could adversely affect
the voting power or, other rights of the holders of the Company's common stock.
However, all equity issuances that result in dilution to stockholders of over
20% require a vote of the existing stockholders, pursuant to Nasdaq rules.
On April 13, 1998, the Company issued 12,500 shares of Preferred Stock. Under
the terms of the securities purchase agreement, the Company received $1,250,000
(less commissions and certain other costs and expenses of approximately
$265,300). The Preferred Stock is convertible into Common Stock at the lesser of
the five day average closing bid price on April 13, 1998 or 75% of the five day
average closing bid price at the time of conversion. The 25% conversion discount
has been reflected as a preferred stock dividend and has resulted in an increase
in the loss applicable to common stockholders in computing net income (loss) per
share. For the nine months ended September 30, 1998, the Company recorded a
deemed dividend of $416,700.
On June 15, 1999, the Company issued 17,500 shares of Preferred Stock. Under the
terms of the securities purchase agreement, the Company received $1,750,000
(less commissions and certain other costs and expenses of approximately
$278,000). The Preferred Stock is convertible into Common Stock at the lesser of
the five day average closing bid price on April 13, 1998 or 75% of the five day
average closing bid price at the time of conversion. The 25% conversion discount
has been reflected as a preferred stock dividend and has resulted in an
F-15
<PAGE>
increase in the loss applicable to common stockholders in computing net loss per
share. For the year ended September 30, 1999, the Company recorded a deemed
dividend of $708,500. During the year ended September 30, 1999, a total of 9,400
shares of Preferred Stock were converted into Common Stock.
COMMON STOCK
Effective June 22, 1998, the Company issued 433,000 shares of its Common Stock,
and cash of $2,356,300 and recorded a payable of $1,390,000, which reflected
performance payments due to the former Infotel shareholders based on Infotel's
fiscal 1998 earnings results, in exchange for all of the outstanding shares of
Infotel, and Infotel became a wholly-owned subsidiary of the Company. (See Note
2)
On March 16, 1999, the Company issued 177,200 shares of its Common Stock to the
former Infotel shareholders as additional purchase consideration for Infotel, as
the Company's Common Stock did not meet the minimum share price on the first
anniversary per the Infotel purchase agreement.
On June 7, 1999, the Company issued 116,565 shares of its Common Stock to retire
$116,600 of debt payable to a stockholder.
On June 15, 1999, the Company recorded the final additional purchase
consideration of $494,600 based on Infotel's profits for the year ended June 30,
1999. The Company issued 559,100 shares of its Common Stock as payment for
$634,600 of the additional cash consideration due the former stockholders of
Infotel.
On August 31, 1999, the Company issued 675,000 shares of Common Stock to Eastern
along with other consideration in exchange for certain software assets.
From June 22, 1998, through September 30, 1999, a total of 18,700 shares of
Preferred Stock plus dividends were converted into 1,821,835 shares of Common
Stock.
6. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Equity Incentive Plan (the "Plan") is administered by the Company's Board of
Directors. Options granted may be either incentive stock options, as defined in
the Internal Revenue Code, or non-qualified stock options. The stock options are
exercisable over a period determined by the Board of Directors, but no longer
than ten years after the date of grant. The vesting schedule for incentive stock
options usually covers a two to seven year period ranging from one-third vested
immediately and the remainder equally over the next two years, to seven year
cliff vesting subject to acceleration provided that certain performance goals
are met. Vesting for non-qualified stock options is determined on a
grant-by-grant basis. Incentive stock options must have an exercise price of not
less than fair market value of the Common Stock on the date of grant (or, for
incentive stock options granted to a person holding more than 10% of the voting
power of the Company, options must have an exercise price equal to 110% of the
fair market value, and be exercisable only for a period of five years). The
aggregate fair value of the Common Stock subject to options granted to an
optionee that are exercisable for the first time by an optionee during any
calendar year may not exceed $100,000. Options generally expire three months
following termination of employment. Currently, the maximum number of shares of
Common Stock authorized for issuance under the Equity Incentive Plan is
1,476,500 shares.
F-16
<PAGE>
The following table summarizes transactions pursuant to the Company's Plan:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Weighted Average
Option Price Per
Share Outstanding
---------------------------------------------------------------------------------------
<S> <C> <C>
DECEMBER 31, 1997 $ 3.16 1,154,100
---------------------------------------------------------------------------------------
Granted 2.05 258,000
Canceled 2.69 (186,900)
---------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 $3.00 1,225,200
Granted 1.33 1, 402,700
Canceled 2.91 (1,151,400)
---------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 $ 1.51 1,476,500
---------------------------------------------------------------------------------------
OPTIONS EXERCISABLE AT:
September 30, 1999 $ 2.02 149,000
September 30, 1998 $ 3.42 503,500
---------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion. No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for the Plan. Under APB
Opinion No. 25, because the exercise price of the Company's stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
The Company measures compensation expense for stock options and warrants issued
to non-employees in accordance with SFAS No. 123. Compensation expense
associated with awards to consultants was $10,600 in 1998 and $104,500 in 1999.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement No. 123. The Company estimates the fair value of each stock option at
the grant date by using a modified Black-Scholes pricing model with the
following weighted-average assumptions used for grants in 1998 and 1999,
respectively: no dividend yield for any year; expected volatility of 42% and
80%; risk-free interest rates of 6.65% and 6.60%; and expected lives of
approximately three to eight years. The weighted average fair value of options
granted in 1998 and 1999 was $0.96 and $1.09.
Under the accounting provisions of FASB Statement No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Nine-months ended Year ended
September 30, 1998 September 30, 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss
As reported ($2,473,200) ($716,800)
Pro forma (2,647,600) (855,300)
Per share as reported ($0.61) ($0.23)
Per share pro forma ($0.64) ($0.26)
----------------------------------------------------------------------------------------
</TABLE>
The above pro forma information includes only the effects of 1997, 1998 and 1999
grants. Because options potentially vest over several years and additional
awards are made each year, the results shown above may not be representative of
the effects on net earnings in future years.
F-17
<PAGE>
Summary information about the Company's stock options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF SEPTEMBER 30, CONTRACTUAL AVERAGE SEPTEMBER 30, AVERAGE
WEIGHTED PRICE 1999 PERIODS IN YEARS EXERCISE PRICE 1999 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00-$2.00 1,005,000 7 years $1.15 50,000 $1.13
- -----------------------------------------------------------------------------------------------------------------------
$2.00-$3.00 441,500 4 years $2.16 79,000 $2.09
- -----------------------------------------------------------------------------------------------------------------------
$3.00-$4.00 30,000 3 years $4.00 20,000 $4.00
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
WARRANTS
In connection with the issuance of Preferred Stock in 1999, the Company granted
various warrants to purchase shares of Common Stock. The following schedule
summarizes the activity:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Warrant Price Remaining
Outstanding Per Share Contractual Life
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1998 847,100 $5.08 2.6 years
----------------------------------------------------------------------------------------------
September 30, 1998 847,100 $5.08 1.9 years
Granted 800,000 $1.22 3.3 years
----------------------------------------------------------------------------------------------
September 30, 1999 1,647,100 $3.20 2.4 years
----------------------------------------------------------------------------------------------
</TABLE>
The weighted average grant-date fair value of warrants issued in 1999 was $0.68.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain property consisting of corporate and sales office
facilities and equipment under operating leases that expire at varying dates
through 2007. Certain facility leases require the Company to pay real estate
taxes, maintenance and utilities. Future minimum annual commitments under these
leases are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
Year ending September 30, Amount
--------------------------------------------------
<S> <C>
2000 $363,700
2001 259,600
2002 270,500
2003 272,000
2004 272,000
Thereafter 657,300
--------------------------------------------------
$2,095,100
--------------------------------------------------
</TABLE>
Rent expense for the nine months ended September 30, 1998 and year ended
September 30, 1999 was $271,700 and $444,600, respectively.
CAPITAL LEASES
The Company leases computer equipment under capital leases. These leases extend
for varying periods through 2003.
F-18
<PAGE>
Equipment under capital lease included in property and equipment is as follows:
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------
<S> <C>
Equipment $265,000
Less accumulated depreciation (61,300)
--------------------------------------------------------
$203,700
--------------------------------------------------------
Payments under the capital lease obligations are as follows:
<CAPTION>
Year Amount
----------------------------------------------------------------
<S> <C>
2000 $95,700
2001 46,800
2002 8,100
2003 7,200
----------------------------------------------------------------
157,800
Less amount representing interest 12,800
----------------------------------------------------------------
Present value of minimum lease payments 145,000
Less current maturities 83,300
----------------------------------------------------------------
$61,700
----------------------------------------------------------------
</TABLE>
Depreciation expense for leased assets was approximately $48,400 and $12,900 at
September 30, 1999 and 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with one officer that
provides for specified severance payments should the Company terminate the
executive's employment with the Company, other than for cause. The amount to be
paid is two years' base salary, which amounts to $360,000 and bonuses. In
addition, pursuant to an employment agreement with the President of the NHAN NA
subsidiary, should the Company terminate the executive's employment with the
Company, other than for cause, the Company is obligated to make certain
severance payments. The amount to be paid through the end of his employment
agreement on February 3, 2000 is 50% of his base salary of $156,000 per annum
and the commissions he would have earned during the six month period subsequent
to his termination. On August 31, 1999, the Company entered into an employment
agreement with its Chief Technology Officer. Pursuant to the agreement, should
the Company terminate the executive's employment with the Company, other than
for cause, the Company is obligated to make certain severance payments. The
amount of severance to be paid through the end of the individual's employment
agreement on September 1, 2001 is 50% of his base salary or $75,000.
8. RESTRUCTURING CHARGES
The Company restructured its operations in the quarter ended March 31, 1999.
Restructuring charges consisted principally of severance payments to the former
Chief Executive Officer 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.
9. CONCENTRATION RISK
Revenues from two customers accounted for approximately 26% and 12% of total net
revenues during the nine months ended September 30, 1998 and 25% and 5% of total
net revenues during the year ended September 30,
F-19
<PAGE>
1999. Included in accounts receivable at September 30, 1999 is $1,965,300 and
$664,500 due from these two customers.
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States and Singapore. The Company
performs ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
The Company's NHAN NA subsidiary purchases substantially all of its inventory
requirements from two vendors. Purchases from these vendors represented 33.2%
and 10.7% of total consolidated material purchases during the year ended
September 30, 1999 and substantially all the consolidated material purchases for
the nine months ended September 30, 1998. Any termination or adverse change in
the Company's distribution arrangements with those vendors could have a material
adverse effect on the Company.
Cash and cash equivalents are held principally at high quality financial
institutions. At times, such balances may be in excess of the FDIC insurance
limit.
10. INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. For the year ended September 30, 1999, approximately
$385,600 of the pretax loss was attributable to U.S. operations and $297,300 was
attributable to foreign operations. For the nine months ended September 30,
1998, $1,615,800 of the pretax loss was attributable to U.S. operations,
$414,200 was attributable to foreign operations and a loss of $368,600 was
incurred for the disposal of Advantis. As of September 30, 1999, the Company's
net operating losses for federal income tax purposes were approximately $7.0
million, and expire between the years 2008 and 2019. For state income tax
purposes, as of September 30, 1999, the Company had net operating loss
carryforwards of approximately $250,000, which expire in 2003. The use of
Federal net operating loss carryforwards is subject to an annual limit of
approximately $250,000 as the Company has incurred an "ownership change". At
September 30, 1999, the Company also has approximately $100,000 of foreign tax
credits available to offset future federal income taxes. These credits expire in
2004. Deferred tax assets at September 30, 1999 consist primarily of the
following:
<TABLE>
-------------------------------------------------------------------------------------
<S> <C>
Net operating loss carryforwards $2,573,500
Cash to accrual change for tax purposes 147,700
Reserves and accrued liabilities 863,100
Accumulated depreciation and amortization (107,500)
Foreign tax credits 100,000
-------------------------------------------------------------------------------------
3,576,800
Less valuation allowance (3,576,800)
------------------------------------------------------------------- -----------------
Net deferred tax asset $ --
------------------------------------------------------------------- -----------------
F-20
<PAGE>
Income taxes for the year ended September 30, 1999 consist primarily of:
<CAPTION>
-------------------------------------------------------------------------------------
CURRENT DEFERRED EXPENSE
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal -- -- --
State 1,600 -- 1,600
Foreign - Singapore 32,300 -- 32,300
-------------------------------------------------------------------------------------
$ 33,900 -- $ 33,900
-------------------------------------------------------------------------------------
Income taxes for the nine months ended September 30, 1998 consist primarily of:
<CAPTION>
-------------------------------------------------------------------------------------
CURRENT DEFERRED EXPENSE
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ -- $ -- $ --
State 1,800 -- 1,800
Foreign - Singapore 71,000 (2,000) 69,000
-------------------------------------------------------------------------------------
72,800 (2,000) 70,800
-------------------------------------------------------------------------------------
Discontinued Operations:
Malaysia 3,800 -- 3,800
-------------------------------------------------------------------------------------
$76,600 ($2,000) $74,600
-------------------------------------------------------------------------------------
The following is a reconciliation of income taxes determined by applying
statutory rates to income taxes reported.
