<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-------
NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
As of February 10, 1999, there were 5,717,228 shares of
Common Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair presentation of the information shown. These unaudited
financial statements should be read in conjunction with the audited financial
statements for the nine months ended September 30, 1998. The results for the
three months ended December 31, 1998 are not necessarily indicative of the
results of operations for a full year.
2
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31,
1998
- --------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 612,700
Restricted cash 1,080,000
Accounts receivable, less allowance for doubtful accounts of $268,100 2,763,700
Inventory 1,564,000
Current portion of notes receivable from related parties 207,900
Prepaid expenses and other 214,600
- --------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,442,900
- --------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 2,181,200
Less accumulated depreciation (761,100)
- --------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,420,100
- --------------------------------------------------------------------------------------------
Excess of cost over net assets acquired of Voice Plus, Inc., net of
accumulated amortization of $62,500 (Note 1) 687,500
Excess of cost over net assets acquired of Infotel, net of accumulated
amortization of $95,600 (Note 1) 1,832,400
Long-term portion of notes receivable from related parties 195,400
Other assets 29,400
- --------------------------------------------------------------------------------------------
$ 10,607,700
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 222,300
Accounts payable 2,004,100
Accrued liabilities 1,539,100
Deferred revenue 1,633,100
Income tax payable 182,900
Notes payable to stockholders 1,577,900
Capital lease obligations, current portion 56,400
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,215,800
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 130,700
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,346,500
- --------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value, 2,000,000 shares
authorized, 2,441 shares issued and outstanding 192,300
Common stock, $0.01 par value, 20,000,000 shares authorized,
5,771,135 shares issued and outstanding 57,700
Additional paid-in capital 21,084,500
Accumulated deficit (17,929,600)
Cumulative translation loss (143,700)
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,261,200
- --------------------------------------------------------------------------------------------
$ 10,607,700
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
NET REVENUES $2,017,000 $3,261,900
Cost of sales 1,453,900 2,231,300
- --------------------------------------------------------------------------------------------
GROSS PROFIT 563,100 1,030,600
- --------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 1,271,800 2,282,100
Amortization of excess of cost over net assets acquired,
including impairment loss of $4,084,300 in 1997 4,235,100 110,500
- --------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,506,900 2,392,600
- --------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (4,943,800) (1,362,000)
OTHER INCOME (EXPENSE)
Interest income 33,600 8,400
Interest expense (6,600) (65,200)
Other ---- 2,700
- --------------------------------------------------------------------------------------------
Total other income (expense) 27,000 (54,100)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (4,916,800) (1,416,100)
INCOME TAX BENEFIT (92,500) ---
- --------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (4,824,300) (1,416,100)
- --------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Income from operations of Advantis 3,100 ---
- --------------------------------------------------------------------------------------------
NET LOSS ($4,821,200) ($1,416,100)
PREFERRED DIVIDENDS --- (3,400)
- --------------------------------------------------------------------------------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS ($4,821,200) ($1,419,500)
- --------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 7) $(1.13) $(0.25)
- --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------- ---------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
PAR VALUE PAR VALUE PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL
- ----------------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1998 3,200 $252,200 5,579,235 $55,800 $21,020,900 ($16,510,100) ($174,900) $4,643,900
Dividends on preferred
stock converted to common
shares --- --- 4,700 100 1,900 (2,000) --- ---
Dividends payable on
preferred stock --- --- --- --- --- (1,400) --- (1,400)
Preferred shares
converted into common
stock (759) (59,900) 187,200 1,800 58,100 --- --- ---
Issuance of common stock
options for payment of
outside service fees --- --- --- --- 3,600 --- --- 3,600
Comprehensive loss:
Net loss --- --- --- --- --- (1,416,100) --- (1,416,100)
Cumulative translation
income (loss) --- --- --- --- --- --- 31,200 31,200
- ----------------------------------------------------------------------------------------- ---------------------------------------
Total comprehensive
income (loss) --- --- --- --- --- (1,416,100) 31,200 (1,384,900)
- ----------------------------------------------------------------------------------------- ---------------------------------------
- ----------------------------------------------------------------------------------------- ---------------------------------------
Balance, December 31, 1998 2,441 $192,300 5,771,135 $57,700 $21,084,500 $(17,929,600) $(143,700) $3,261,200
- ----------------------------------------------------------------------------------------- ---------------------------------------
- ----------------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
5
<PAGE>
NHANCEMENT TECHNOLOGIES INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- -----------------------------
THREE MONTHS ENDED
DECEMBER 31,
1997 1998
- ---------------------------------------------------------------------------------- -----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($4,821,200) ($1,416,100)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and other amortization 50,700 96,200
Amortization of excess cost over net assets acquired, including
impairment loss 4,239,300 110,500
Compensation related to grant of stock options and common stock --- 3,600
Other 8,800 (5,300)
Changes in operating assets and liabilities:
Accounts receivable (330,000) 1,815,600
Inventory 114,800 (222,900)
Prepaid expenses and other 96,700 27,500
Other assets 294,200 217,400
Income tax payable (172,000) (8,500)
Accounts payable and other current liabilities (49,500) (127,300)
- ---------------------------------------------------------------------------------- -----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (568,200) 490,700
- ---------------------------------------------------------------------------------- -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash --- (711,000)
Deferred acquisition costs (135,600) ---
Note receivable from related party (1,100) ---
Purchase of property and equipment (70,700) (171,600)
- ---------------------------------------------------------------------------------- -----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (207,400) (882,600)
- ---------------------------------------------------------------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under line of credit --- (8,600)
Principal payments on capital leases --- (25,600)
Principal payment on notes payable --- (669,600)
Principal payment on long-term debt due to stockholders (187,500) ---
- ---------------------------------------------------------------------------------- -----------------------------
NET CASH USED IN FINANCING ACTIVITIES (187,500) (703,800)
- ---------------------------------------------------------------------------------- -----------------------------
Effect of exchange rate changes on cash --- 31,200
- ---------------------------------------------------------------------------------- -----------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (963,100) (1,064,500)
- ---------------------------------------------------------------------------------- -----------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,326,300 1,677,200
- ---------------------------------------------------------------------------------- -----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,363,200 $612,700
- ---------------------------------------------------------------------------------- -----------------------------
- ---------------------------------------------------------------------------------- -----------------------------
SUPPLEMENTAL DATA:
Interest paid $67,000 $84,900
Income taxes paid --- $1,600
</TABLE>
6
<PAGE>
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment additions of $99,300 were financed by capital
lease obligations.
On December 15,1997, the Company issued 208,500 shares of its Common
Stock in exchange for all the outstanding shares of Advantis pursuant to a
purchase and plan of merger agreement. A preacquisition note of $306,200
due to the Company was assumed in conjunction with the acquisition.
1. LIQUIDITY
The Company has incurred losses from continuing operations for the year
ended December 31, 1997, and the nine months ended September 30, 1998, and
the three months ended December 31, 1998 of $4.6 million, $1.5 million, and
$1.4 million. The losses in 1997 and for the nine-month period ended
September 30, 1998 include non-cash charges for goodwill impairment of $4.0
million and $525,000. Negative working capital at December 31, 1998 was
approximately $773,000. Continued losses could have a material adverse
effect on the financial condition of the Company.
To improve the liquidity and future cash flows, management made the
decision to restructure operations in early January 1999, and is currently
implementing the plan. Under the plan, headcount is expected to decrease by
10%. Furthermore, cost reductions will be implemented in corporate
overhead, travel, discretionary sales expenses, outside services and
general and administrative expenses. Additionally, the Company increased
its short-term credit facility from $1 million to $2 million. Based on
discussions with its financial advisors, management believes it can raise
additional equity. Although no assurance can be given that above efforts
will be successful, management believes these measures, together with its
cash balances as of December 31, 1998 of about $0.6 million, will provide
sufficient cash flow for future operations.
The Company's current net tangible assets of $741,300, fail to meet the
requirements for listing on the Nasdaq SmallCap Market system. To stay
listed the Company is required to maintain (i) net tangible assets of Two
Million Dollars ($2,000,000); (ii) market capitalization of Thirty-Five
Million Dollars ($35,000,000); or (iii) net income of Five Hundred Thousand
Dollars ($500,000) in the most recently completed fiscal year or in two of
the last three most recently completed fiscal years. Nasdaq is currently
reviewing our plan to determine the propriety of continuing the Company's
listing on the Nasdaq Small Cap Market System. The Company does not
currently meet these requirements, nor can there be any assurance that the
Company will in fact meet these requirements in any future period.
The Company is required to pay $1,390,400 to the former Infotel
shareholders pursuant to the purchase agreement regarding the acquisition
of Infotel, 30 days after the filing of the 10-KSB which was filed in
January 1999. The Company does not currently have the cash necessary for
payment. The Company is renogatiating with the shareholders to defer
payment. There can be no assurance that the shareholders will agree to any
delay, and the outcome may have a material adverse effect on the Company's
financial position and results of operations.
2. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or
the "Company"), was incorporated in October 1996 as a holding company. The
business of NHancement is conducted by its operating company subsidiaries:
Voice Plus, Inc.("VPI" or "Voice Plus), whose name was recently changed to
NHancement Technologies North America, Inc. and Infotel Technologies (Pte)
Ltd ("Infotel"). Voice Plus, a California corporation headquartered in
Fremont, California, is a
7
<PAGE>
systems integrator and national distributor of voice processing and
multimedia messaging equipment. Infotel, a Singapore corporation acquired
on June 22, 1998 is (1) a systems integrator of (i) infrastructure
communications equipment, (ii) turnkey project management services, and
(iii) radar systems; and (2) a provider of test measuring systems.