<CAPTION>
----------------------------------------------------------------------------------------
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER SEPTEMBER
30, 1998 30, 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Federal tax ($904,200) ($258,300)
State tax (162,200) (45,600)
Foreign taxes 73,000 32,300
Goodwill amortization 300,700 300,000
Loss on sale of subsidiary 30,000 --
Change in valuation allowance 870,300 (50,600)
Other (133,000) 56,100
----------------------------------------------------------------------------------------
$74,600 $33,900
----------------------------------------------------------------------------------------
</TABLE>
The valuation reserve at September 30, 1999 decreased by $50,600 from the
reserve balance at September 30, 1998. At September 30, 1999 the Company
established a 100% valuation allowance for the gross deferred tax asset in the
U.S. since management could not determine that it was more likely than not that
the deferred tax asset could be realized.
11. EMPLOYEE COMPENSATION AND BENEFITS
The Company's NHAN NA subsidiary has a 401(k) profit sharing plan in which all
qualifying employees with a minimum of 1,000 hours of service at year end are
eligible to participate. Matching contributions are made at the discretion of
the Company's Board of Directors. The Company pays all fees to administer the
plan. There were no matching contributions during the nine-month period ended
September 30, 1998 or the year ended September 30, 1999.
F-21
<PAGE>
12. CHANGE IN FISCAL YEAR
On July 30, 1998, the Company changed its fiscal year end from December 31 to
September 30. Consequently, the Consolidated Statements of Operations and Cash
Flows present audited information for the nine months ended September 30, 1998
and the year ended September 30, 1999. Included below is unaudited information
for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997
(UNAUDITED)
----------------------------------------------------------------------------------------
<S> <C>
Net Revenue $6,720,800
Gross Profit 3,207,400
Income tax expense 92,500
Income from continuing operations 230,000
Net income $230,000
----------------------------------------------------------------------------------------
</TABLE>
13. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128, "Earnings Per
Share". The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
NET LOSS - NUMERATOR SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss ($2,473,200) ($716,800)
Preferred stock dividends (435,700) (738,400)
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss applicable to common stockholders (2,908,900) (1,455,200)
- --------------------------------------------------------------------------------------------------------------------
COMMON SHARES - DENOMINATOR
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted weighted average common shares outstanding 4,802,300 6,249,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 3,123,600 shares of Common Stock and Preferred
Stock convertible into 846,400 shares of Common Stock were outstanding at
September 30, 1999 and options and warrants to purchase 2,072,300 shares of
Common Stock and Preferred Stock convertible into 274,675 shares of Common Stock
were outstanding at September 30, 1998. Also, there are 177,200 and 354,400
additional consideration shares which would be issuable according to the
antidilution provisions in the Infotel acquisition agreement at September 30,
1999 and 1998. None of the above options, warrants, or other contingently
issuable common shares were included in the computation of diluted loss per
common share for the periods ended September 30, 1999 or 1998 as the effect
would be antidilutive.
14. SEGMENT REPORTING
NHancement adopted SFAS No. 131, "Disclosure about Segments of an Enterprises
and Related Information", during 1998. SFAS No 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different products and serves different markets.
F-22
<PAGE>
NHancement reportable operating segments include NHAN NA, Infotel and NHAN
SWG. NHAN NA operating in the U.S. is a systems integrator and distributor of
voice processing equipment, which includes equipment installation, technical
support and ongoing maintenance. NHAN NA derives substantially all of its
revenue from sales in the U.S. Infotel is a provider and integrator of
infrastructure communications equipment products operating in Singapore,
providing radar system integration, turnkey project management services and
test instrumentation. Infotel derives substantially all of its revenue from
sales in Singapore. NHAN SWG was formed late in fiscal 1999 to internally
develop and sell integration and application software products. NHAN SWG did
not generate revenue in 1999.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
NHAN NA Infotel NHAN SWG Other (1) Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $13,659,500 $9,680,400 -- -- $23,339,900
Net income (loss) from continuing
operations 1,312,600 840,000 -- (2,869,400) (716,800)
Interest Income(2) 13,800 64,300 -- 29,400 107,500
Interest Expense (327,200) -- -- (86,400) (413,600)
Tax Expense 800 32,300 -- 800 33,900
Total assets 5,118,200 6,297,600 1,511,500 3,093,200 16,020,500
Property and equipment, net 638,900 179,100 -- 337,000 1,155,000
Depreciation and Amortization 445,900 332,600 -- 69,300 847,800
- ----------------------------------------------------------------------------------------------------------------------
(1) Other includes corporate expenses. Additionally, management reports include
goodwill for Infotel in total assets.
(2) Intercompany interest is eliminated.
<CAPTION>
SEPTEMBER 30, 1998(1)
- ----------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL OTHER (2) TOTAL(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $6,391,700 $3,036,000 $14,500 $9,442,200
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing
operations (1,100,000) 94,400 (517,600) (1,523,200)
Interest Income (5) 37,300 15,000 24,600 76,900
Interest Expense (97,900) -- (41,000) (138,900)
Tax expense 1,800 69,000 -- 70,800
Total assets 4,165,400 5,488,600 3,217,300 12,871,300
Property and equipment, net 628,200 337,000 280,200 1,245,400
Depreciation and Amortization (3) 884,700 88,600 10,300 983,600
- ------------------------------------------- ---------------- ------------------- ------------------ ------------------
</TABLE>
(1) The data presented for 1998 represents the nine-month period from January
1, 1998 through September 30, 1998, except for the Infotel data that
represents the period from acquisition on June 22, 1998 through September
30, 1998.
(2) Other includes corporate expenses. Additionally, management's reports
include goodwill for Infotel in total assets.
(3) NHAN NA includes goodwill impairment loss of $525,000 and amortization of
the excess of costs over net assets acquired of $225,000.
(4) The data presented does not include the loss on the sale of Advantis or the
loss from Advantis' operations.
(5) Intercompany interest is eliminated.
F-23
<PAGE>
15. DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
On June 22, 1998, the Company acquired all outstanding shares of Common Stock
of Infotel Technologies (Pte) Ltd. in exchange for approximately 433,000 shares
of the Company's Common Stock with an estimated value of $1,840,400 and
$2,356,300 in cash. Additionally, management accrued additional purchase
consideration of $1,390,400 based on Infotel's profits through June 30, 1998.
On June 7, 1999, the Company issued 116,565 shares of its Common Stock for
conversion of $116,600 of debt due to a stockholder.
On June 15, 1999, the Company recorded the final additional purchase
consideration of $494,600 committed on Infotel's profits in fiscal 1999. The
Company issued 559,100 shares of its Common Stock for conversation of $634,600
of the additional consideration due the former stockholders of Infotel.
On August 31, 1999, the Company acquired certain assets of Eastern, principally
a software program, in exchange for 675,000 shares of the Company's Common Stock
valued at $1,029,400 and the future issuance of shares of Common Stock worth
$400,000. Refer to Note 2 for further information.
Refer to Note 5 regarding the conversion of the Company's Preferred Stock to
Common Stock.
Property and equipment additions of $124,200 and $140,700 were financed by
capital lease obligations in 1999 and 1998.
16. DISPOSAL OF ADVANTIS
On September 30, 1998 the Company sold its Advantis operations. The measurement
date is September 24, 1998 and the disposal date is September 30, 1998. The loss
from operations as of the measurement date to the disposal date was immaterial.
Three of the former stockholders of Advantis entered into a guarantee agreement
pursuant to which each such stockholders agreed to guarantee repayment of the
outstanding loan of $300,000 made by the Company to Advantis (together with all
the interest accrued to date) pursuant to a loan agreement and related
promissory notes dated July 7, 1997 (Note 2). In exchange, the Company delivered
all of the Advantis shares and transferred its ownership interest in Advantis to
the original stockholders in full and final settlement of any and all damages
the Company may have suffered as a result of the breaches of certain
representations and warranties made by the three former Advantis stockholders
who signed the guarantee pursuant to the agreement for the sale of the Advantis
shares dated June 20, 1997. Revenues from Advantis were $569,500 for the nine
months ended September 30, 1998.
17. SUBSEQUENT EVENTS
In December 1999, the Company moved its headquarters from Fremont, California to
Pleasanton, California. In conjunction with the move, the Company has entered
into commitments to purchase approximately $400,000 of office furniture and
computer equipment including a new server. The lease commitments outlined in
Note 7 include the obligations from the Pleasanton lease.
On December 10, 1999, the Company entered into an agreement to acquire all
outstanding shares of common stock of Trimark, Inc., which does business as
"Triad Marketing" ("Triad"). The consideration to be paid to the Triad
shareholders will consist of 750,000 shares of Common Stock of Nhancement and
warrants to purchase 250,000 shares of Common Stock of NHancement at the
closing market price on December 9, 1999. In the event the average closing
price of
F-24
<PAGE>
NHancement Common Stock for the five consecutive trading days ending on the
trading day immediately prior to the first anniversary and second anniversary of
the transaction's closing (the "Valuation Formula") falls below $4.00, the Triad
shareholders are entitled to additional consideration, at NHancement's option,
of cash or Common Stock. At the first anniversary date, the Triad shareholders
are entitled to additional consideration equal to one-half of the unregistered
shares of NHancement Common Stock they still own plus all of the registered
shares of NHancement Common Stock they still own, multiplied by the lesser of
(a) Four Dollars $4.00 minus the Valuation Formula or (b) Two Dollars and Fifty
Cents $2.50. At the second anniversary date, the Triad shareholders are entitled
to additional consideration equal to 250,000 unregistered shares owned by the
Triad shareholders multiplied by the lesser of (a) Four Dollars $4.00 minus the
Valuation Formula or (b) Two Dollars and Fifty Cents $2.50.
F-25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
<S> <C>
2.3 -- Plan and Agreement of Reorganization, dated December 10, 1999, by and among
Trimark Inc., d.b.a. Triad Marketing, Greg Darling, Richard Glover and the
Company.
3.1 -- Amended and Restated Certificate of Incorporation, as filed with the Delaware
Secretary of State on January 27, 1997, as amended by Certificate of
Designations, as filed with the Delaware Secretary of State on April 9, 1998, as
further amended by Amended Certificate of Designations, as filed with the
Delaware Secretary of State on April 13, 1998, as further amended by Amended
Certificate of Designations, as filed with the Delaware Secretary of State on
June 11, 1999. (1)
3.2 -- Amended and Restated Bylaws. (2)
4.1 -- Form of Common Stock Certificate. (3)
4.2 -- Form of Underwriter Warrant. (4)
4.3 -- Registration Rights Agreement, dated September 1, 1996, between BioFactors, Inc.
("BFI") and (i) a majority of the holders of securities pursuant to the Secured
Note and Warrant Purchase Agreement dated December 1, 1994, as amended; (ii) a
majority of the holders of securities issued pursuant to the Secured Note and
Stock Purchase Agreement, dated December 1, 1995, as amended; (iii) a majority of
the holders of securities issued pursuant to the Unsecured Note and Stock
Purchase Agreement, dated February 1, 1996, as amended; (iv) a majority of the
holders of securities issued pursuant to the Unit Subscription Agreement, dated
May 17, 1996, as amended; (v) the purchasers of securities issued pursuant to the
Unit Subscription Agreement dated October 3, 1996; and (vi) the former holders of
BFI's Series A Preferred Stock. (4)
4.4 -- Registration Rights Agreement, dated October 25, 1996, between the Company and
James S. Gillespie. (3)
4.5 -- Form of Series A Preferred Stock Certificate. (5)
4.6 -- Registration Rights Agreement, dated as of April 13, 1998, among the Company, The
Endeavour Capital Fund S.A. and AMRO INTERNATIONAL S.A. (5)
4.7 -- Warrant Agreement dated February 2, 1999 between the Company and JWGenesis
Capital Markets LLC. (6)
4.8 -- Warrant Agreement dated February 2, 1999 between the Company and Kenneth L.
Greenberg. (6)
4.9 -- Warrant Agreement dated February 2, 1999 between the Company and Mark Goldberg.
(6)
4.10 -- Form of Warrant dated June 15, 1999 delivered to purchasers of Series A
Convertible Preferred Stock. (7)
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). (7)
4.12 -- Warrant Agreement dated June 7, 1999 between the Company and James S. Gillespie.
(7)
4.13 -- Warrant Agreement dated June 15, 1999 between the Company and Grady & Hatch and
Company, Inc. (7)
10.1 -- Formation Agreement, dated as of October 15, 1996, between BFI and Voice Plus,
Inc. ("Voice Plus"). (3)
10.2 -- Agreement and Plan of Merger, dated as of October 30, 1996, between the Company,
BFI Acquisition Corporation and BFI. (4)
10.3 -- Agreement and Plan of Merger, dated as of October 25, 1996, between the Company,
Voice Plus Acquisition Corporation, Voice Plus and James S. Gillespie, together
with Forms of Promissory Notes. (8)
10.4 -- Agreement of Merger between Voice Plus and BFI dated as of October 10, 1997. (5)
10.5 -- License Agreement, dated November 24, 1988, by and between BFI and Systems
Technology, Inc., as amended by Addendum to License Agreement, dated May 19,
1994, as amended by Second Addendum to License Agreement, dated November 18, 1996.
(4)
10.6 -- Sublicense Agreement, dated August 30, 1995, between BFI and SportsTrac, Inc., as
amended by Addendum to Sublicense Agreement, dated July 31, 1996. (3)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
10.7 -- Secured Note and Warrant Purchase Agreement, dated December 1, 1994, between BFI
and the purchasers listed therein, as amended by the First Amendment to Secured
Note and Warrant Purchase Agreement, dated July 1995, as amended by Amendment to
Secured Note and Warrant Purchase Agreement, dated December 1, 1995, as amended
by Third Amendment to Secured Note and Warrant Purchase Agreement, dated March 1,
1996, and as amended by Fourth Amendment to Secured Note and Warrant Purchase
Agreement, dated October 1, 1996, together with Amended and Restated Security
Agreement and Form of Secured Promissory Note. (4)
10.8 -- Secured Note and Stock Purchase Agreement, dated December 1, 1995, between BFI
and the purchasers listed therein, as amended by the First Amendment to Secured
Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second
Amendment to Secured Note and Stock Purchase Agreement, dated July 1, 1996, and
as amended by Third Amendment to Secured Note and Stock Purchase Agreement, dated
October 1, 1996, together with Form of Secured Promissory Note. (4)
10.9 -- Unsecured Note and Stock Purchase Agreement, dated February 1, 1996, between BFI
and the purchasers listed therein, as amended by the First Amendment to Unsecured
Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second
Amendment to Unsecured Note and Stock Purchase Agreement, dated July 1, 1996, and
as amended by Third Amendment to Unsecured Note and Stock Purchase Agreement,
dated October 1, 1996, together with Form of Unsecured Promissory Note. (4)
10.10 -- Unit Subscription Agreement, dated May 17, 1996, between BFI and the purchasers
listed therein, as amended by First Amendment to Unit Subscription Agreement,
dated October 1, 1996, together with Form of Promissory Note. (4)
10.11 -- Unit Subscription Agreement, dated October 1, 1996, between BFI and the
purchasers listed therein, together with Form of Promissory Note and Form of
Warrant. (2)
10.12 -- Equity Incentive Plan. (2)
10.13 -- Employment Agreement, dated as of October 30, 1996, between Douglas S. Zorn and
the Company. (2)
10.14 -- Employment Agreement, dated as of October 25, 1996, between James S. Gillespie
and the Company. (3)
10.15 -- Employment Agreement, dated as of October 30, 1996, between Esmond T. Goei and
the Company. (3)
10.16 -- Form of FACTOR 1000-Registered Trademark- Service Contract. (3)
10.17 -- Office Building Lease, dated April 8, 1996, between BFI and Denver West Office
Building No. 21 Venture. (4)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16, 1996, between Centigram
Communications Corporation and Voice Plus. (3)
10.19 -- Office Lease, dated October 16, 1995, between AJ Partners Limited Partnership and
Voice Plus. (4)
10.20 -- Agreement, dated October 16, 1995, between BFI, Burton Kanter and Elliot
Steinberg, as amended by Amendment dated July 16, 1996, between BFI, Esmond Goei,
Douglas Zorn, Burton Kanter and Elliot Steinberg. (4)
10.21 -- Stockholder Agreement, dated October 25, 1996, between the Company and James D.
Gillespie. (4)
10.22 -- 1997 Management and Company Performance Bonus Plan. (4)
10.23 -- Employment Agreement, dated as of November 1, 1996, between Diane E. Nowak and
Voice Plus. (2)
10.24 -- Employment Agreement, dated as of November 1, 1996, between Bradley Eickman and
Voice Plus.(2)
10.25 -- Promissory Note Payable to the Company by Esmond T. Goei. (5)
10.26 -- Agreement for the Sale of Shares in Advantis Network & System Sdn Bhd dated
June 20, 1997, between the Company and the shareholders of Advantis, as amended
by the Supplemental Agreement to the Agreement dated November 26, 1997, and the
Second Supplemental Agreement dated November 26, 1997. (9)
10.27 -- Building Lease dated June 9, 1997 by and between the Company, as Tenant and El
Dorado Holding Company, Inc., as Landlord. (10)
10.28 -- Form of Lock Up Agreement between the Company and the former shareholders of
Advantis. (11)
10.29 -- Securities Purchase Agreement, dated as of April 13, 1998, by and among the
Company, the Endeavour Capital Fund S.A. and AMRO INTERNATIONAL S.A. (5)
10.30 -- Form of Escrow Instructions related to Securities Purchase Agreement, dated as of
April 13, 1998. (5)
10.31 -- Form of Reseller Agreement between Interactive Intelligence Inc. and the Company
dated July 8, 1998. (12)
10.32 -- Form of Associate Agreement between NEC, Inc. and the Company dated May 26, 1998.
(12)
10.33 -- Form of Loan and Security Agreement between AEROFUND FINANCIAL and the Company
dated October 9, 1998. (12)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------
10.34 -- Form of Guaranty from Lee Giam Teik, Man Yiew Ming and Ng Kok Wah dated September
30, 1998. (12)
10.35 -- Letter Agreement between Lee Giam Teik, Man Yiew Ming and Ng Kok Wah and the
Company dated September 30, 1998. (12)
10.36 -- Agreement relating to the sale and purchase of 500,000 ordinary shares in the
Capital of Infotel Technologies (Pte) Ltd ("Infotel"), dated as of January 19,
1998, by and between the Company and the stockholders of Infotel (the "Sale
Agreement"). (13)
10.37 -- Letter Agreement amending the Sale Agreement, dated as of April 2, 1998, by and
between the Company and the stockholders of Infotel ("Supplement No. 1"). (14)
10.38 -- Form of letter agreement amending the Sale Agreement, as amended by Supplement
No. 1, dated as of April 22, 1998, by and between the Company and the
stockholders of Infotel ("Supplement No. 2"). (15)
10.39 -- Letter agreement amending the Sale Agreement, as amended by Supplement No. 1 and
Supplement No. 2, dated as of June 22, 1998, by and between the Company and
stockholders of Infotel. (16)
10.40 -- Promissory Note, dated as of June 15, 1998, in the original principal amount of
$375,000, payable by the Company to AMRO International S.A. ("AMRO"). (17)
10.41 -- Promissory Note, dated as of June 15, 1998, in the original principal amount of
$375,000, payable by the Company to Endeavour Capital Fund S.A. ("Endeavour").
(18)
10.42 -- Letter agreement, dated as of June 15, 1998, amending Securities Purchase
Agreement, dated as of April 13, 1998, by and among the Company, AMRO and
Endeavour. (19)
10.43 -- Letter agreement, dated as of June 12, 1998, by and among the Company, Esmond T.
Goei, Douglas S. Zorn and James S. Gillespie. (20)
10.44 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$125,000 payable by the Company to Esmond T. Goei. (21)
10.45 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$225,000 payable by the Company to Douglas S. Zorn. (22)
10.46 -- Promissory Note, dated as of June 12, 1998, in the original principal amount of
$300,000 payable by the Company to James S. Gillespie. (23)
10.47 -- Separation Agreement dated January 13, 1999 between Esmond T. Goei and the
Company. (24)
10.48 -- Letter Agreement dated February 2, 1999 between the Company and JWGenesis Capital
Markets LLC. (6)
10.49 -- Amendment dated June 11, 1999, to Securities Purchase Agreement dated April 13,
1998. (1)
10.50 -- Termination, Consulting and Confidentiality Agreement dated June 7, 1999 between
James S. Gillespie and the Company. (7)
10.51 -- Loan and Security Agreement, dated as of August 31, 1999, by and among Eastern Systems
Technology, Inc. ("Eastern"), Ram V. Mani ("Mani"), Front-End Technolgies, Srini
Ramakrishnan ("Ramakrishnan") and the Company. (25)
10.52 -- Secured Promissory Note, dated as of August 31, 1999, in the principal amount of
$250,000, payable by Eastern to the Company. (25)
10.53 -- Employment Agreement, dated as of August 31, 1999, by and between Mani and the
Company. (25)
10.54 -- Plan and Agreement of Reorganization, dated August 31, 1999, among Eastern, Mani
and the Company. (26)
10.55 -- Form of Ratification Agreement, dated September ___, 1999, by the Company,
Eastern, Mani and Ramakrishnan. (27)
21 -- Subsidiaries.
23 Consent of BDO Seidman, LLP.
24 -- Power of Attorney (included on signature page to this Report on Form 10-KSB).
27 -- Financial Data Schedule for the nine months ended September 30, 1998 and the
twelve months ended September 30, 1999.
-----------------
</TABLE>
(1) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Report on Form 8-K, as filed with the
Securities and Exchange Commission on June 15, 1999.
(2) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 2 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on January 13, 1997.
<PAGE>
(3) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Registration Statement on Form SB-2,
File Number 333-15563, as filed with the Securities and Exchange Commission
on November 5, 1996.
(4) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 1 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on December 20, 1996.
(5) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission on April 15, 1998.
(6) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on February 16, 1999.
(7) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on July 28, 1999.
(8) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 3 to Registrant's Registration
Statement on Form SB-2, File Number 333-15563, as filed with the Securities
and Exchange Commission on January 28, 1997.
(9) Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K, as
filed with the Securities and Exchange Commission on December 30, 1997.
(10) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as
filed with the Securities and Exchange Commission on November 14, 1997.
(11) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, as
filed with the Securities and Exchange Commission on December 30, 1997.
(12) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Annual Report, as amended, on Form
10-KSB/A, as filed with the Securities and Exchange Commission on
January 29, 1999.
(13) Incorporated by reference to Exhibit 2.1 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(14) Incorporated by reference to Exhibit 2.2 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(15) Incorporated by reference to Exhibit 2.3 contained in Registrant's
Registration Statement on Form S-3, File No. 333-52709, as initially
filed with the Securities and Exchange Commission on May 14, 1998.