Accordingly, the consolidated financial statements include the
results of operations from NHancement and its Voice Plus subsidiary for
both periods presented and those of Infotel for the three months ended
December 31, 1998. Furthermore, the results of operations of Advantis
Network & Systems Sdn Bhd, which was acquired on December 15, 1997, are
classified as discontinued as this subsidiary was sold on September 30,
1998.
3. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The accompanying consolidated financial statements as of December 31,
1998 and for the three months ended December 31, 1998 and 1997 are
unaudited. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been omitted. These consolidated
financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the year ended September
30, 1998 presented in the Company's latest annual report on Form 10-KSB.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
The consolidated financial statements presented herein reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations for the
periods presented.
4. STOCK OPTIONS
During the three months ended December 31, 1998, the Company granted
options to purchase approximately 136,500 shares of the Company's Common
Stock to employees, and options to purchase 20,000 shares of Common Stock
to an outside director, with an exercise price of $1.1563 per share.
5. FINANCING ACTIVITIES
In October 1998, the Company obtained a line of credit, with a
monthly rate of 2.75%, providing for borrowings of up to 80% of eligible
accounts receivable not to exceed $1 million, expiring in March 1999, with
the option to renew for an additional year. In January 1999, the Company's
available line of credit was increased to $2 million and restrictions were
eased on the receivables eligible for inclusion in the Company's borrowing
base.
In June 1998, funds were loaned to the Company by certain management
stockholders totaling $650,000. Of this amount, $125,000, $225,000 and
$300,000 were loaned to NHancement by Esmond T. Goei, Former Chairman of
the Board and Chief Executive Officer of the Company, Douglas S. Zorn,
current President and Chief Executive Officer of the Company, and James S.
Gillespie, currently a member of the Board of Directors of the Company,
respectively. The total principal and interest originally due September 30,
1998, was repaid on November 5, 1998 without penalty.
8
<PAGE>
6. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of the Company and Infotel for the three months ended December
31, 1997, as if the acquisition had occurred at the beginning of the
period, after giving effect to certain adjustments, including the
amortization of excess of costs over net assets acquired and interest
expense on notes payable to related parties. The following unaudited pro
forma summary does not necessarily reflect the results of operations as
they would have been had the Infotel acquisition occurred at the beginning
of the period presented and is not necessarily indicative of the results of
operations for any future period. These proforma results exclude the income
from discontinued operations.
<TABLE>
<CAPTION>
------------------------------------------------------------- ----------------------------------
UNAUDITED
PRO FORMA
THREE MONTHS ENDED
------------------
DECEMBER 31,
------------
1997
------------------------------------------------------------- ----------------------------------
<S> <C>
Net revenues $4,166,200
Net loss ($4,595,200)
Net loss per common share ($0.98)
Weighted average common and common equivalent shares
outstanding 4,661,500
------------------------------------------------------------- ----------------------------------
</TABLE>
7. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128,
Earnings Per Share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
NET LOSS - NUMERATOR 1997 1998
-------------------- ---- ----
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) ($4,821,200) ($1,416,100)
Preferred stock dividends (3,400)
-------------------------------------------------------------------------------------------------------
Basic and diluted net loss applicable
to common stock ($4,821,200) ($1,419,100)
-------------------------------------------------------------------------------------------------------
COMMON SHARES - DENOMINATOR
---------------------------
Basic weighted average common shares
outstanding 4,264,700 5,739,400
Options and warrants --- ---
-------------------------------------------------------------------------------------------------------
Diluted weighted average common
shares outstanding 4,264,700 5,739,400
-------------------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 1,359,625 shares of Common Stock and
Preferred Stock convertible into 337,100 shares of Common Stock were
outstanding during the three months ended December 31, 1998 and options and
warrants to purchase 1,154,100 shares at December 31, 1997 were outstanding
but were not included in the computation of diluted loss per common share
because the effect would be antidilutive.
9
<PAGE>
8. SEGMENT REPORTING
NHancement's reportable operating segments include Voice Plus and
Infotel. Infotel is based in Singapore and derives substantially all of its
revenue from sales in Asia.
Financial information for these segments includes the following:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------- ----------------- ---------------- --------------- -----------------
VPI INFOTEL OTHER(1) TOTAL
--------------------------------------- ----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Sales to external customers $1,396,900 $1,865,000 --- $3,261,900
Loss from continuing operations (543,200) 189,000 ($1,061,900) ($1,416,100)
Total assets 3,596,700 5,853,900 1,291,200 10,741,800
--------------------------------------- ----------------- ---------------- --------------- -----------------
</TABLE>
(1) Other includes corporate expenses. Management's reports include
goodwill for Infotel in total assets.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------- ----------------- ----------------- -------------- -------------------
VPI (1) INFOTEL OTHER(2) TOTAL
--------------------------------------- ----------------- ----------------- -------------- -------------------
<S> <C> <C> <C> <C>
Net Sales to external customers $2,016,000 --- $1,000 $2,017,000
Loss from continuing operations (4,247,900) --- (576,400) (4,824,300)
Total assets 3,584,100 --- 3,713,200 7,297,300
--------------------------------------- ----------------- ----------------- -------------- -------------------
</TABLE>
(1) VPI loss includes an impairment loss of $4,084,300 and amortization of
the excess of costs over net assets acquired of $150,900.
(2) Other includes corporate expenses. Management reports include goodwill
for Infotel in total assets.
9. SUBSEQUENT EVENTS
On January 6, 1999, Mr. James S. Gillespie was reappointed as a director
of the Company, subsequently at the same meeting, Messrs. Boyle, Das and Nemetz
resigned from the Board, and on January 13, 1999, Thomas J. Lawrence resigned as
a director. On January 6, 1999, Mr. Goei resigned his positions as President and
CEO pursuant to the terms of a Separation Agreement approved by the Board of
Directors, which modifies the terms of his Employment Agreement. Subsequently,
Mr. Goei also resigned both from his position as Chairman of the Board and as a
Board member. In exchange for Mr. Goei's resignation, the Company has agreed to
a severance package with the following principal terms (i) six and one-half
months of regular pay at his current rate, (ii) Mr. Goei will continue to
receive benefits under the Company's medical and group insurance plans through
May 5, 1999, (iii) Mr. Goei will have use of the Company paid, leased automobile
through the end of the lease term in July 1999, (iv) the Company will reimburse
moving expenses of approximately $70,000, (v) the Company will issue warrants to
purchase 50,000 shares of NHancement Common Stock at the current fair market
price, and (vi) Mr. Goei and the Company agree to a mutual waiver of all claims
related to Mr. Goei's employment. On January 6, 1999, Mr. Douglas S. Zorn was
appointed President and CEO.
On February 2, 1999 the Board approved the appointment of Mr. Gillespie as
a consultant to the Company. Messers. Robers J. Schmier and N. Bruce Walko were
also elected to the Board of Directors to fill the vacancies created by the
resignations of Messers. Boyle, Das and Nemetz. Subsequently at the same meeting
the Board of Directors reduced the number of Board members from seven (7) to
five (5). As of the date of this filing, there is still one (1) vacancy on the
Board of Directors. Mr. Walko is serving as the Chairman of the Board.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fremont-based NHancement Technologies Inc. (the "Company") is an integrator
and distributor of voice processing equipment and telecommunications systems in
the United States and Asia.
The Company's consolidated financial statements include the accounts of the
Company and its two operating segments: Voice Plus, Inc. ("VPI" or "Voice Plus")
now named NHancement Technologies North America, Inc. and Infotel Technologies
(Pte) Ltd ("Infotel").
During 1998, the Company changed its fiscal year end from December 31 to
September 30. As a result of this change the Company's 1998 fiscal year ended on
September 30, 1998 and its 1999 fiscal year began on October 1, 1998.
The following contains forward-looking statements regarding future events
or the future financial performance of the Company that involve risks and
uncertainties. Certain statements included in this Form 10-QSB, including,
without limitation, statements related to anticipated cash flow sources and uses
under "Liquidity and Capital Resources", the mitigation of the Year 2000 issue
under "Impact of the Year 2000 Issue" and other statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financing alternatives, financial position,
business strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Any
forward-looking statements herein are subject to certain risks and uncertainties
in the Company's business, including but not limited to, reliance on key
customers and competition in its markets, market demand, business strategy,
product performance, technological developments, maintenance of relationships
with key suppliers, difficulties of hiring and retaining key personnel and the
effect of the Company's accounting policies, all of which may be beyond the
control of the Company. In addition, the Company's Nasdaq SmallCap Market System
listing is in jeopardy. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth herein.
GENERAL
This is the Company's Quarterly Report on Form 10-QSB for the first
quarter of fiscal 1999. Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
consolidated financial statements included herein. Further, this quarterly
report should be read in conjunction with the Company's Consolidated
Financial Statements and Notes to Consolidated Financial Statements included
in its 1998 Annual Report on Form 10-KSB. In addition, you are urged to read
this report in conjunction with the risk factors described herein.
In this MD&A, the Company explains its results of operations for the three
month periods ended December 31, 1998, as compared to the corresponding period
in 1997, and discusses its financial condition. The discussion of financial
condition includes: (1) changes in the voice processing and telecommunications
industry and how the Company expects these changes to influence future results
of operations; and (2) liquidity and capital resources, including discussions of
capital financing activities, and uncertainties that could affect future
results.