(16) Incorporated by reference to Exhibit 2.4 contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(17) Incorporated by reference to Exhibit 10.1 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(18) Incorporated by reference to Exhibit 10.2 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(19) Incorporated by reference to Exhibit 10.3 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(20) Incorporated by reference to Exhibit 10.4 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(21) Incorporated by reference to Exhibit 10.5 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(22) Incorporated by reference to Exhibit 10.6 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(23) Incorporated by reference to Exhibit 10.7 as contained in Registrant's
Report on Form 8-K, as filed with the Securities and Exchange Commission on
July 7, 1998.
(24) Incorporated by reference to the document bearing the same exhibit
number as contained on Form 8-K, as filed with the Securities and Exchange
Commission on February 12, 1999.
(25) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Report on Form 8-K, as filed with the
Securities and Exchange Commission on September 15, 1999.
<PAGE>
(26) Incorporated by reference to Exhibit 2.1 to Registrant's Report on
Form 8-K, as filed with the Securities and Exchange Commission on September
15, 1999.
(27) Incorporated by reference to Exhibit 2.2 to Registrant's Report on
Form 8-K, as filed with the Securities and Exchange Commission on September
15, 1999.
<PAGE>
EXHIBIT 2.3
PLAN AND AGREEMENT OF REORGANIZATION
THIS PLAN AND AGREEMENT OF REORGANIZATION ("AGREEMENT"), dated December
10, 1999, by and among Trimark Inc., d.b.a. Triad Marketing, a California
corporation ("TRIMARK"), Greg Darling and Richard Glover (individually a
"SHAREHOLDER" and collectively the "SHAREHOLDERS"), NHancement Technologies
Inc., a Delaware corporation ("NHANCEMENT"), and NHancement Acquisition
Corp., a California corporation and wholly-owned subsidiary of NHancement
("MERGERSUB").
PLAN OF REORGANIZATION
The reorganization (the "REORGANIZATION") will comprise, in general, the
merger of Trimark with and into MergerSub and the issuance by NHancement to
the Shareholders of shares of NHancement's authorized but unissued voting
common stock (the "COMMON STOCK") in exchange for the cancellation of their
shares of Trimark Common Stock, all upon and subject to the terms and
conditions of the agreement hereinafter set forth. The parties intend that
the Reorganization qualify as a tax-free reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE").
The parties further intend for the Reorganization to qualify for accounting
treatment as a tax-free reorganization.
AGREEMENT
In order to consummate the Reorganization, and in consideration of the
representations and undertakings herein set forth, the parties agree as
follows:
1. THE MERGER. At the Effective Time (as defined in Section 1.1) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California Corporations Code (the "CCC"),
Trimark shall be merged with and into MergerSub, the separate existence of
Trimark shall cease and MergerSub shall continue as a surviving corporation
and as a wholly-owned subsidiary of NHancement, the name of which shall, on
the Effective Time, be changed to "Trimark Inc., dba Triad Marketing" (the
"MERGER"). MergerSub as the surviving corporation after the Merger is
sometimes referred to as the "SURVIVING CORPORATION." The Merger shall be
accomplished as follows:
1.1 EFFECTIVE TIME. Unless this Agreement is earlier terminated
pursuant to Section 9, the closing of the Merger (the "CLOSING") will take
place as promptly as practicable, but in no event later than five (5) days
following satisfaction of the conditions set forth in Section 8, at the
offices of Tomlinson Zisko Morosoli & Maser LLP, 200 Page Mill Road, Second
Floor, Palo Alto, California 94306. At the Closing, the parties shall cause
the Merger to be consummated by filing a Certificate of Merger with the
California Secretary of State (the "CERTIFICATE OF MERGER") in accordance
with the
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Trimark Inc. / NHancement Technologies Inc.
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relevant provisions of the CCC. The date and time the Merger becomes
effective in accordance with the provisions of the CCC is the "EFFECTIVE
TIME."
1.2 EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of the CCC.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises
of Trimark and MergerSub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Trimark and MergerSub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.3 ARTICLES OF INCORPORATION; BYLAWS. Unless otherwise
determined by NHancement prior to the Effective Time, at the Effective Time,
the Articles of Incorporation and Bylaws of MergerSub shall be the Articles
of Incorporation and Bylaws of the Surviving Corporation.
1.4 DIRECTORS AND OFFICERS. The Directors of MergerSub
immediately prior to the Effective Time shall be the initial Directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation. The officers of
MergerSub immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, each to hold office in accordance with
the Bylaws of the Surviving Corporation.
1.5 MAXIMUM SHARES TO BE ISSUED. The maximum number of shares of
NHancement Common Stock to be issued in exchange for the cancellation of all
outstanding Trimark Capital Stock shall be Seven Hundred Fifty Thousand
(750,000) shares and warrants (in the form attached as Exhibit "A") to
purchase Two Hundred Fifty Thousand (250,000) shares of NHancement Common
Stock at a warrant price equal to the then current fair market value at
Closing (further subject to the Valuation Formula set forth in Section 4.2
below). Each share of Common Stock of Trimark (the "TRIMARK COMMON STOCK")
issued and outstanding immediately prior to the Effective Time will be
canceled and extinguished and be converted automatically into the right to
receive Seven Hundred Fifty (750) shares, and Warrants to purchase on
additional Two Hundred Fifty (250) shares, of NHancement Common Stock upon
surrender of the Certificate representing such shares of Trimark Common Stock
in the manner provided in Section 1.7. From the date hereof until the
Effective Time, Trimark agrees not to issue any additional shares of its
Capital Stock (including any options, warrants, conversion privileges or
other rights, commitments or agreements of any nature to purchase any such
shares of Trimark Capital Stock). All of the shares of MergerSub owned by
NHancement immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and non-assessable share of
Common Stock of the Surviving Corporation. Each stock certificate of
MergerSub evidencing ownership of any shares shall continue to evidence
ownership of shares of capital stock of the Surviving Corporation. No
fraction of a share, or a Warrant to purchase a fractional share, of
NHancement Common Stock will be issued, but in lieu thereof, each holder of
shares of Trimark Capital Stock who would otherwise be entitled to a fraction
of a share of NHancement Common Stock (after aggregating all fractional
shares of NHancement Common Stock to be received by such holder) shall be
entitled to receive from NHancement in the amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied by
(ii) the average closing price of a share of NHancement
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 3
Common Stock for the five (5) consecutive trading days ending on the trading
day immediately prior to the Closing, as reported on the NASDAQ National
Market and, in the case of the Warrants, a Warrant rounded up to purchase the
nearest whole share.
1.6 DISSENTING SHARES. Prior to the execution and delivery of
this Agreement by the parties, all of the holders of Trimark Capital Stock
shall have irrevocably consented to and approved the Merger and no holders of
any shares of Trimark Capital Stock shall be entitled to appraisal or
dissenters' rights.
1.7 SURRENDER OF CERTIFICATES. Prior to the Effective Time,
NHancement shall designate its transfer agent to act as the exchange agent
(the "EXCHANGE AGENT") in the Merger. Promptly after the Effective Time,
NHancement shall make available to the Exchange Agent for exchange in
accordance with this Section 1.7, the aggregate number of shares, and
warrants to purchase shares, of NHancement Common Stock issuable pursuant to
Section 1.5 in exchange for all issued and outstanding shares of Trimark
Capital Stock. Promptly after the Effective Time, the Surviving Corporation
shall cause to be mailed to each holder of record of a certificate or
certificates (the "CERTIFICATES") which immediately prior to the Effective
Time represented outstanding shares of Trimark Capital Stock whose shares
were converted and to the right to receive shares of NHancement Common Stock
and Warrant pursuant to Section 1.5, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and the risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and shall have such other provisions
as NHancement may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of NHancement Common Stock and Warrants. Upon surrender
of a Certificate for cancellation to the Exchange Agent together with such
letter of transmittal duly completed and validly executed in accordance with
the instructions thereto, the holder of Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of NHancement Common Stock plus cash in lieu of fractional shares and
Warrants in accordance with Section 1.5, to which such holder is entitled
pursuant to Section 1.5, and the Certificate so surrendered shall forthwith
be canceled. Until so surrendered, each outstanding Certificate that, prior
to the Effective Time, represented shares of Trimark Capital Stock will be
deemed from and after the Effective Time, for all corporate purposes, to
evidence the ownership of the number of full shares of NHancement Common
Stock and Warrants into which such shares of Trimark Capital Stock shall and
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.5.
1.8 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the
parties hereto that the Merger shall (i) constitute a reorganization within
the meaning of Section 368 of the Code and (ii) qualify for accounting
treatment as a tax free reorganization.
1.9 FURTHER ACTION. If, at any time after the Effective Date, any
such further action is necessary or desirable to carry out the purposes of
this Agreement and to vest the Surviving Corporation with full right, title
and possession to all assets, liabilities, properties, rights, privileges,
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 4
powers and franchises of Trimark and MergerSub, the officers and Directors of
Trimark and MergerSub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and
necessary actions.
2. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS. Each of the
Shareholders, jointly and severally, represent and warrant to NHancement that
all of the statements made below in this Section 2 are true and correct in
all respects. These representations and warranties are subject to the
exceptions set forth on attached Schedule 2 (the "SCHEDULE OF EXCEPTIONS"),
specifically identifying the relevant Section hereof, which exceptions shall
be deemed to be representations and warranties as if made hereunder. The
phrase "to the best knowledge of Trimark" shall, when included in a
representation or warranty made by a Shareholder, means to the best knowledge
of such Shareholder.
2.1 ORGANIZATION AND STANDING. Trimark is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California and has full power and authority to carry on its business as
now conducted and as proposed to be conducted. Trimark is not required to be
qualified as a foreign corporation in any jurisdiction; provided, however,
that Trimark need not be qualified in any jurisdiction in which a failure to
qualify would not have a material and adverse effect on its operations or
financial condition.
2.2 CAPITALIZATION. The authorized capital stock of Trimark
consists of one million (1,000,000) shares of Common Stock, of which one
thousand (1,000) shares are presently, and at the Effective Time will be,
issued and outstanding. All of Trimark's issued and outstanding shares are
owned beneficially and of record by the Shareholders in the amounts set forth
on attached Schedule 2.2. All outstanding shares of Trimark Common Stock are
duly authorized, validly issued, fully paid and non-assessable and are not
subject to preemptive rights created by statute, the Articles of
Incorporation or Bylaws of Trimark or any agreement to which Trimark or
either Shareholder is a party or by which it is bound. There are no options,
warrants, calls, rights, conversion privileges, commitments or agreements of
any character, written or oral, to which Trimark is party or by which it is
bound obligating Trimark to issue, deliver, sell, repurchase or redeem, or
caused to be issued, delivered, sold, repurchased or redeemed, any shares of
the capital stock of Trimark.
2.3 SUBSIDIARIES. Trimark has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association, joint venture, partnership
or other business entity.
2.4 CORPORATE AUTHORITY AND AUTHORIZATION. Trimark has all
requisite, corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of Trimark, its officers, directors and Shareholder necessary for the
authorization, execution, delivery and performance of this Agreement by
Trimark and the performance of all of Trimark's obligations hereunder has
been taken. As set forth in Section 1.6 above, all of the holders of Trimark
Capital Stock have consented to and approved the Merger and no holders of any
shares of Trimark Capital Stock are entitled to appraisal or dissenters'
rights. This
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 5
Agreement constitutes a valid and binding obligation of Trimark and the
Shareholders, enforceable against Trimark and the Shareholders in accordance
with its terms, except as the indemnification provisions of Section 7.7
hereof may be limited by principles of public policy and subject to laws of
general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
2.5 GOVERNMENTAL CONSENT. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on
the part of Trimark is required in connection with the valid execution and
delivery of this Agreement, or the consummation of any transaction
contemplated hereby.