On November 20, 1998, the Company informed Nasdaq that, due to continued
losses, it no longer met the requirements for continued listing on the Nasdaq
SmallCap Market System. Specifically, the Company failed to meet the
requirements of Nasdaq Marketplace Rule 4310(C)(2) which requires that an issuer
maintain (i) net tangible assets of Two Million Dollars ($2,000,000); (ii)
market capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net
income of Five Hundred Thousand Dollars
11
<PAGE>
($500,000) in the most recently completed fiscal year or in two of the last
three most recently completed fiscal years.
The Company continues not to meet these requirements and recently received
correspondence from Nasdaq stating that Nasdaq plans to delist the Company's
Common Stock. The Company is in discussions with Nasdaq regarding continued
listing of its Common Stock, but there can be no assurance that the Company's
Common Stock will not be delisted. Further, there can be no assurance that if
the Company's stock is delisted that the Company will in the future meet the
listing requirements for the Nasdaq SmallCap Market System. Continued losses
from operations will have a material adverse effect on the financial condition
of the Company. However, the Company believes that the changes management
implemented in January 1999 and the corresponding cost reduction measures
expected to be implemented primarily through a 10% headcount reduction and
certain operating expense cutbacks in travel, outside services, discretionary
sales costs, corporate overhead, and administrative costs will return the
Company to profitability during fiscal 1999, despite first quarter sales that
were well below recent historical run rate, and a one time restructuring charge
related to severance benefits to be incurred in the second fiscal quarter of
1999. As a mitigating factor, sales in the second fiscal quarter of 1999 are
expected to equal or exceed historical run rates. Currently management believes
that this anticipated return to profitability coupled with an increased credit
facility and planned financing activities will provide adequate cash flow for
future operations, although no assurances can be given that current efforts will
be successful.
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings for the
three-month periods ended December 31, 1998 and 1997. The Company then explains
why revenues and expenses varied from 1998 to 1997.
The following table shows results of operations, as a percentage of net sales,
for the three-month periods ended December 31, 1998 and 1997.
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
--------------------------------------------------------- --------------------------
THREE MONTHS ENDED
------------------
DECEMBER 31
1997 1998
--------------------------------------------------------- ------------- ------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 72.1% 68.4%
Gross profit 27.9% 31.6%
Selling , general and administrative expenses 63.1% 70.0%
Loss on impairment and amortization of excess of cost (210.0)% 3.4%
over net assets acquired
Loss from operations (245.1)% (41.8)%
Other income (expense) 1.3% (1.7)%
Loss from continuing operations before income taxes (243.8)% (43.4)%
Income tax benefit 4.6% 0.0%
Loss from continuing operations (239.2)% (43.4)%
Discontinued operations 0.2% ---
Net loss (239.0)% (43.4)%
--------------------------------------------------------- -------------- ------------
</TABLE>
The Company's primary focus in the three months ended December 31, 1998 was
as an integrator and distributor of voice processing and telecommunications
systems. These operations were conducted through the Company's VPI and Infotel
subsidiaries. VPI's net sales for the first quarter of 1999 as a
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stand-alone business decreased 31% from $2.0 million for the three months
ended December 31, 1997 to $1.4 million for the three months ended December
31, 1998. The decrease in VPI net revenues between 1998 and 1997 was due
primarily to a slow down in voice processing systems and parts sales. However
VPI's order backlog at December 31, 1998 increased to $1.6 million from $1.0
million the previous quarter. Consequently, management believes that VPI
sales for the second fiscal quarter will return to near historical levels.
VPI's revenues continue to be almost exclusively derived from the sale of
Centigram products, and any adverse change in the Company's distributor
relationship with Centigram and Baypoint Innovations, the successor in
interest to the Centigram CPE business, would have a material adverse impact
upon the Company's voice processing business.
VPI was acquired by the Company in February 1997. Based on the estimated
future undiscounted operating cash flows of its related business, the Company
periodically evaluates the carrying value of goodwill for VPI and its other
subsidiaries. Due to issues not known by management at the time of the VPI
acquisition, the estimated future undiscounted operating cash flows of VPI were
calculated to be less than those estimated at the time of its acquisition and
less than the carrying amount of the excess of cost over net assets acquired. On
December 31, 1997 and September 30, 1998, the Company recorded impairment losses
of $4,084,300 and $525,000, representing the difference between the carrying
amount of goodwill over its estimated fair value. As a result of these changes,
the remaining balance of the VPI goodwill was reduced to $750,000 and the useful
life was reduced to three years. Management believes that after 1999, revenues
for legacy systems will decline and that VPI revenues will come increasingly
from new technologies and products that are just now being introduced to the
marketplace. The Company is in the process of repositioning its VPI subsidiary
to take advantage of the new trends in the voice processing industry,
specifically the migration from legacy systems to the new NT computer-based
systems of the future. This transition required the addition of several new
management members and new technological capabilities within the VPI subsidiary
resulting in significant expense to the Company in the first quarter of 1999.
The Company's Infotel subsidiary located in Singapore, was acquired on June
22, 1998. Therefore no sales or income were recorded for the three months ended
December 31, 1997. On a stand-alone pro forma basis, net sales for the first
quarter decreased slightly from $2.1 million in 1997 to $2.0 million for the
same period in 1998. Although Singapore is forecasting zero growth for its
economy for 1999, management expects the operations of Infotel to continue to be
profitable due to its blue chip customer base and position in the local
Singapore communications markets.
Gross margins in the three months ended December 31, 1998 improved to
31.6% from 27.9% in the same period in 1997. VPI's gross margin on a
stand-alone basis decreased slightly in the three months ended December 31,
1998 as compared to the same period of 1997 from 29.7% to 28.2%. Gross
margins in both 1998 and 1997 were below historical levels as fixed costs
were absorbed over a smaller revenue base. VPI's product costs as a
percentage of revenues decreased during the three months ended December 31,
1998 to 40.1% versus 50.9% in the same quarter in 1997. This decrease was due
primarily to low system sales for the quarter ended December 31, 1998 which
resulted in higher maintenance and support revenue with no offsetting product
cost. Infotel's gross margin on a stand-alone basis improved to 34.1% of
sales versus 28.4% of sales for the quarter ended December 31, 1997. This was
primarily due to commission revenue of $0.2 million in the first quarter of
fiscal 1999, with no offsetting cost, while no commission revenues were
recorded in the same three month period of 1997. Infotel earns commissions
when its vendors (Motorola and Rhode & Schwart) sell directly to its end-user
customers.
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net sales increased to 70.0% for the three months ended December
31, 1998 versus 63.1% for the same period in 1997. VPI on a stand-alone basis
increased to 58.9% for the first fiscal quarter of 1999 compared to 42.6% for
the same three month period in 1997, due primarily to (i) a 10.6% increase in
salary expenses as a percentage of revenue associated with the hiring of
additional sales and marketing personnel during the first fiscal quarter quarter
of 1999; (ii) a 2.6% increase in travel costs as a percentage of
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revenue associated with training sales and operations personnel on new NT
based communication products currently marketed by VPI; and (iii) a 3.0%
increase in general and administrative expenses related to increases in short
term facility rents and depreciation expense related to systems upgrades to
support the Company's growth plans. On a stand-alone basis, Infotel's SG&A as
a percent of revenues decreased to 20.5% for the three months ended
December 31, 1998 compared to 21.4% for the three months ended December 31,
1997. The reduction in Infotel's SG&A was due primarily to delays in hiring
personnel, and lower travel and training costs. Corporate overhead costs
increased for the three months ended December 31, 1998 due to the following
services: (i) increased outside services costs as a result of an aborted
financing; (ii) increased costs for audit and legal related to the additional
reporting requirements of a public company, including a special proxy
statement; and (iii) relocation fees related to the former CEO.
At December 31, 1998 the Company provided a 100% reserve against its
deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets, such that a full
valuation allowance is required. The federal net operating loss carryforwards
are subject to an annual limit of approximately $250,000.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complimentary businesses and products has been
an element of the Company's business strategy, the Company's ability to engage
in acquisitions is subject to severe limitations given the Company's current
financial condition. To engage in such activity, the Company will need to obtain
additional debt or equity financing, neither of which may be available or, if
available, available on terms acceptable to the Company. Debt financing may
require the Company to pay significant amounts of interest and principal
payments, thus reducing the resources available to expand its existing
businesses. Equity financing may dilute the Company's existing stockholders'
interest in the assets or earnings of the Company. There can be no assurance
that the Company will be able to obtain either debt or equity financing if and
when it is needed for acquisitions or general working capital purposes or that,
if available, such financing will be available on terms the Company deems
acceptable. In April of 1998, the Company negotiated an equity financing for
$3.0 million, of which $1,250,000 was received, with substantially all of the
proceeds having been used for the acquisition of Infotel. The Company amended
the agreement in September of 1998 limiting the aggregate financing amount to
$1,250,000, (approximately $985,000 net of expenses).
During the three months ended December 31, 1998, net cash provided by
operating activities was $0.5 million, consisting primarily of the collection of
accounts receivable offset by cash used to fund the net operating loss. Net cash
used by investing and financing activities totaled $1.6 million consisting of
(i) purchases of property and equipment for the Company's internal computer
system, and (ii) payment of the notes payable to management. At December 31,
1998, the Company's working capital deficit was ($0.8) million and cash and cash
equivalents totaled $0.6 million. The current ratio decreased slightly from 1.1
to 1 at September 30, 1998 to 0.9 to 1.0 at December 31, 1998. Management
believes that available cash reserves coupled with additional available credit
and the implementation of cost reductions will provide adequate funds for future
operations, although no assurance can be given that current efforts will be
successful.