2.6 INTELLECTUAL PROPERTY.
2.6.1 Trimark possesses and has good, valid and marketable
title, free and clear of all security interests, liens, claims, charges,
encumbrances or any other defects in title of any nature whatsoever to, or
has the valid, enforceable right to use (pursuant to written agreements, true
and correct copies of which are listed on Schedule 2.6 and have been
submitted to NHancement), all trademarks, trademark rights, trade names,
trade name rights, licenses, franchises, service marks, patents, patent
applications, copyrights, inventions, discoveries, improvements, processes,
trade secrets, confidential or proprietary information, formulae, proprietary
rights or data, shop rights, algorithms, technical data, ideas or know-how
(collectively the "INTELLECTUAL PROPERTY") necessary to conduct its business
as now being conducted or as proposed to be conducted, without conflict with
or infringement upon any valid rights of others and the lack of which could
adversely affect the operations or condition, financial or otherwise, of
Trimark. Trimark (i) owns or has the right to use (and to make, use, sell,
license and lease products incorporating or manufactured using), free and
clear of all liens, claims and restrictions, all Intellectual Property used
in the conduct of its business as now conducted or as proposed to be
conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person under or with respect to any of the foregoing,
and (ii) is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner of, licensor of
or other claimant to any patent, trademark, service mark, trade name,
copyright, license or other right with respect to the use thereof in
connection with the conduct of its business or otherwise. Trimark owns and
has the unrestricted right to use all Intellectual Property required for or
incident to the development, manufacture, operation and sale of all products
and services sold or proposed to be sold by Trimark, free and clear of any
rights, liens or claims of others, including, without limitation, former
employers of all employees of Trimark. All of the foregoing rights to
Intellectual Property will be owned and enjoyed by the Surviving Corporation
following the Merger without the consent or approval of any third party and,
following such Merger, the Surviving Corporation will possess and enjoy all
of such rights to Intellectual Property as Trimark did immediately prior to
such Merger.
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 6
2.6.2 Set forth in Schedule 2.6 is a complete listing of
all software related in any fashion or manner whatsoever to the business of
Trimark as now conducted or has proposed to be conducted (the "SOFTWARE").
All copies of the Software were, as of the Closing, in Trimark's possession
and control, except for certain object code copies which then were in the
possession of customers of Trimark. All such customers have entered into
license agreements with Trimark that, to the best knowledge of Trimark,
effectively protect Trimark's rights in and to all such Software. For
purposes of this Section, the term "SOFTWARE" includes any set of
instructions (including, without limitation, arithmetic, logical, data
transfer, data manipulation and input/output) meant to run on, or to control
the operation of, any computer, whether those instructions are a complete
program, a collection of programs making up a subsystem or system or are
merely subroutines or macroroutines meant to operate in conjunction with
other software, and whether such instructions must be run through another
computer program (commonly referenced as a "compiler") before being usable on
a computer, whether such instructions must be used at execution time in
conjunction with another computer program (commonly referenced as an
"interpreter") or whether such instructions are in a form that can be run on
a computer "as is" without additional programs.
2.6.3 The Software will not, due to a date change: (i)
have any operational impediments, (ii) malfunction, (iii) cease to perform,
(iv) generate incorrect or ambiguous data or results with respect to
same-century and multi-century, Leap Year and other calendar formulas,
functions and data or (v) produce incorrect or ambiguous results with respect
to same-century and multi-century, Leap Year and other calendar formulas,
functions, date values and date data interfaces. The Software is free from
all computer "viruses" and other elicit code. The Software performs in all
material respects in accordance with its specifications.
2.7 MANUFACTURING RIGHTS. Trimark has not granted rights to
manufacture or assemble its products to any other person or entity.
2.8 OFFICERS, DIRECTORS AND EMPLOYEES.
2.8.1 To the best knowledge of Trimark, no present or
former officer, director or employee of Trimark is a party to or is otherwise
bound by any agreement or arrangement (including any agreement of
noncompetition) that in any way adversely affects his or her performance of
his or her duties as an officer, director or employee of Trimark or Trimark's
ability to conduct its business. Trimark has established appropriate
policies and procedures to ensure no officer, director or other employee of
Trimark misuses confidential information or trade secrets of others in the
course of their employment or other relationship with Trimark. Trimark is
not a party to any labor agreements, employment contracts, consulting
agreements or any other instruments which limit the rights of Trimark to
terminate the employment or other relationship with a particular individual
at will. Trimark is not aware that any officer, director or key employee, or
that any group of officers, directors or key employees, would not continue
their employment with NHancement on the same terms as previously employed by
Trimark.
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 7
2.8.2 Trimark: (i) is not bound by or subject to any
collective bargaining agreement with respect to any of its employees nor has
any labor union requested or, to the best knowledge of Trimark, sought to
represent any of the employees, representatives or agents of Trimark, (ii)
does not have any current labor problems or disputes, pending or threatened,
(iii) does not have in effect any "employee pension benefit plans" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of
1974) or employee benefit or similar plans qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, and (iv) does not maintain, has
not in the past maintained and is not and has not been a contributor to any
multi-employer plan or single employer plan, as defined in Section 4001 of
the Employee Retirement Income Security Act of 1974, as amended, for the
employees of Trimark or any trade or business (whether or not incorporated)
which, together with Trimark, would be deemed to be a "single employer"
within the meaning of such Section 4001. Trimark has complied in all
material respects with all laws relating to the employment of labor,
including provisions relating to wages, hours, equal opportunity, collective
bargaining and payment of Social Security and other taxes.
2.9 CERTAIN TRANSACTIONS. Except as set forth in schedule 2.0,
Trimark is not indebted, directly or indirectly, to any of its officers,
directors or Shareholder, or to their respective affiliates, spouses or
children, in any amount whatsoever, except for salaries and fees accrued in
the ordinary course of business; none of said officers, directors or, to the
best knowledge of Trimark, either Shareholder, or any of their affiliates or
members of their immediate families, are indebted to Trimark or have any
direct or indirect ownership interest in any firm or corporation with which
Trimark is affiliated or with which Trimark has a business relationship, or
any firm or corporation which competes with Trimark (except with respect to
any interest in less than five percent (5%) of the stock of any corporation
whose stock is publicly traded). No officer, director or shareholder, or any
affiliate or member of their immediate families, is, directly or indirectly,
interested in any material contract with Trimark.
2.10 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC.
Trimark is not in violation of any term of its Articles of Incorporation or
Bylaws, as amended and in effect on and as of the Closing. Trimark is not in
violation in any respect of any term or provision of any mortgage,
indebtedness, indenture, contract, agreement, instrument, judgment or decree,
order, statute, rule or regulation applicable to it where such violation
would adversely affect Trimark, its operations or financial condition. The
execution, delivery and performance of and compliance with this Agreement
have not resulted and will not result in any violation of or conflict with,
or constitute a material default under, any mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment or decree, order,
statute, rule or regulation applicable to it, or result in the creation of
any mortgage, pledge, lien, encumbrance or charge upon any of the properties
or assets of Trimark; and there is no such term or provision which adversely
affects Trimark, its operations or financial condition as presently conducted
or as contemplated to be conducted. Trimark and, to the best knowledge of
Trimark, its officers, directors and key employees, are not parties to any
mortgage, indebtedness, indenture, contract, agreement, instrument, judgment,
decree or order restricting its ability to enter or compete in any line of
business or market.
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Trimark Inc. / NHancement Technologies Inc.
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Page 8
2.11 MATERIAL CONTRACTS AND OBLIGATIONS.
2.11.1 Included in the Schedule 2.11 is a list of all
agreements, contracts and other obligations to which Trimark is a party or by
which it is bound that are material to the operation of its business and
properties, which: (i) provide for aggregate payments to or by Trimark in
excess of Ten Thousand Dollars ($10,000), (ii) obligate Trimark to share,
license or develop any product or technology, (iii) appoint distributors,
dealers or sublicensees of Trimark's products, which agreements cannot be
terminated on thirty (30) days' notice or less or (iv) involve transactions
or proposed transactions between Trimark and its officers, directors,
affiliates or any affiliate thereof. Copies of such agreements and contracts
and documentation evidencing such other obligations have been delivered to
NHancement. All of such agreements and contracts are valid, binding and in
full force and effect in all material respects, assuming due execution by the
other parties to such agreements and contracts. There is no pending or
threatened dispute or disagreement, and there have been no events which may
give rise to any dispute or disagreement, between Trimark and any of the
clients or customers of Trimark, or any other person having a business
relationship with Trimark, which dispute or disagreement, if resolved
unfavorably to Trimark, would have a materially adverse effect on Trimark's
operations or financial condition. No significant client or customer of
Trimark, or any other significant person having a business relationship with
Trimark, has indicated that it presently contemplates terminating its
business relationship with Trimark.
2.11.2 All open orders, licenses and contracts for
Trimark's products and services can be fulfilled by Trimark within its
current capacity, in accordance with the terms thereof, and the fulfillment
thereof will not result in material losses or material warranty or other
liabilities to the Surviving Corporation. Section 2.11 sets forth a summary
of Trimark's backlog (including deferred revenue recorded on Trimark
financials), which included the total backlog as of the date of this
Agreement reflected and written agreements and a monthly breakdown of the
expected shipment dates for the orders represented by such backlog. All
orders reflected in such backlog are evidenced by written purchase orders or
contracts. All such orders or contracts are firm, fixed, committed and
non-cancelable. To the best of its knowledge, Trimark will collect the
revenue from such orders and contracts in accordance with the terms of their
respective purchase orders or contracts, including, without limitation,
receiving payment in accordance with the deadline set forth therein.
2.12 HAZARDOUS WASTE DISPOSAL. To the best knowledge of Trimark,
Trimark has materially complied with all laws regulating the discharge and
disposal of hazardous waste, the violation of which would have a material,
adverse effect on the operations or financial condition of Trimark,
including, but not limited to:
2.12.1 Comprehensive Environmental Response, Compensation
and Liability Act, 42 USC Sections 9601, et seq.;
2.12.2 Resource Conservation and Recovery Act, 42 USC
Sections 6901, et seq.;
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Trimark Inc. / NHancement Technologies Inc.
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2.12.3 Toxic Substances Control Act, 15 USC Sections 2601,
et seq.;
2.12.4 California Hazardous Substances Information and
Training Act, California Labor Code Sections 6360, et seq.;
2.12.5 California Hazardous Waste Act, California Health &
Safety Code Sections 25100, et seq.;
2.12.6 California Hazardous Substances Act, California
Health & Safety Code Sections 28740, et seq.; and
2.12.7 California Safe Drinking Water and Toxic Enforcement
Act of 1986, California Health & Safety Code Sections 25249.5, et seq.
2.13 LICENSES AND PERMITS. Included in the Schedule 2.13 is a
complete and accurate list of all of the licenses, permits, authorizations
and franchises issued to, possessed by, used by or otherwise in effect with
respect to the business of Trimark. Trimark has delivered to NHancement
complete and accurate copies of all of the licenses, permits, authorizations
and franchises identified in said Schedule. All of the licenses, permits,
authorizations and franchises identified are valid and in full force and
effect. Said licenses, permits, authorizations and franchises constitute all
of the licenses, permits, authorizations and franchises required to permit
Trimark to conduct its business in the manner in which it is now being
conducted, and Trimark is not in violation or breach of any of the terms,
requirements or conditions of any of said licenses, permits, authorizations
or franchises.
2.14 LITIGATION, ETC. Except as set forth in schedule 2.0. There
are no actions, suits, proceedings or investigations pending against Trimark
or, to the best knowledge of Trimark, any of its officers, directors or
employees or its properties, before any court or governmental agency (nor, to
the best knowledge of Trimark, is there any reasonable basis therefor or
threat thereof), which, either in any case or in the aggregate, might result
in any material adverse change in the business or financial condition of
Trimark, or in any material impairment of the right or ability of Trimark to
carry on its business as now conducted or as proposed to be conducted or in
any material liability on the part of Trimark, or any change in the current
equity ownership of Trimark, and none which questions the validity of this
Agreement or any action taken or to be taken in connection herewith. The
foregoing includes, without limiting its generality, actions pending or
threatened (or any basis therefor known to Trimark) involving the prior
employment of any of Trimark's employees, their use in connection with
Trimark's business of any information or techniques allegedly proprietary to
any of their former employers or their obligations under any agreements with
prior employers.