During 1998, the Company obtained a $1.0 million accounts receivable credit
line with a U.S. finance company with an advance rate of 80% of eligible
receivables at an interest rate of 2.0% every 15 days. In October 1998, the
terms of the revolving credit line were re-negotiated to a maximum of $1.0
million at an interest rate of 2.75% per month. In January 1999, the Company's
lender increased the credit line from $1.0 million to $2.0 million and
restrictions were eased on the receivables eligible for inclusion in the
Company's borrowing base. The Company, through its Infotel subsidiary, is
attempting to complete a credit line with a major Singapore bank for S$3.5
million with interest at 1.25% above bank prime to
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be used for Infotel's overdraft protection, letters of credit, letters of
guarantee, foreign exchange and revolving credit. The Company hopes to
complete this facility early in calendar 1999.
The Company's management estimates that it will incur about $200,000 in
capital expenditures during the next 12 months, representing mostly company-wide
business systems hardware and communication systems. It is anticipated that all
major capital expenditures will be financed through equipment leases and will
not require significant direct outlays of cash.
The Company is required to pay $1,390,400 to the former Infotel shareholders
pursuant to the purchase agreement regarding the acquisition of Infotel, 30 days
after the filing of the 10-KSB. The Company's 10-KSB was filed on January 13,
1999, approximately 30 days prior to the date of this report. The Company does
not currently have the cash necessary for payment. The Company is renegotiating
with the shareholders to defer payment. There can be no assurance that the
shareholders will agree to any delay, and the outcome may have a material
adverse effect on the Company's financial position and results of operations.
Based upon its present cost reduction plans, management believes that
operating cash flow, available cash and available credit are adequate to meet
the working capital cash needs of the Company and to meet anticipated capital
needs during the next 12 months. Although the Company intends to issue shares of
common stock as its primary method of financing acquisitions, it anticipates
that additional funds will be required to successfully implement its acquisition
program, and it will use various methods to finance acquisitions, including the
payment of cash, for this purpose.
RISK FACTORS
The following risk factors, in addition to the risks described elsewhere in
the description of the Company's business in this report on Form 10-QSB may
cause actual results to differ materially from those in any forward-looking
statements contained in the business description, management's discussion and
analysis or elsewhere in this report or made in the future by the Company or is
representatives. Such forward-looking statements involve known risks,
uncertainties and other factors which may cause the actual results, performance
or achievements expressed or implied by such forward-looking statements.
RISKS ASSOCIATED WITH DELISTING OF COMMON STOCK; PENNY STOCK RULES.
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on November 20, 1998, the Company informed Nasdaq that
it no longer met the requirements for continued listing on the Nasdaq SmallCap
Market System. Specifically, the Company failed to meet the requirements of
Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer maintain (i)
net tangible assets of Two Million Dollars ($2,000,000); (ii) market
capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net income
of Five Hundred Thousand Dollars ($500,000) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal years.
Nasdaq is currently reviewing the propriety of continuing the Company's listing
on the Nasdaq Small Cap Market System. The Company has submitted a plan to
correct its listing deficiency with Nasdaq and has not yet received a reply
regarding continued listing of its Common Stock and there can be no
assurance, that the Common Stock will remain listed.
If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny
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stock" rules, and as a result, an investor will find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Company's
Common Stock.
The "penny stock" rules under the Exchange Act impose additional sales
practice and market-making requirements on broker-dealers who sell and/or make a
market in such securities. For transactions covered by the penny stock rules, a
broker-dealer must make special suitability determinations for purchasers and
must have received the purchaser's written consent to the transaction prior to
sale. In addition, for any transaction involving a penny stock, unless exempt,
the rules require delivery prior to any transaction in a penny stock of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market and penny stocks. As a result, the Company's delisting
from the Nasdaq SmallCap Market System and its becoming subject to the rules on
penny stocks would negatively affect the ability or willingness of
broker-dealers to sell or make a market in the Company's securities and,
therefore, would severely and adversely affect the market liquidity for the
Company's Common Stock.
PRIOR LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.
For the three months ended December 31, 1998, the Company incurred a net
loss in the amount of $1.4 million on net revenues of $3.3 million. The failure
of the Company to produce positive operating results may affect the future value
of the Common Stock, may contribute to the Company losing its eligibility for
listing of the Common Stock on the Nasdaq SmallCap Market System, may adversely
affect the Company's ability to obtain debt or equity financing on terms
acceptable to the Company, and may prevent the Company from completing future
acquisitions.
VOLATILITY OF STOCK PRICES.
The over-the-counter markets for securities such as the Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and trends in the Company's industry and the investment
markets generally, as well as economic conditions and quarterly variations in
the Company's results of operations, may adversely affect the market price of
the Common Stock. In addition, there can be no assurance that the Company's
Common Stock will remain eligible for listing on the Nasdaq SmallCap Market
System.
FINANCING RISKS.
The acquisition of complementary businesses although currently
de-emphasized, is still an element of the Company's business strategy. If a cash
payment in excess of available working capital is required to make an
acquisition, the Company will need to obtain additional debt or equity
financing. Debt financing may require the Company to pay significant amounts as
interest and principal payments, thus reducing the resources available to expand
its existing businesses. Equity financing may be dilutive to the Company's
existing stockholders' interest in the assets or earnings of the Company. There
can be no assurance that the Company will be able to obtain either debt or
equity financing if and when it is needed for acquisitions or that, if
available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing would have a
material adverse effect on the Company's acquisition strategy. Further, the
refusal of potential acquisition candidates to accept Common Stock in payment of
the Company's purchase price obligations, in whole or in part, could require the
Company to reduce or curtail its acquisition strategy. To the extent that Common
Stock is used as consideration in an acquisition transaction, such stock
issuance may be dilutive to the Company's existing stockholders. Even if the
Company is able to obtain financing needed for an acquisition, the
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terms of such financing may involve considerable costs to the Company. In this
regard, as of December 31, 1998, 10,059 shares of Preferred Stock and accrued
dividends were converted into 901,160 shares of Common Stock at an average
price per share of about $0.90.
VPI'S STRATEGIC RELATIONSHIP WITH CENTIGRAM COMMUNICATIONS CORPORATION.
VPI's business is based upon the integration of hardware and software and
telecommunications and data processing equipment manufactured by others into
integrated systems designed to meet the needs of its customers. Although VPI has
distributor agreements with a number of equipment manufacturers, substantially
all of its revenue is based upon products manufactured by Centigram
Communications Corporation ("Centigram"). The Company depends upon Centigram to
offer products that are competitive with products offered by other manufacturers
as to technological advancement, reliability and price. If Centigram's
competitors should surpass Centigram in any of these qualities, the Company may
be required to establish alternative strategic relationships. Any such
development, or any other adverse change in the Company's distributor
relationship with Centigram, would adversely affect the Company's business for
an indeterminate period of time until new supplier relationships could be
established. In this regard, Centigram recently sold to its customer premises
equipment ("CPE") business to Mitel Corporation ("Mitel") and is now known as
Baypoint Innovations ("Baypoint"). The distributor agreement entered into with
Centigram may be canceled by either party upon ninety (90) days' notice and is
subject to termination in the event that the Company defaults on or is otherwise
in breach of various of its obligations under the agreement. Baypoint has
continued to distribute the CPE products and honor the VPI distribution
agreement. Any disruption to product supplied by Centigram or Baypoint would
have a significant adverse impact upon the Company's business for an
indeterminate period of time until new supplier relationships could be
established.
RELIANCE UPON COMPANY'S DISTRIBUTOR AND SUPPLIER RELATIONSHIPS; DEPENDENCE ON
SIGNIFICANT CUSTOMERS.
VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of these distributor
agreements, a manufacturer may discontinue the distributor relationship because
of factors related to a particular distributor or because of a manufacturer's
decision to change its method of distributing its products to all or parts of
its markets. In making such a change, a manufacturer of key products sold by a
distributor may effectively become a direct competitor of its former
distributor. Moreover, a manufacturer may reduce its dealer discounts, eliminate
any exclusive distribution rights, and/or reduce the manufacturer's support of a
distributor or otherwise adversely affect the competitive environment in which
the distributor sells the manufacturer's products. Any material change in VPI's
distributor relationships with its key suppliers or any interruption of the
delivery of equipment to VPI by any of its key suppliers would have a material
adverse effect upon the Company.
COMPETITION IN VPI'S VOICE PROCESSING AND CUSTOMER PREMISES EQUIPMENT
BUSINESSES.
The voice processing and customer premises equipment markets are highly
competitive and competition in this industry is expected to intensify with the
introduction of new product enhancements and new competitors. VPI competes with
a number of larger integrated companies that provide competitive voice
processing products and services as subsets of larger product offerings,
including all the former regional Bell operating companies and major PBX
equipment manufacturers, such as Fujitsu Limited and Lucent Technologies Inc.
("Lucent"), formerly a division of AT&T. These integrated public company
competitors are substantially larger than the Company and have substantially
greater revenues than the Company, and, as a result, may encroach on the
Company's voice processing equipment and service markets. Additionally, in the
CPE markets, VPI competes with two types of equipment companies: (i)
interconnects (PBX providers), including Lucent, Northern Telecom Limited,
Fujitsu Limited and NEC Corporation, and (ii) independent voice processing
manufacturers, such as Octel
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Communications Corporation (now owned by Lucent). Digital Sound Corporation,
Active Voice Corporation, Applied Voice Technology, Inc., Glenayre
Technologies, Inc. and Comverse Technology, Inc., among others, also compete
with the Company in the service provider market. VPI's competitors have better
name recognition in the market, a larger installed base of customers and
greater financial, marketing and technical resources than the Company.
COMPETITION IN INFOTEL'S INFRASTRUCTURE COMMUNICATIONS EQUIPMENT BUSINESSES.
Infotel competes against several large companies in Singapore that are
better capitalized. Although Infotel has in the past managed to compete
successfully against such larger companies on the basis of its engineering and
project management expertise; there can be no assurance that such expertise will
permit Infotel to compete effectively with such larger companies in the future.
Further, various large manufacturers have established their own branch offices
in Singapore and compete against Infotel.
RISKS IN INTEGRATING ACQUIRED COMPANIES.
Acquisitions may involve a number of special risks, including adverse
short-term effects on the Company's operating results, diversion of management's
attention from the operations of the Company, dependence on retention, hiring
and training of key personnel, risks associated with unanticipated problems or
legal liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's operations and
financial performance. Successfully integrating the operations of additional
companies into those of the Company will require the cooperative efforts of the
managers and employees of the respective business entities, including the
integration of the owners or managers of smaller companies into roles that
require them to report to supervisors. Significant costs and management time may
be required to integrate management control systems. Furthermore, to manage its
operations effectively, the Company must continue to improve its operational,
financial and management controls and information systems, to accurately
forecast sales demand, to control its overhead and to manage its marketing
programs. As discussed in previous sections, the acquisition of Voice Plus and
Advantis have yielded operating results that were significantly lower than
expected. Other acquisitions could generate results different from our
expectations. Accordingly, no assurance can be given that the future performance
of the Company's subsidiaries will be commensurate with the consideration paid
to acquire such companies. If management fails to establish the needed controls
and to manage growth effectively, the Company's operating results, cash flows
and overall financial condition will be adversely affected.
RISKS INVOLVED IN CHANGES OF MANAGEMENT.
Management changes often have a disruptive effect on businesses and can lead
to the loss of key employees because of the uncertainty inherit in change. The
loss of key employees could have a materially adverse effect on the Company's
operations. Furthermore, no assurances can be given that the current changes in
management of the Company will be adequate to reverse losses recorded in
previous years, to return the Company to profitability or to meet future growth
targets.
YEAR 2000 COMPLIANCE
The Company has developed an implementation plan to correct any internal
computer systems that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Software programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to or
replacement of existing software, the Year 2000 problems will not pose
significant operational problems for the Company's domestic computer systems.
The Company believes that the costs associated with any such upgrade or
replacement of software will not be material, and that
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all such changes will be implemented by the end of calendar year 1999.
However, if such modifications are not made in a timely manner, or are not
made properly, the Company may be unable to implement appropriate Year 2000
solutions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company distributes products from third party product voice product
equipment manufacturers in North America, some of which are susceptible to Year
2000 problems. During fiscal year 1997, the Company initiated a review of the
products its domestic subsidiary, VPI, distributes to determine which, if any,
are not capable of recognizing the year 2000. Communications were initiated with
all of the manufacturers of such products to determine the nature and extent of
any Year 2000 problems. Where potential Year 2000 computer problems contained in
the products used or distributed by the Company have been identified, the
manufacturers have stated that they have committed resources to resolve such
problems prior to year 2000. However, there can be no assurance that these
manufacturers will, in fact, timely complete the resolution of their Year 2000
problems or, even if timely completed, that those solutions will be acceptable
in the marketplace. The solution to be provided by some manufacturers will
involve a significant upgrade cost to the end user, which may give rise to
disputes and/or litigation between the end user and the manufacturer, which may
also involve the Company. The costs of such possible disputes or litigation
could be significant, thereby resulting in a material adverse effect on the
Company's business, financial condition and results of operations.
As for Asian operations, the Company has not completed its review of
third-party products distributed by Infotel to determine the nature and extent
of Year 2000 problems, if any, with such products. As a result, the Company is
currently unable to determine whether there are any Year 2000 problems
associated with such third-party products, and if so, whether the manufacturers
will be able to timely resolve any such problems. The Company also has not been
able to determine whether the legal systems of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.
The Company's internal computer systems for North American operations were
purchased in 1998 from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant. As for Asian operations, the Company
recently completed its review of the internal computer systems of Infotel and
discovered that Infotel's systems are not Year 2000 compliant. A plan has been
established to convert Infotel to the Company's internal business system during
spring 1999. The estimated cost of the new business systems for all locations
combined is $400,000; but also to maintain proper controls for management of the
Company.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 30, 1998, a case entitled C.C.& Associates, et al. V. NHancement
Technologies, Inc., et al. was filed in Santa Clara County Superior Court.
The compliant was allegedly served in September 1998. The dispute arises out
of the payment of legal expenses pursuant to a non-binding letter of intent.
On December 19, 1998, plaintiff filed with the court a Request for Entry of
Default and Clerk's Judgement ("Request") against the Company in the amount
of $54,722.00. On January 30, 1999, plaintiff agreed to withdraw the Request
and allow the Company to answer the complaint. The Company is contesting the
allegations, in particular, the amount allegedly owing. The Company cannot
presently make any determination regarding the probable outcome of the
litigation; however, the parties have agreed to mediate the dispute within
the next thirty (30) days and it is not anticipated that the resolution will
have a material adverse effect on the financial condition and operations of
the Company.
OPTION GRANTS IN LAST FISCAL QUARTER
<TABLE>
<CAPTION>
CLASS OF DATE OF TITLE OF NUMBER OF AGGREGATE FORM OF
PURCHASERS(1) SALE NHANCEMENT SHARES PRUCHASE CONSIDER
SECURITIES PRICE ATION
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options granted to seven Shares of
employees(2) 11/01/98 Common Stock 136,500 (2) (2)
Shares of
Options granted to one director(3) 11/01/98 Common Stock 20,000 (3) (3)
</TABLE>
(1) The grant of options to the individuals identified in the table above
were made in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"), and /or Regulation D promulgated thereunder.
(2) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options are incentive stock options,
generally expire ten years from the date of grant and become
exercisable for twenty-five percent of the shares on the first year
anniversary of the date of grant, with the balance vesting 1/36 per
month thereafter. The exercise price on the date of grant was equal to
or greater than 100% of the fair market value as determined on the date
of grant.
(3) The options were granted to a director who resigned his position as a
director in January 1999. The terms of the option, a non-statutory
stock option, provided for expiration of the option ten years from the
date of grant and for the option to become exercisable for fifty
percent of the shares on the first year anniversary of the date of
grant, with the balance vesting on the second year anniversary of the
date of grant. The exercise price on the date of grant was equal to or
greater than 100% of the fair market value as determined on the date of
grant. None of the director's options had vested at the time of his
resignation.
ITEM 5. OTHER INFORMATION
CHANGES IN MANAGEMENT
On January 6, 1999, Mr. Goei resigned his position as President and
CEO pursuant to the terms of a Separation Agreement approved by the
Board of Directors, which modifies the terms of his Employment
Agreement. In exchange for Mr. Goei's resignation, the Company has
agreed to a severance package with the following principal terms: (i)
six and one-half months of regular pay at his current rate, (ii)
continued benefits under the Company's medical and group insurance plan
through May 15, 1999, (iii) use of the Company paid leased automobile
through the end of the lease term in July 1999, (iv) the Company will
reimburse Mr. Goei for certain accrued moving expenses totaling
$70,000, (v) the Company will issue warrants to purchase 50,000 shares
of NHancement Common Stock at the fair market price effective as of the
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date of his resignation at $1.00 per share, and (vi) Mr. Goei and the
Company agree to a mutual waiver of all claims related to Mr. Goei's
employment. Mr. Goei continued to serve as Chairman of the Board and
Director of the Company until January 13, 1999 when he resigned from
these positions.
Effective January 6, 1999, Douglas S. Zorn became interim President
and Chief Executive Officer to fill the vacancies created by Mr. Goei's
resignation. On February 2, 1999, the Board of Directors elected Mr.
Zorn to the offices of Chief Executive Officer and President. Mr. Zorn
continues to serve as Chief Financial Officer, Treasurer and Secretary
of the Company.
Messers. James Boyle, Santanu Das and Gary Nemetz resigned as
Directors of the Company on January 6, 1999. Thomas J. Lawrence
resigned as a Director on January 13, 1999.
On January 6, 1999, James S. Gillespie was reappointed as a
Director of the Company. Mr. Gillespie had previously served as
Vice President of Sales and a Director of the Company since its
incorporation in 1996. He resigned his position as Vice President
of Sales in April 1998, and resigned as a Director of the Company on
September 22, 1998. On February 2, 1999, the Board approved a consulting
arrangement between Mr. Gillespie and the Company.
Messers. Robert J. Schmier and N. Bruce Walko were also elected to
the Board of Directors on January 6, 1999 to fill vacancies created by
the resignations of Messers. Boyle, Das and Nemetz.
On February 2, 1999, the Board of Directors reduced the number of
Board members from seven (7) to five (5). As of the date of this
filing, there is still one (1) vacancy on the Board of Directors. Mr
Walko serves as the Chairman of the Board of Directors.