2.15 CRIMINAL INVESTIGATIONS AND ACTIVITIES. Trimark, its past and
present officers and directors and the Shareholder: (i) have never been
convicted of a felony, (ii) have not been named as a defendant in a pending
criminal proceeding involving a felony, and (iii) are not now or ever have
been the subject of any governmental decree or order prohibiting it or any of
them from engaging
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 10
in certain business activities. There is no pending criminal investigation
of any nature whatsoever into the activities of Trimark, its officers,
directors and Shareholder. Trimark has fully complied with the provisions of
the United States Export Administration Act and all rules and regulations
promulgated thereunder.
2.16 MATERIAL LIABILITIES. Trimark has no liabilities which are,
individually or in the aggregate, material to the financial condition or
operating results of Trimark which have not been disclosed on Schedule 2.16
and schedule 2.0.
2.17 TRIMARK FINANCIAL STATEMENTS. Schedule 2.17 sets forth
Trimark's unaudited balance sheets as of December 31, 1998 and November
30,1999 (the "BALANCE SHEETS") and the related unaudited statements of
operations, stockholders' equity and cash flows for the years then ended and
the Company's unaudited balance sheets dated as of November 30, 1999 and the
unaudited statements of operations for the period then ended (all of the
foregoing collectively the "TRIMARK FINANCIALS"). The Trimark Financials
have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
presented except that the unaudited Trimark Financials do not contain the
footnotes required by GAAP and are subject to normal year-end adjustments
which will not be material individually or in the aggregate. The Trimark
Financials fairly present the financial position of Trimark as of their dates
and results of operations for the periods there ended. Except as set forth
in the Trimark Financials, Trimark does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured or otherwise (whether or not
required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate has not arisen in the ordinary course
of Trimark's business since the unaudited Trimark Financials, in all cases
consistent with past practices and amounts.
2.18 TAX AND OTHER RETURNS AND REPORTS.
2.18.1 DEFINITION OF TAXES. For the purposes of this
Agreement, "TAX" or, collectively, "TAXES", means any and all federal, state,
local and foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts and any obligations under any
agreements or arrangements with any other person with respect to such amounts
and including any liability for taxes of a predecessor entity.
2.18.2 TAX RETURNS AND AUDITS. Except as set forth in
Schedule 2.18:
2.18.2.1 Trimark as of the Effective Time will have
prepared and filed all federal, state, local and foreign returns, estimates,
information statements and reports ("RETURNS") required to be filed by such
date relating to any and all Taxes concerning or attributable to
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 11
Trimark or its operations and such Returns are or will be true and correct
and have been completed in accordance with applicable law.
2.18.2.2 Trimark as of the Effective Time: (a) will have
paid or accrued all Taxes it is required to pay or accrue and (b) will have
withheld with respect to its employees all federal and state income taxes,
FICA, FUTA and other Taxes required to be withheld.
2.18.2.3 Trimark has not been delinquent in the payment
of any Tax nor is there any Tax deficiency outstanding, proposed or assessed
against Trimark, nor has Trimark executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax.
2.18.2.4 No audit or other examination of any Return of
Trimark is presently in progress, nor has Trimark been notified of any
request for such an audit or other examination.
2.18.2.5 Trimark does not have any liabilities for
unpaid federal, state, local or foreign Taxes which have not been accrued or
reserved against on the Trimark Financials, whether asserted or unasserted,
contingent or otherwise, and Trimark has no knowledge of any basis for the
assertion of any such liability attributable to Trimark, its assets or
operations.
2.18.2.6 Trimark has provided to NHancement copies of
all federal and state income and all state sales and use Tax Returns filed to
date for all periods since the date of Trimark's incorporation.
2.18.2.7 There are (and as of immediately following the
Closing there will be) no liens, pledges, charges, claims, security interests
or other encumbrances of any sort ("LIENS") on the assets of Trimark relating
to or attributable to Taxes except liens for current taxes not yet delinquent.
2.18.2.8 Trimark has no knowledge of any basis for the
assertion of any claims relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the asserts of Trimark.
2.18.2.9 None of Trimark's assets are treated as
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
2.18.2.10 As of the Effective Time, there will not be any
contract, agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
Trimark that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Section 280G or 162 of
the Code.
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 12
2.18.2.11 Trimark has not filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Trimark.
2.18.2.12 Trimark is not a party to a tax sharing or
allocation agreement nor does Trimark owe any amount under any such agreement.
2.18.2.13 Trimark is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code.
2.18.2.14 Trimark has not agreed to and is not required
to make any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method, and
there is no application by Trimark pending with any taxing authority
requesting permission for any changes in any accounting method of Trimark.
No taxing agency (domestic or foreign) has proposed any adjustment or change
in Trimark's method of accounting for tax purposes.
2.19 TITLE. Except as set forth in schedule 2.0. Trimark has good
and marketable title to all of its assets and properties (both tangible and
intangible). Such assets and properties (both tangible and intangible) are
not subject to any security interests, liens, mortgages, pledges,
encumbrances or charges of any kind.
2.20 CHANGE OF CONTROL. There is no plan or agreement pursuant to
which any amounts may become payable (whether currently or in the future) to
current or former employees, officers and directors of Trimark as a result of
or in connection with the Merger.
2.21 BROKER'S FEES. Trimark has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.22 DISCLOSURE. Trimark has fully provided NHancement with all of
the information which NHancement has requested for deciding whether to enter
into the Reorganization hereunder and all information reasonably necessary to
enable NHancement to make such decision. This Agreement, the Trimark
Financials, and any written statement or certificate furnished to NHancement
pursuant to this Agreement in connection with the transactions contemplated
by this Agreement, when taken together, do not contain any untrue statement
of a material fact nor omit to state a material fact necessary to make the
statements made not misleading.
2.23 TAX TREATMENT OF TRANSACTION. Trimark, to the best of its
knowledge and based upon consultation with its independent advisors, has not
taken or agreed to take any action, and is not aware of any condition that
(without giving effect to any action taken or agreed to be taken by
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 13
Trimark), would effect the ability of the parties hereto to report the
business combination to be effected by the Merger as a tax-free
reorganization within the meaning of Section 368 of the Code.
3. REPRESENTATIONS AND WARRANTIES OF NHANCEMENT. NHancement
represents and warrants to the Shareholders that:
3.1 CORPORATE STATUS. NHancement is a corporation duly organized
and existing under the laws of Delaware, with an authorized, issued and
outstanding capital stock as set forth in the 1934 Act documents in defined
Section 3.4 below.
3.2 CORPORATE AUTHORITY AND AUTHORIZATION. NHancement has the
corporate right and authority to issue and deliver the NHancement Common
Stock and Warrants required to be issued hereunder to Trimark; and such
shares and Warrants when delivered at or after the Closing will be fully paid
and nonassessable. All corporate action on the part of NHancement necessary
for the authorization, execution, delivery and performance of this Agreement
by NHancement and the performance of all of NHancement's obligations
hereunder has been taken. This Agreement constitutes a valid and binding
obligation of NHancement, and enforceable against NHancement in accordance
with its terms, except of the indemnification provisions of Section 7.7
hereof may be limited by principals of public policy and subject to laws of
general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
3.3 GOVERNMENTAL CONSENT. No consent, approval or authorization
or designation, declaration or filing with any governmental authority on the
part of NHancement is required in connection with the valid execution and
delivery of this Agreement, or of the consummation of any other transaction
contemplated hereby except as specifically referenced in the Agreement.
3.4 1934 ACT DOCUMENTS. NHancement has delivered to Trimark and
the Shareholder a copy of its Form 10K for the fiscal year ending September
30, 1998 and its Form 10Q for the quarter ending June 30, 1999 (the "1934 ACT
DOCUMENTS") filed with the SEC by NHancement pursuant to the Securities
Exchange Act of 1934 (the "1934 ACT"). None of the 1934 Documents, when
taken together, contain any untrue statement of the material fact or omit to
state a material fact necessary to make the statements made not misleading.
3.5 BROKER'S FEES. NHancement has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
4. ADDITIONAL AGREEMENTS. NHancement, Trimark and the Shareholders
further agree as follows:
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 14
4.1 TAX ACCOUNTING. Neither NHancement nor Trimark has taken nor
shall take any action which reasonably would be expected to jeopardize the
tax-free nature of the reorganization hereunder.
4.2 SUBSEQUENT ADJUSTMENT. In the event that the average closing
price of a share of NHancement Common Stock as reported on the NASDAQ
National Market for the five (5) consecutive trading days ending on the
trading day immediately prior to the first anniversary and second anniversary
of the Closing (the "VALUATION FORMULA") is then less than $4.50 per share
(as presently constituted and subject to appropriate adjustment for stock
splits, combinations, dividends and the like), NHancement shall provide to
the Shareholders, in proportion to their respective proportionate interests
in Trimark at the Closing, at NHancement's option, either (i) cash in the
aggregate amount of the Adjustment Amount, (ii) shares of NHancement's
restricted Common Stock then valued in accordance with the Valuation Formula
in aggregate value equal to the Adjustment Amount or (iii) some combination
of (i) and (ii). For purposes of this Section, at the first anniversary the
term "ADJUSTMENT AMOUNT" SHALL mean one half of the unregistered shares plus
those registered shares still owned by the Shareholders (as presently
constituted and subject to appropriate adjustment for stock splits,
combinations, dividends and the like) multiplied by the lesser of (a) $4.50
minus the then current fair market value of a share of NHancement's Common
Stock determined in accordance with the Valuation Formula or (b) $3.00 (i.e.
$4.50 - $1.50). By way of illustration, if at the first anniversary date
the Shareholders had a total of five hundred thousand (500,000) registered
and unregistered shares and the value of a share of NHancement Common Stock
calculated pursuant to the Valuation Formula was then $2.00 per share, the
Shareholders as a group would be entitled to $1,250,000 in cash or in shares
of NHancement Common Stock (then valued in accordance with the Valuation
Formula) or some combination of cash and shares allocated between them in
accordance with their proportionate interests in Trimark at the Closing. In
other words, the Shareholders as a group would be entitled to, in this
example, the differential in value between $4.50 and $2 (or $2.50) multiplied
by 500,000 shares in accordance with the foregoing. ). For purposes of this
Section, at the second anniversary the term "ADJUSTMENT AMOUNT" shall mean
two hundred and fifty thousand (250,000) unregistered shares owned by the
Shareholders (as presently constituted and subject to appropriate adjustment
for stock splits, combinations, dividends and the like) multiplied by the
lesser of (a) $4.50 minus the then current fair market value of a share of
NHancement's Common Stock determined in accordance with the Valuation Formula
or (b) $3.00 (i.e. $4.50 -$1.50) By way of illustration, at the second
anniversary date the Shareholders have a total of 250,000 unregistered shares
and if the value of a share of NHancement Common Stock calculated pursuant to
the Valuation Formula was then $2.00 per share, the Shareholders as a group
would be entitled to $625,000 in cash or in shares of NHancement Common
Stock (then valued in accordance with the Valuation Formula) or some
combination of cash and shares allocated between them in accordance with
their proportionate interests in Trimark at the Closing. In other words, the
Shareholders as a group would be entitled to, in this example, the
differential in value between $4.50 and $2 (or $2.50) multiplied by 250,000
shares in accordance with the foregoing. All shares of NHancement Common
Stock issued pursuant to this section shall be "restricted securities" for
purposes of federal and state securities laws and may not be resold or
transferred by the Shareholders except in compliance with such laws. Each of
the Shareholders shall execute and deliver to
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 15
NHancement an investment representation letter with respect to such shares in
usual and customary form.
5. SURVIVAL OF REPRESENTATIONS, WARRANTIES; INDEMNITY. The respective
representations and warranties given by NHancement, Trimark and the
Shareholders contained herein shall remain effective against their respective
successors, heirs and assigns and shall survive the Closing. NHancement
shall indemnify and hold Trimark and the Shareholders harmless from any
damage, claim, liability or expense, including reasonable attorneys' fees,
arising out of the breach of any representation or warranty or the
nonfulfillment of any agreement contained herein, or in any certificate to be
delivered at the Closing, by NHancement. Trimark and each of the Shareholders
shall, jointly and severally, indemnify and hold NHancement harmless from any
damage, claim, liability or expense, including reasonable attorneys' fees,
arising out of the breach of any representation or warranty or the
nonfulfillment of any agreement contained herein, or in any certificate to be
delivered at the Closing, by Trimark or the Shareholder.
6. SECURITIES LAWS MATTERS. Because of the exemptions from the
registration requirements of the Securities Act of 1933 (the "ACT") and from
the qualification requirements of the California Corporate Securities Law of
1968 (the "LAW") relied upon by NHancement in issuing the shares of
NHancement Common Stock under Section 1 above (the "SECURITIES"), the
Shareholders represent and warrant that they:
6.1 Are aware that such Securities are highly speculative and that
there can be no assurance as to what return, if any, there may be.
6.2 Are aware of NHancement's business affairs and financial
condition and have acquired sufficient information about NHancement to reach
an informed and knowledgeable decision to acquire such Securities.
6.3 Are each acquiring such Securities for investment FOR HIS OR
HER OWN ACCOUNT ONLY and not with a view to, or for sale in connection with,
any "distribution" thereof within the meaning of the Act or the Law (except
that shares of Registrable Stock may be resold pursuant to and on the
effectiveness of the S-3 Registration Statement referred to in Section 7
below (the "S-3").
6.4 Except for shares of Registrable Stock registered under the
S-3, understand that such Securities have not been registered under the Act
or qualified under the Law by reason of specific exemptions therefrom, which
exemptions depend upon, among other things, the bona fide nature of the
Shareholders' investment intent as expressed herein. In this connection, the
Shareholders understand that, in the view of the SEC, the statutory basis for
one exemption from the Act may not be present if their representations mean
that their present intentions are to hold such shares for a minimum capital
gains period under the tax statutes, for a deferred sale, for a market rise,
for a sale if the market does not rise, or for a year or any other fixed
period in the future.
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 16
6.5 Except for shares of Registrable Stock registered under the
S-3, further understand that such Securities must be held indefinitely unless
subsequently registered under the Act and qualified under the Law or an
exemption from such registration and such qualification is available, and
that, except as set forth in Section 7 below, NHancement is under no
obligation to effect such registration or qualification or to assure the
availability of any such exemption.
6.6 Are aware of Rule 144 promulgated under the Act which permits
limited public resale of the Securities if it is acquired in a non-public
offering subject to the satisfaction of certain conditions, including, among
other things: the availability of certain public information about the
NHancement, the resale occurring not less than one (1) year after he or she
purchased and completed payment for the Securities to be sold, the sale being
made on the public market through a broker in an unsolicited "broker's
transaction" or to a "market maker" and the amount of the Securities sold
during any three-month period not exceeding specified limitations (generally,
one percent (1%) of all Common Stock outstanding); except that such
conditions need not be met by a person who is not an affiliate of the
NHancement at the time of sale and has not been an affiliate for the
preceding three (3) months, if the Securities to be sold have been
beneficially owned by such person for at least two (2) years prior to their
sale. The Common Stock may not be publicly traded or NHancement may not be
satisfying the current public information requirements of Rule 144 at the
time Trimark or a Shareholder wishes to sell the Securities; and thus, they
may be precluded from selling the Securities under Rule 144 even though the
minimum holding period may have been satisfied.
6.7 Further understand that in the event the requirements of Rule
144 are not met, registration under the Act, compliance with Regulation A or
some other registration exemption will be required for any disposition of the
Securities; and that, although Rule 144 is not exclusive, the Commission has
expressed its opinion that persons proposing to sell private placement
Securities other than in a registered offering and other than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales and that
such persons and the brokers who participate in such transactions do so at
their own risk.
6.8 Except for shares of Registrable Stock registered under the
S-3, understand that the certificates evidencing the Securities will be
imprinted with legends in substantially the following form:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT FOR THE SHAREHOLDERS OWN ACCOUNT AND NOT WITH
A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF.
NO SALE OR OTHER DISPOSITION OF SUCH SHARES MAY BE EFFECTED WITHOUT
THE (1) REGISTRATION OF SUCH SALE OR DISPOSITION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND (2) QUALIFICATION OF SUCH
SALE OR DISPOSITION UNDER THE CALIFORNIA CORPORATE SECURITIES LAW OF
1968, AS AMENDED, OR WITHOUT AN OPINION OF COUNSEL IN FORM AND
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 17
SUBSTANCE SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED."
7. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS;
COMPLIANCE WITH SECURITIES ACT.
7.1 RESTRICTIONS ON TRANSFERABILITY. The Securities shall not be
sold, assigned, transferred or pledged except upon the conditions specified
in this Section 7.
7.2 CERTAIN DEFINITIONS. As used in this Section 7, the following
terms shall have the following respective meanings:
7.2.1 "REGISTRABLE SECURITIES" shall mean Two Hundred
Fifty Thousand (250,000) shares of the Securities as so designated by the
Shareholders jointly in writing to NHancement and any Common Stock of
NHancement issued as a dividend or other distribution with respect to or in
exchange for replacement of any such shares.
7.2.2 The terms "REGISTER," "REGISTERED" and
"REGISTRATION" shall refer to a registration effected by preparing and filing
an S-3 Registration Statement in compliance with the Act, and the declaration
or ordering of the effectiveness of such registration statement. Such terms
shall also include an undertaking to file all required pre and post-effective
amendments to such registration statement and the preparation, filing and
declaration or ordering of the effectiveness of appropriate applications for
the qualification or registration of securities pursuant to applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Act and any other governmental requirements or
regulations necessary to permit the lawful offer and sale of Registrable
Securities in the United States of America.
7.2.3 "REGISTRATION EXPENSES" shall mean all expenses
incurred by Trimark in complying with Section 7.3, including, without
limitation, all registration, qualification and filing fees, printing
expenses, fees and disbursements of counsel for NHancement.
7.2.4 "SELLING EXPENSES" shall mean all underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities.
7.2.5 "HOLDER" shall mean any Shareholder so long as such
Shareholder holds outstanding Registrable Securities.
7.3 REGISTRATION ON FORM S-3.
7.3.1 NHancement shall use its best efforts to qualify for
registration on Form S-3 (or successor forms); and, to that end, NHancement
shall comply with the reporting requirements of the 1934 Act. NHancement
will use its best efforts to effect promptly the registration of
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 18
all shares of Registrable Securities on Form S-3 (or successor form) as soon
as practicable but in no event later than six (6) months following the
Closing.
7.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
Section 7.3 shall be borne by NHancement. All Selling Expenses related to
securities registered by the Holders shall be borne by the Holders.
7.5 REGISTRATION PROCEDURES. In the case of the registration
effected by NHancement pursuant to this Section 7, NHancement will keep each
Holder advised in writing as to the initiation of such registration,
qualification and compliance and as to the completion thereof. At its
expense NHancement shall:
7.5.1 Keep such registration effective for a period of one
hundred eighty (180) days, or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto,
whichever shall occur first; and
7.5.2 Furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may reasonably
request.
7.6 DELAY OF REGISTRATION. No Holder shall have any right to take
any action to restrain, enjoin or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation
or implementation of this Section 7.
7.7 INDEMNIFICATION. In the event any Registrable Securities
shall be included in a registration statement pursuant to this Section 7:
7.7.1 To the extent permitted by law, NHancement will
indemnify and hold harmless each Holder requesting or joining in a
registration and each person, if any, who controls such Holder within the
meaning of the Act against any losses, claims, damages or liabilities, joint
or several, to which they may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based on any untrue or alleged untrue statement
of any material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
arise out of any violation by NHancement of any rule or regulation
promulgated under the Act or any other applicable law, rule or regulation
applicable to NHancement and relating to action or inaction required of
NHancement in connection with any such registration; and will reimburse each
such Holder or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage,
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 19
liability or action; provided, however, that the indemnity agreement
contained in this Section 7.7.2 shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of NHancement (which consent shall not be
unreasonably withheld) nor shall NHancement be liable in any such case for
any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in connection with such
registration statement, preliminary prospectus, final prospectus or
amendments or supplements thereto, in reliance upon and in conformity with
information furnished expressly for use in connection with such registration
by any such Holder or controlling person seeking the indemnification.
7.7.2 To the extent permitted by law, each Holder
requesting or joining in the registration will indemnify and hold harmless
NHancement, each of its directors, each of its officers who have signed the
registration statement and each person, if any, who controls NHancement
within the meaning of the Act and each other such Holder against any losses,
claims, damages or liabilities to which NHancement or any such director,
officer, controlling person or other Holder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such registration statement,
preliminary or final prospectus or amendments or supplements thereto, in
reliance upon and in conformity with information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by NHancement
or any such director, officer, controlling person or other Holder in
connection with investigating or defending such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement
contained in this Section 7.7.3 shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of such Holder (which consent shall not be
unreasonably withheld), and provided, further, that the liability of each
Holder to reimburse legal or other expenses pursuant to this Section shall,
in each case, be limited to the total dollar amount received by such Holder
for the securities sold pursuant to such registration by that Holder.
7.7.3 Promptly after receipt by an indemnified party under
this Section 7.7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section, notify the indemnifying party in
writing of the commencement thereof and the indemnifying party shall have the
right to participate in and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties. The
failure to notify an indemnifying party promptly of the commencement of any
such action, if materially prejudicial to such indemnifying party's ability
to defend such action, shall relieve such indemnifying party of any liability
to the indemnified party under this Section, but the omission to so
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Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 20
notify the indemnifying party will not relieve such indemnifying party of any
liability that such indemnifying party may have to any indemnified party
otherwise than under this Section.
7.8 REPORTS UNDER THE 1934 ACT. With a view to making available
to the Holders the benefits of certain rules and regulations promulgated by
the SEC that may permit the Holders to sell shares of NHancement's stock to
the public without registration, NHancement agrees to:
7.8.1 Make and keep adequate current public information
available, as those terms are understood and defined in Rule 144, at all
times subsequent to the Closing; and
7.8.2 Furnish to any Holder forthwith upon request, so
long as such Holder shall own any Registrable Securities, a written statement
by NHancement that it has complied with the reporting requirements of Rule
144, and of the Act and the 1934 Act, a copy of the most recent annual or
quarterly report of NHancement, and such other reports and documents so filed
by NHancement as may be reasonably requested in availing the Holder of any
rule or regulation promulgated by the Commission that allows the selling of
any such securities without registration.
7.9 LOCKUP AGREEMENT. In consideration for NHancement's agreeing
to its obligations under this Agreement and to ensure compliance with the
Act, each Shareholder agrees not to sell, make any short sale of, loan, grant
any option for the purchase of or otherwise dispose of (i) any shares of the
Securities (other than Registrable Securities registered and sold under a
then effective S-3) for a one (1) year period following the Closing and (ii)
one-half (1/2) of such shares of the stock for an additional one (1) year
period following the first anniversary date of the Closing. All subsequent
transferees or assignees of the shares of Stock must agree in writing to the
provisions set forth in this Section 7.9 a precondition to any such transfer
or assignment. Following the expiration of any such lock-up, shares of such
Securities may be resold by the Shareholders only in compliance with all
applicable federal and state securities laws.
7.10 ASSIGNMENT OF REGISTRATION RIGHTS. With the exception of a
spouse or immediate family member of Shareholder, the rights hereby granted
to the Holders to cause NHancement to register securities under Section 7.3
above may not be assigned, in whole or in part, to any transferee or assignee
of Registrable Securities.
7.11 TERMINATION OF REGISTRATION RIGHTS. In lieu of registering
the Registrable Securities pursuant to this Section 7 and upon mutual
agreement between NHancement and Shareholders, NHancement shall have the
right, to terminate its obligations to effect such registration by
irrevocably offering to purchase all of such Registrable Securities on the
third (3rd) month anniversary date of the Closing at a purchase price equal
to the then current fair market value determined in accordance with the
Valuation Formula, but in no event less than $1.50 per share (as presently
constituted and subject to appropriate adjustment for stock splits,
combinations, dividends and the like). In the event NHancement so elects to
terminate such registration rights, NHancement shall provide the Holders with
written notice thereof at least ten (10) days prior to such third (3rd) month
anniversary date
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 21
and the Holders shall then have the option, exercisable by written notice to
NHancement within ten (10) days following receipt of NHancement's notice to
elect to have all or any portion of such Registrable Securities repurchased
at such purchase price. Such repurchase shall occur within twenty (20) days
following receipt by NHancement of written acceptance by such Holders. In
the event the Holders decline to accept such offer with respect to all or any
portion of the Registrable Securities, the registration rights granted hereby
shall nevertheless terminate.