AGREEMENT WITH JWGENESIS
Effective February 2, 1999, the Company entered into an exclusive
one-year agreement with JWGenesis Capital Markets to assist the
Company as financial advisors in connection with the possible sale,
merger, consolidation, recapitalization, business combination,
exchange offer or purchase or sale of securities or assets of the
Company. The agreement includes the payment of a non-refundable fee of
$25,000, the reimbursement of out-of-pocket expenses of $25,000,
warrants to purchase 300,000 shares of the Company's Common Stock at a
per share exercise price of 110% of the fair market value as of the
date of the agreement and transaction fees due upon the successful
closing of any such transaction of (i) ten percent (10%) if equity
(five percent (5%) if merger, acquisition or debt of the first ten
million dollars of the aggregate consideration), (ii) seven percent
(7%) if equity (three and one-half percent (3.5%) if merger,
acquisition or debt of the next ten million dollars of the aggregate
consideration), (iii) five percent (5%) if equity (two and one-half
percent (2.5%) if merger, acquisition or debt of the next ten million
dollars of the aggregate consideration), and (iv) four percent (4%) if
equity (two percent (2%) if merger, acquisition or debt of the balance
of the aggregate consideration) subject to a minimum transaction fee
of $500,000 on each transaction. A seller's remorse fee of $250,000 is
payable to JWGenesis on any bona fide transaction proposal with
aggregate consideration of over $5,000,000 which is accepted by the
Company for which the Company fails to complete the transaction except
due to a breach by or failure of condition under the control of the
third party to the transaction.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following Exhibits are filed as part of the Quarterly Report on
Form 10-QSB
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------ --------------------------------------------------------------
<S> <C>
4.7 Warrant Agreement dated February 2, 1999 between the Company
and JWGenesis Capital Markets LLC.
4.8 Warrant Agreement dated February 2, 1999 between the Company
and Kenneth L. Greenberg.
4.9 Warrant Agreement dated February 2, 1999 between the Company
and Mark Goldberg.
10.47 Separation Agreement dated January 13, 1999 between Esmond T.
Goei and the Company.(1)
10.48 Letter Agreement dated February 2, 1999 between the Company
and JWGenesis Capital Markets LLC.
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None
- -------------
(1) Incorporated by reference to the document bearing the same exhibit number
as contained in the Company's Form 8-K, as filed with the Securities and
Exchange Commission on February 12, 1999.
22
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NHANCEMENT TECHNOLOGIES INC.
By: /s/ Douglas S. Zorn
-------------------------------------
Date: February 15, 1999 Douglas S. Zorn
Chief Executive Officer, President
Chief Financial Officer and Treasurer
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------ --------------------------------------------------------------
<S> <C>
4.7 Warrant Agreement dated February 2, 1999 between the Company
and JWGenesis Capital Markets LLC.
4.8 Warrant Agreement dated February 2, 1999 between the Company
and Kenneth L. Greenberg.
4.9 Warrant Agreement dated February 2, 1999 between the Company
and Mark Goldberg.
10.47 Separation Agreement dated January 13, 1999 between Esmond T.
Goei and the Company.(1)
10.48 Letter Agreement dated February 2, 1999 between the Company
and JWGenesis Capital Markets LLC.
27.0 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the document bearing the same exhibit number as
contained in the Company's Form 8-K, as filed with the Securities and Exchange
Commission on February 12, 1999.
24
<PAGE>
Exhibit 4.7
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
Shares 150,000
FOR VALUE RECEIVED, NHancement Technologies Inc. (the "Company"), a
Delaware corporation, hereby certifies that JWGenesis Capital Markets LLC
("JWGenesis") or its permitted assigns are entitled to purchase from the
Company, at any time or from time to time commencing on February 2, 1999 and
prior to 5:00 P.M., New York City time then current, on February 2, 2004,
150,000 fully paid and non-assessable shares of the common stock, $0.01 par
value, of the Company at the purchase price of $150,000 (computed on the
basis of $1 per share). (Hereinafter, (i) said common stock, together with
any other equity securities which may be issued by the Company with respect
thereto or in substitution therefor, is referred to as the "Common Stock,"
(ii) the shares of the Common Stock purchasable hereunder are referred to as
the "Warrant Shares," (iii) the aggregate purchase price payable hereunder
for the Warrant Shares is referred to as the "Aggregate Warrant Price," (iv)
the price payable hereunder for each of the shares of the Warrant Shares is
referred to as the "Per Share Warrant Price" and (v) this warrant and all
warrants hereafter issued in exchange or substitution for this warrant are
referred to as "Warrants.") The Aggregate Warrant Price is not subject to
adjustment. The Per Share Warrant Price is subject to adjustment as
hereinafter provided; in the event of any such adjustment, the number of
Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by
the Per Share Warrant Price in effect immediately after such adjustment.
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised, in whole at any time or in part from
time to time [commencing on February 2, 1999 (the "Commencement Date")
and] prior to 5:00 P.M., New York City time then current, on February
2, 2004 (the "Expiration Date"), by the holder of this Warrant (the
"Holder") by the surrender of this Warrant (with the subscription form
at the end hereof duly executed) at the address set forth in
Subsection 10(a) hereof, together with proper payment of the Aggregate
Warrant Price, or the proportionate part thereof if this Warrant is
exercised in part. Payment for the Warrant Shares shall be made by
check, payable to the order of the Company. If this Warrant is
exercised in part, this Warrant must be exercised for a number of
whole shares of the Common Stock, and the Holder is entitled to
receive a new Warrant covering the number of Warrant Shares in respect
of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such
Warrant Shares. Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, if this Warrant is
exercised in whole, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, pay cash equal to the
fair value of such fractional share (determined in such reasonable
manner as the Board of Directors of the Company shall determine), and
(ii) deliver the other securities and properties receivable upon the
exercise of this Warrant, or the proportionate part thereof if this
Warrant is exercised in part, pursuant to the provisions of this
Warrant.
<PAGE>
(b) In lieu of exercising this Warrant in the manner set forth in
paragraph 1(a) above, this Warrant may be exercised
[between the Commencement Date and] on or prior to the Expiration
Date by surrender of the Warrant without payment of any other
consideration, commission or remuneration, together with the
cashless exercise subscription form at the end hereof, duly
executed. The number of shares to be issued in exchange for the
Warrant shall be the product of (x) the EXCESS OF the market price
of the Common Stock on the date of surrender of the Warrant and the
exercise subscription form OVER the Per Share Warrant Price and (y)
the number of shares subject to issuance upon exercise of the
Warrant, divided by the market price of the Common Stock on such
date. Upon such exercise and surrender of this Warrant, the Company
will (i) issue a certificate or certificates in the name of the
Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, in lieu of any
fractional share of the Common Stock to which the Holder shall be
entitled, pay cash equal to the fair value of such fractional share
(determined in such reasonable manner as the Board of Directors of
the Company shall determine), and (ii) deliver the other securities
and properties receivable upon the exercise of this Warrant,
pursuant to the provisions of this Warrant.
2. RESERVATION OF WARRANT SHARES.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of this
Warrant, such number of shares of the Common Stock and such amount of other
securities and properties as from time to time shall be deliverable to the
Holder upon the exercise of this Warrant, free and clear of all
restrictions on sale or transfer (except such as may be imposed under
applicable federal and state securities laws) and free and clear of all
preemptive rights and all other rights to purchase securities of the
Company.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute to the holders of its outstanding Common
Stock, (i) securities, other than shares of Common Stock, or (ii)
property, other than cash, without payment therefor, with respect to
Common Stock, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities
and property which the Holder would hold on the date of such exercise
if, on the date of this Warrant, the Holder had been the holder of
record of the number of shares of the Common Stock subscribed for upon
such exercise and, during the period from the date of this Warrant to
and including the date of such exercise, had retained such shares and
the securities and properties receivable by the Holder during such
period. Notice of each such distribution shall be forthwith mailed to
the Holder.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall (i) pay a dividend or make a distribution on its
capital stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares,
(iii) combine its outstanding shares of Common Stock into a smaller
number of shares or (iv) issue by reclassification of its Common Stock
any shares of capital stock of the Company, the Per Share Warrant
Price in effect immediately prior to such action shall be adjusted so
that the Holder of any Warrant thereafter exercised shall be entitled
to receive the number of shares of Common Stock or other capital stock
of the Company which he would have owned or been entitled to received
immediately following the happening of any of the events described
above had such Warrant been exercised immediately prior thereto. An
adjustment made pursuant to this (b) shall become effective
immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or
reclassification. If, as a result of an
<PAGE>
adjustment made pursuant to this (b), the holder of any Warrant
thereafter surrendered for exercise shall become entitled to
receive shares of two or more classes of capital stock or shares of
Common Stock and other capital stock of the Company, the Board of
Directors (whose reasonable determination shall be conclusive and
shall be described in a written notice to the Holder of any Warrant
promptly after such adjustment) shall determine the allocation of
the adjusted Per Share Warrant Price between or among shares of
such classes or capital stock or shares of Common Stock and other
capital stock.
(c) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any shares of Common Stock for less than $0.50 per share, the
Per Share Warrant Price shall be adjusted as of the date of such
issuance or sale so that the same shall equal the price determined by
dividing (i) the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by
the Per Share Warrant Price plus (B) the consideration received by the
Company upon such issuance or sale by (ii) the total number of shares
of Common Stock outstanding after such issuance or sale.
(d) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any rights, options, warrants or securities convertible into
Common Stock entitling the holders thereof to purchase the Common
Stock or to convert such securities into Common Stock at a less than
$0.50 per share, the Per Share Warrant Price shall be adjusted as of
the date of such issuance or sale so that the same shall equal the
price determined by dividing (i) the sum of (A) the number of shares
of Common Stock outstanding on the date of such issuance or sale
multiplied by the Per Share Warrant Price plus (B) the Total
Consideration by (ii) the number of shares of Common Stock outstanding
on the date of such issuance or sale plus the maximum number of
additional shares of Common Stock issuable upon exercise or conversion
of such securities.