8. CONDITIONS TO THE MERGER.
8.1 CONDITIONS TO OBLIGATIONS OF EACH TO PARTY TO AFFECT THE
MERGER. The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction at or prior to the Closing of
the following conditions:
8.1.1 NHANCEMENT BOARD APPROVAL. This Agreement and the
Merger shall have been approved and adopted by the Board of Directors of
NHancement.
8.1.2 NO INJUNCTIONS OR RESTRAINTS. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal or regulatory restrain
or prohibition preventing the consummation of the Merger shall be in effect.
No litigation challenging the legality of the transactions contemplated by
this Agreement shall be pending or overtly threatened.
8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF NHANCEMENT AND
MERGERSUB. The obligations of NHancement and MergerSub to consummate the
Merger and the transactions contemplated by this Agreement shall be subject
to the satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by NHancement
and MergerSub:
8.2.1 REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Trimark and the Shareholders contained in this Agreement
shall have been true and correct in all material respects when made and shall
continue to be true and correct in all material respects as of the Effective
Time except for changes contemplated by this Agreement, and NHancement shall
have received a certificate to such effect signed by Trimark and the
Shareholders.
8.2.2. AGREEMENTS AND COVENANTS. Trimark and the
Shareholders shall have performed or complied in all material respects with
all agreements and covenants required by this Agreement to be performed or
complied with by them on or prior to the Effective Time, and NHancement shall
have received a certificate to such effect signed by Trimark and the
Shareholders.
8.2.3 MATERIAL ADVERSE CHANGE. There shall not have
occurred any material adverse change in the business, assets (including
intangible assets), financial condition or results of operation of Trimark
since the date of this Agreement.
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 22
8.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF TRIMARK AND
SHAREHOLDERS. The obligations of Trimark and Shareholders to consummate the
Merger and the transactions contemplated by this Agreement shall be subject
to the satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by Trimark
and the Shareholders:
8.3.1 REPRESENTATIONS AND WARRANTIES. The representations
and warranties of NHancement contained in this Agreement shall have been true
and correct in all material respects when made and shall continue to be true
and correct in all material respects as of the Effective Time, and Trimark
and the Shareholders shall have received a certificate to such effect signed
by NHancement.
8.3.2 AGREEMENTS AND COVENANTS. NHancement shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
on or prior to the Effective Time, and Trimark and the Shareholders shall
have received a certificate to such effect signed by NHancement.
8.3.3 MATERIAL ADVERSE CHANGE. There shall not occurred
any material adverse change in the business, assets (including intangible
assets), financial condition or results of operation of NHancement since the
date of this Agreement. For purposes of this condition, a reduction in the
trading price of NHancement's Common Stock as quoted by NASDAQ shall not
constitute a material adverse change.
9. TERMINATION, AMENDMENT AND WAIVER.
9.1 TERMINATION. This Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
9.1.1 By the mutual consent of NHancement and Trimark;
9.1.2 By NHancement or Trimark if (i) the condition
specified in Section 8.1.1 shall not have been satisfied by January 11, 2000,
(ii) the Effective Time has not occurred by December 11, 1999 (provided that
the right to terminate this Agreement under this Section shall not be
available to any party whose willful failure to fulfil any obligation
hereunder has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date); (iii) there shall be a final
non-appealable order of a federal or state court in effect preventing
consummation of the Merger or (iv) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental entity that would make the consummation of the
Merger illegal;
9.1.3 By NHancement (if it is not a material breach of its
obligations under this Agreement) if there has been a breach of any
representation, warranty, covenant or agreement
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 23
contained in this Agreement on the part of Trimark or the Shareholders or a
material adverse change in the financial condition of Trimark as set forth in
Section 8.2.3.
9.1.4 By Trimark and Shareholders (if they are not in
breach of their obligations under this Agreement) if there has been a breach
of any representation, warranty, covenant or agreement contained in this
Agreement on the part of NHancement or a material adverse change in the
financial condition of NHancement as set forth in Section 8.3.3.
9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of NHancement,
MergerSub, Trimark or the Shareholders, or their respective officers,
directors or stockholders.
9.3 EXTENSION; WAIVER. At any time prior to the Effective Time,
NHancement and MergerSub, on the one hand, and the Company and the
Shareholders, on the other, may (i) extend the time for the performance of
any of the obligations of the other party(s) hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance of any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of party hereto to
any such extension or waiver shall be valid only if set forth in an
instrument and writing signed on behalf of such party.
10. EXPENSES. Except as provided to the contrary herein, each party
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement. Except, Nhancement
agrees to pay Trimark's attorney expenses not to exceed $10,000.
11. SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision 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 such void or unenforceable provision of this Agreement with
a valid and enforceable provision which will achieve, to the extent possible,
the economic, business and other purposes of the void or unenforceable
provision.
12. ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto and thereto. The
express terms hereof control and supersede any course of performance or usage
of the trade inconsistent with any of the terms hereof.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and
the same instrument. This Agreement shall become binding when one
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 24
or more counterparts hereof, individually or taken together, shall bear the
signatures of all of the parties reflected hereon as signatories.
14. FINDER'S FEES. Each party agrees to indemnify and to hold harmless
all other parties from any liability for any commission or compensation in
the nature of a brokerage or finders' fee or agents' commission or any
similar charge (and the costs and expenses of defending against such
liability or asserted liability) for which such indemnifying party, its
employees, agents or representatives is responsible.
15. OTHER REMEDIES. Any and all remedies herein expressly conferred
upon a party shall be deemed cumulative with and not exclusive of any other
remedy conferred hereby or by law on such party, and the exercise of any one
remedy shall not preclude the exercise of any other.
16. AMENDMENT AND WAIVERS. Any term or provision of this Agreement may
be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby.
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 succeeding breach or default.
17. SURVIVAL OF AGREEMENTS. All covenants, agreements, representations
and warranties made herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
18. 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.
19. ATTORNEYS' FEES. Should suit be brought to enforce or interpret
any part of this Agreement, 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).
20. NOTICES. Whenever any party hereto desires or is required to give
any notice, demand, or request with respect to this Agreement, 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, addressed as follows:
If to Trimark: Trimark Inc.
d.b.a. Triad Marketing
4725 Mercury Street, Suite 210
San Diego, CA 92111-2125
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 25
If to a Shareholder: Trimark Inc.
d.b.a. Triad Marketing
4725 Mercury Street, Suite 210
San Diego, CA 92111-2125
If to NHancement: NHancement Technologies Inc.
6663 Owens Drive
Pleasanton, CA 94588
If to NHancement, William E. Zisko, Esq.
with a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, California 94306
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 five (5) 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.
21. TIME. Time is of the essence of this Agreement.
22. CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. A reference in this
Agreement to any Section shall include a reference to every Section the
number of which begins with the number of the Sections to which reference is
specifically made (e.g., a reference to Section 5.8 shall include a reference
to Sections 5.8.1 and 5.8.2.1). The titles and headings herein are for
reference purposes only and shall not in any manner limit the construction of
this Agreement which shall be considered as a whole.
23. NO JOINT VENTURE. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall
have the power to control the activities and operations of any other and
their status is, and at all times, will continue to be, that of independent
contractors with respect to each other. No party shall have any power or
authority to bind or commit any other. No party shall hold itself out as
having any authority or relationship in contravention of this Section.
24. 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 Agreement.
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 26
25. ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this
Agreement are intended nor shall be interpreted to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, or partner of any party hereto or any other
person; unless specifically provided otherwise herein, and, except as so
provided, all provisions hereof shall be personal solely between the parties
to this Agreement.
26. EXECUTION OF DOCUMENTS. At any time and from time to time after
the Closing, the Shareholders will execute and deliver to NHancement such
further conveyances, assignments and other written assurances as NHancement
shall reasonably request in order to consummate the Merger.
27. PARTIES IN INTEREST. Nothing herein expressed or implied is
intended or shall be construed to confer upon or to give any person, firm or
corporation other than the parties hereto any rights or remedies under or by
reason hereof.
28. BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, 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.
29. GOVERNING LAW. It is the intention of the parties hereto that the
internal laws of the State of California, U.S.A. (irrespective of its choice
of law principles) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the
rights and duties of the parties hereto.
30. COMPLETENESS OF AGREEMENT. This Agreement and the other agreements
entered into among the parties on even date herewith contain the entire
understanding between the parties hereto with respect to the transactions
contemplated hereby and there are no prior or contemporaneous agreements
other than are in writing signed by the parties which alter or modify this
written instrument. It is intended by the parties that this Agreement
supercede all oral or contemporaneous agreements other than those signed by
the parties mentioned above. This Agreement constitutes the final, complete
and exclusive embodiment of the parties' agreement.
31. NEGOTIATED AGREEMENT. This Agreement has been negotiated by the
parties hereto and their respective legal counsel, and the language hereof
shall not be construed for or against any such party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
<PAGE>
Trimark Inc. / NHancement Technologies Inc.
Plan & Agreement of Reorganization
Page 27
NHANCEMENT: TRIMARK:
NHANCEMENT TECHNOLOGIES INC. TRIMARK INC.
By: /s/ Douglas S. Zorn By: /s/ Richard Glover
---------------------------- ----------------------------------
Douglas S. Zorn, Richard Glover
President and Chief Executive President and Chief Executive Officer
Officer
SHAREHOLDERS: By: /s/ Greg Darling
----------------------------------
Greg Darling
/s/ Greg Darling Executive Vice President and Chief
- --------------------------------- Operating Officer
Greg Darling
/s/ Richard Glover
- ---------------------------------
Richard Glover
<PAGE>
Exhibit 21
SUBSIDIARIES
NHancement Technologies North America, Inc. (formerly named Voice Plus, Inc.), a
California corporation
Infotel Technologies (Pte) Ltd, a Singapore corporation
NHancement Technologies Software Group Inc., a California corporation
18474 Yukon Inc., a Yukon Territory (Canada) corporation
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nhancement Technologies Inc. and Subsidiaries
We consent to incorporation by reference in the Registration Statements
(Nos. 333-52709 and 333-85287) on Form S-3 of Nhancement Technologies Inc.
and Subsidiaries of our report dated December 14, 1999, relating to the
consolidated balance sheet of Nhancement Technologies Inc. and Subsidiaries as
of September 30, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the fiscal year ended September 30,
1999, and the nine months ended September 30, 1998, which report appears in the
September 30, 1999 annual report on Form 10-KSB of Nhancement Technologies Inc.
and Subsidiaries.
BDO Seidman, LLP
San Francisco, California
December 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1999
<PERIOD-START> JAN-01-1998 OCT-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 2,046 2,519
<SECURITIES> 0 0
<RECEIVABLES> 4,825 5,880
<ALLOWANCES> 231 158
<INVENTORY> 1,327 1,594
<CURRENT-ASSETS> 8,522 10,527
<PP&E> 1,910 2,206
<DEPRECIATION> 665 1,051
<TOTAL-ASSETS> 12,872 16,021
<CURRENT-LIABILITIES> 8,142 8,743
<BONDS> 0 0
0 0
252 855
<COMMON> 56 82
<OTHER-SE> 4,326 6,298
<TOTAL-LIABILITY-AND-EQUITY> 12,872 16,021
<SALES> 10,013 23,339
<TOTAL-REVENUES> 10,013 23,339
<CGS> 6,434 15,799
<TOTAL-COSTS> 6,434 15,799
<OTHER-EXPENSES> 36 133
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 166 414
<INCOME-PRETAX> (1,452) (683)
<INCOME-TAX> 71 34
<INCOME-CONTINUING> (1,523) 0
<DISCONTINUED> (850) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,473) (717)
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<EPS-DILUTED> (0.61) (0.23)
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