(e) No adjustment in the Per Share Warrant Price shall be required in the
case of (i) the issuance of up to 1,000,000 shares of Common Stock
upon the exercise of options which may be granted under the Company's
official stock option plan as in effect on the date hereof, or (ii)
the issuance of shares pursuant to the exercise of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange
of securities with another entity (including any exchange effected in
connection with a merger of any other corporation with the Company),
the Holder of this Warrant shall have the right thereafter to convert
such Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale
or conveyance had this Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale
or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests
thereafter of the Holder of this Warrant to the end that the
provisions set forth in this Section 3 shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in
<PAGE>
relation to any shares of stock or other securities or property
thereafter deliverable on the exercise of this Warrant. The above
provisions of this 3(f) shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
Notice of any such consolidation, merger, statutory exchange, sale or
conveyance, and of said provisions so proposed to be made, shall be
mailed to the Holder not less than twenty (20) days prior to such
event. A sale of all or substantially all of the assets of the
Company for a consideration consisting primarily of securities shall
be deemed a consolidation or merger for the foregoing purposes.
(g) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least
$0.05 per share of Common Stock; PROVIDED, HOWEVER, that any
adjustments which by reason of this (g) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment; AND PROVIDED FURTHER, however, that adjustments shall be
required and made in accordance with the provisions of this Section 3
(other than this (g)) not later than such time as may be required in
order to preserve the taxfree nature of a distribution to the Holder
of this Warrant or Common Stock. All calculations under this Section
3 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be. Anything in this Section 3 to the contrary
notwithstanding, the Company shall be entitled to make such reductions
in the Per Share Warrant Price, in addition to those required by this
Section 3, as it in its reasonable discretion shall deem to be
advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of
this Warrant in accordance with this Section 3, the Company shall, at
its own expense, within ten (10) days of such adjustment or
modification, deliver to the holder of this Warrant a certificate of
the principal financial officer of the Company setting forth the Per
Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of
the facts requiring such adjustment or modification and the manner of
computing the same.
(i) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Stock, other
than out of earned surplus, the Company shall mail notice thereof to
the Holder not less than twenty (20) days prior to the record date
fixed for determining shareholders entitled to participate in such
dividend or other distribution.
4. FULLY PAID STOCK; TAXES.
The Company agrees that the shares of the Common Stock represented by each
and every certificate for Warrant Shares delivered on the exercise of this
Warrant in accordance with the terms hereof shall, at the time of such
delivery, be validly issued and outstanding, fully paid and non-assessable
and not subject to preemptive rights, or other contractual rights to
purchase securities of the Company, and the Company will take all such
actions as may be necessary to assure that the par value or stated value,
if any, per share of the Common Stock is at all times equal to or less than
the then Per Share Warrant Price. The Company further covenants and agrees
that it will pay, when due and payable, any and all federal
<PAGE>
and state stamp, original issue or similar taxes which may be payable in
respect of the issue of any Warrant Share or certificate therefor.
5. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) The Company agrees that if, at any time during the period
commencing on February 2, 1999 and ending on February 2, 2004, the
Board of Directors of the Company shall authorize the filing of a
registration statement under the 1933 Act, in connection with the
proposed offer of any of its securities by it or any of its
shareholders, the Company will (i) promptly notify the Holder in
writing not less than thirty (30) days prior to filing such
Registration Statement with the Commission, and the Holder shall
have the right to register all but not less than twenty percent
(20%) of the Warrant Shares by notifying the Company in writing
within fifteen (15) days of receipt of the Company notice,
requesting registration of such Warrant Shares and setting forth
the intended method of distribution and such other date or
information as the Company or its counsel shall reasonably require.
Such registration shall be without cost to the Holder except for
its counsel fees and sales commissions incurred if the underlying
shares of Warrant Shares are sold. In the event such offering is
underwritten by a broker/dealer other than JWGenesis, than Holder's
right to register its Warrant Stock in such Registration Statement
shall be subject to the approval of such underwriter, and the
Company agrees to use its reasonable efforts to obtain such
approval.
(b) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the
Company shall (i) furnish each holder of any such Warrant Shares and
each underwriter of such Warrant Shares with such copies of the
prospectus, including the preliminary prospectus, conforming to the
Act (and such other documents as each such holder or each such
underwriter may reasonably request) in order to facilitate the sale or
distribution of the Warrant Shares, (ii) use its best efforts to
register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or jurisdictions as the
holders of any such Warrant Shares and each underwriter of Warrant
Shares being sold by such holders shall reasonably request and (iii)
take such other actions as may be reasonably necessary or advisable to
enable such holders and such underwriters to consummate the sale or
distribution in such jurisdiction or jurisdictions in which such
holders shall have reasonably requested that the Warrant Shares be
sold.
(c) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this
Section, except for the attorneys' fees and expenses of the holder(s)
of the Warrant Shares covered by such registration incurred in
connection with such registration or other action, underwriting
discounts and applicable transfer taxes relating to the Warrant
Shares.
(d) The exercise price per Warrant Share shall be 110% of the offering
price. The exercise price may be paid in cash, by chick or by the
surrender to the Company of that number of the Warrant Shares which is
calculated by multiplying (I) the total number of Warrants by (ii) the
exercise price and (iii) by dividing the product of (I) and (ii) by
the then current market price for the Company's Common Stock, on the
date of exercise (the "Cashless Exercise Price"). The Cashless
Exercise Price may be tendered pro rata by the Holder of less than all
the warrants.
<PAGE>
(e) The market price of Common Stock shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the last
reported sale price of the Common Stock as reported on the NASDAQ
National Market System ("NASDAQ") or, if there is no such reported
sale on the day in question, on the basis of the average of the
closing bid and asked quotations as so reported or, if the Common
Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the
Common Stock is listed or, if the Common Stock is not listed on any
national securities exchange, on the basis of the average of the
closing bid and asked quotations on the day in question in the
over-the-counter market as reported by the National Association of
Securities Dealers' Automated Quotations System or, if not so quoted,
as reported by National Quotation Bureau, Incorporated or any similar
organization.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each selling holder
of Warrant Shares and each person who controls any such selling holder
within the meaning of Section 15 of the Act, and each and all of them,
from and against any and all losses, claims, damages, liabilities or
actions, joint or several, to which any selling holder of Warrant
Shares or they or any of them may become subject under the Act or
otherwise and to reimburse the persons indemnified as above for any
legal or other expenses (including the cost of, and for the personnel
time spent in connection with, any investigation, testimony and
preparation) incurred by them in connection with any litigation or
threatened litigation, whether or not resulting in any liability, but
only insofar as such losses, claims, damages, liabilities or actions
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration
statement pursuant to which Warrant Shares were registered under the
Act (hereinafter called a "Registration Statement"), any preliminary
prospectus, the final prospectus or any amendment or supplement
thereto (or in any application or document filed in connection
therewith) or document executed by the Company based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify the Warrant Shares under
the securities laws thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (ii) the
employment by the Company of any device, scheme or artifice to
defraud, or the engaging by the Company in any act, practice or course
of business which operates or would operate as a fraud or deceit, or
any conspiracy with respect thereto, in which the Company shall
participate, in connection with the issuance and sale of any of the
Warrant Shares; PROVIDED, HOWEVER, that (i) the indemnity agreement
contained in this (a) shall not extend to any selling holder of
Warrant Shares in respect of any such losses, claims, damages,
liabilities or actions arising out of, or based upon, any such untrue
statement or alleged untrue statement, or any such omission or alleged
omission, if such statement or omission was based upon and made in
conformity with information furnished in writing to the Company by a
selling holder of Warrant Shares specifically for use in connection
with the preparation of such Registration Statement, any final
prospectus, any preliminary prospectus or any such amendment or
supplement thereto. The
<PAGE>
Company agrees to pay any legal and other expenses for which it is
liable under this (a) from time to time within thirty (30) days
after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers
who shall have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of Section 15 of the
Act to the same extent as the foregoing indemnity from the Company,
but in each case to the extent, and only to the extent, that any
statement in or omission from or alleged omission from such
Registration Statement, any final prospectus, any preliminary
prospectus or any amendment or supplement thereto was made in reliance
upon information furnished in writing to the Company by such selling
holder specifically for use in connection with the preparation of the
Registration Statement, any final prospectus or the preliminary
prospectus or any such amendment or supplement thereto; PROVIDED,
HOWEVER, that the total obligation of any holder of Warrant Shares to
indemnify any and all such indemnified parties under the provisions of
this (b) shall be limited to the product of the number of Warrant
Shares being sold by the selling holder and the market price of the
Common Stock on the date of the sale to the public of these Warrant
Shares. Each selling holder of Warrant Shares agrees to pay any legal
and other expenses for which it is liable under this (b) from time to
time within thirty (30) days after receipt of a bill therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing 5 (a) or (b) (an "indemnified party") in
respect of which indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such 5 (a) or
(b), such indemnified party shall promptly notify such indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party of any such action shall not release the
indemnifying party from any liability it may have to such indemnified
party in accordance with (a) or (b) of this Section 6. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying party
against which a claim is to be made will be entitled to participate
therein at its own expense and, to the extent that it may wish, to
assume at its own expense the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that (i) if
the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have
reasonably concluded based upon advice of counsel that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the
indemnifying party, the indemnified party shall have the right to
select separate counsel to assume such legal defenses and otherwise to
participate in the defense of such action on behalf of such
indemnified party or parties and (ii) in any event, the indemnified
party shall be entitled to have counsel chosen by such indemnified
party participate in, but not conduct, the defense at the expense of
the indemnifying party. Upon receipt of notice from the indemnifying
party to such indemnified party of its election to so assume the
defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in
accordance with provisos (i) or (ii) to the preceding sentence (it
being understood, however, that the indemnifying party shall not be
liable for the
<PAGE> expenses of more than one separate counsel), (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action or (iii)
the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party. An
indemnifying party shall not be liable for any settlement of any
action or proceeding effected without its written consent, which
consent shall not be unreasonably withheld.
(d) In order to provide for an equitable contribution in circumstances in
which the indemnity agreement provided for in (a) of this Section 6 is
unavailable to a selling holder of Warrant Shares in accordance with
its terms, the Company and the selling holder of Warrant Shares shall
contribute to the aggregate losses, claims, damages and liabilities,
of the nature contemplated by said indemnity agreement, incurred by
the Company and the selling holder of Warrant Shares, in such
proportions as is appropriate to reflect the relative benefits
received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; PROVIDED, HOWEVER, that if such
allocation is not permitted by applicable law or if the indemnified
party failed to give the notice required under (c) of this Section 6,
then the relative fault of the Company and the selling holder of
Warrant Shares in connection with the statements or omissions which
resulted in such losses, claims, damages and liabilities and other
relevant equitable considerations will be considered together with
such relative benefits and PROVIDED, HOWEVER, that the limitations in
the proviso in (b) of this Section 6 shall apply in all cases.
(e) The respective indemnity and contribution agreements by the Company
and the selling holder of Warrant Shares in (a), (b), (c) and (d) of
this Section 6 shall remain operative and in full force and effect
regardless of (i) any investigation made by any selling holder of
Warrant Shares or by or on behalf of any person who controls such
selling holder or by the Company or any controlling person of the
Company or any director or any officer of the Company, (ii) payment
for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and
any successor of the Company, or of any selling holder of Warrant
Shares, or of any person who controls the Company or any selling
holder of Warrant Shares, as the case may be, shall be entitled to the
benefit of such respective indemnity and contribution agreements. The
respective indemnity and contribution agreements by the Company and
the selling holder of Warrant Shares contained in (a), (b), (c) and
(d) of this Section 6 shall be in addition to any liability which the
Company and the selling holder of Warrant Shares may otherwise have.
7. LIMITED TRANSFERABILITY.
(a) This Warrant is not transferable or assignable by the Holder except in
whole or part (i) to JWGenesis or any successor firm or corporation of
Genesis, (ii) to one or more of any of the principals, members,
officers or employees of JWGenesis or of any such successor firm or
(iii) in the case of an individual, pursuant to such individual's last
will and testament or the laws of descent and distribution and is so
transferable only upon the books of the Company which it shall cause
to be maintained for the purpose. The Company may treat the
registered holder of this Warrant as he or its appears on the
Company's books at any time as the Holder for all purposes. The
Company shall permit any holder of a Warrant or his duly authorized
attorney, upon written request during
<PAGE>
ordinary business hours, to inspect and copy or make extracts from
its books showing the registered holders of Warrants. All Warrants
will be dated the same date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon
the exercise of this Warrant will be acquired, by the Holder solely
for the account of such Holder and not with a view to the
fractionalization and distribution thereof and will not be sold or
transferred except in accordance with the applicable provisions of the
Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, and the Holder agrees that neither
this Warrant nor any of the Warrant Shares may be sold or transferred
except under cover of a Registration Statement under the Act which is
effective and current with respect to such Warrant Shares or pursuant
to an opinion, in form and substance reasonably acceptable to the
Company's counsel, that registration under the Act is not required in
connection with such sale or transfer. Any Warrant Shares issued upon
exercise of this Warrant shall bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and are restricted
securities within the meaning thereof. Such securities may not
be sold or transferred except pursuant to a registration
statement under such Act which is effective and current with
respect to such securities or pursuant to an opinion of counsel
reasonably satisfactory to the issuer of such securities that
such sale or transfer is exempt from the registration
requirements of such Act."
8. LOSS, ETC. OF WARRANT.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon
surrender and cancellation of this Warrant, if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor
and denomination.
9. WARRANT HOLDER NOT SHAREHOLDERS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a
shareholder of the Company, as such, in respect of any matters whatsoever,
or any other rights or liabilities as a shareholder, prior to the exercise
hereof.
10. COMMUNICATION.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and shall
be deemed to have been given if, the same is in writing and is mailed by
first-class mail, postage prepaid, addressed to:
<PAGE>
(a) the Company at 39420 Liberty Street, Suite 250, Fremont, CA 94538
or such other address as the Company has designated in writing to the
Holder; or
(b) the Holder at 980 North Federal Highway, Boca Raton, Florida
33432, or such other address as the Holder has designated in writing to the
Company.
11. HEADINGS.
The headings of this Warrant have been inserted as a matter of convenience
and shall not affect the construction hereof.
12. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the laws
of the State of New York without giving effect to the principles of
conflicts of law thereof.
IN WITNESS WHEREOF, N. Bruce Walko has caused this Warrant to be signed by
its Chairman of the Board and attested by its Assistant Secretary on this
10th day of February, 1999.
ATTEST:
By: /s/ Linda V. Moore By: /s/ N. Bruce Walko
------------------------- ---------------------------
Linda V. Moore N. Bruce Walko
Assistant Secretary Chairman of the Board
<PAGE>
SUBSCRIPTION
The undersigned,________________________________________ , pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase
___________________ shares of the Common Stock of _____________________________
covered by said Warrant, and makes payment therefor in full at the price per
share provided by said Warrant.
Dated:______________ Signature:______________________________
Address:________________________________
SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION
The undersigned,________________________________________ , pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe to that number
of shares of the Common Stock as are issuable in accordance with the formula set
forth in Section 1(b) of the Warrant, and makes payment therefor in full by
surrender and delivery of this Warrant.
Dated:______________ Signature:______________________________
Address:________________________________
ASSIGNMENT
<PAGE>
FOR VALUE RECEIVED,_____________________________ hereby sells, assigns and
transfers unto ________________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint _______________
___________, attorney, to transfer said Warrant on the books of ______________
____________________________________.
Dated:______________ Signature:______________________________
Address:________________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED,________________________________________________hereby
assigns and transfers unto________________________________________the right to
purchase_____________shares of the Common Stock of____________________________
_____________by the foregoing Warrant, and a proportionate part of said Warrant
and the rights evidenced hereby, and does irrevocably constitute and appoint
___________________________, attorney, to transfer that part of said Warrant on
the books of__________________________________________________.
Dated:______________ Signature:______________________________
Address:________________________________
<PAGE>
Exhibit 4.8
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
Shares 75,000
FOR VALUE RECEIVED, NHancement Technologies Inc. (the "Company"), a
Delaware corporation, hereby certifies that Kenneth L. Greenberg or his
permitted assigns are entitled to purchase from the Company, at any time or
from time to time commencing on February 2, 1999 and prior to 5:00 P.M., New
York City time then current, on February 2, 2004, 75,000 fully paid and
non-assessable shares of the common stock, $0.01 par value, of the Company at
the purchase price of $75,000 (computed on the basis of $1 per share).
(Hereinafter, (i) said common stock, together with any other equity
securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the shares
of the Common Stock purchasable hereunder are referred to as the "Warrant
Shares," (iii) the aggregate purchase price payable hereunder for the Warrant
Shares is referred to as the "Aggregate Warrant Price," (iv) the price
payable hereunder for each of the shares of the Warrant Shares is referred to
as the "Per Share Warrant Price" and (v) this warrant and all warrants
hereafter issued in exchange or substitution for this warrant are referred to
as "Warrants.") The Aggregate Warrant Price is not subject to adjustment.
The Per Share Warrant Price is subject to adjustment as hereinafter provided;
in the event of any such adjustment, the number of Warrant Shares shall be
adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant
Price in effect immediately after such adjustment.
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised, in whole at any time or in part from
time to time [commencing on February 2, 1999 (the "Commencement Date")
and] prior to 5:00 P.M., New York City time then current, on February
2, 2004 (the "Expiration Date"), by the holder of this Warrant (the
"Holder") by the surrender of this Warrant (with the subscription form
at the end hereof duly executed) at the address set forth in
Subsection 10(a) hereof, together with proper payment of the Aggregate
Warrant Price, or the proportionate part thereof if this Warrant is
exercised in part. Payment for the Warrant Shares shall be made by
check, payable to the order of the Company. If this Warrant is
exercised in part, this Warrant must be exercised for a number of
whole shares of the Common Stock, and the Holder is entitled to
receive a new Warrant covering the number of Warrant Shares in respect
of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such
Warrant Shares. Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, if this Warrant is
exercised in whole, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, pay cash equal to the
fair value of such fractional share (determined in such reasonable
manner as the Board of Directors of the Company shall determine), and
(ii) deliver the other securities and properties receivable upon the
exercise of this Warrant, or the proportionate part thereof if this
Warrant is exercised in part, pursuant to the provisions of this
Warrant.
<PAGE>
(b) In lieu of exercising this Warrant in the manner set forth in
paragraph 1(a) above, this Warrant may be exercised [between the
Commencement Date and] on or prior to the Expiration Date by surrender
of the Warrant without payment of any other consideration, commission
or remuneration, together with the cashless exercise subscription form
at the end hereof, duly executed. The number of shares to be issued
in exchange for the Warrant shall be the product of (x) the EXCESS OF
the market price of the Common Stock on the date of surrender of the
Warrant and the exercise subscription form OVER the Per Share Warrant
Price and (y) the number of shares subject to issuance upon exercise
of the Warrant, divided by the market price of the Common Stock on
such date. Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, in lieu of any fractional
share of the Common Stock to which the Holder shall be entitled, pay
cash equal to the fair value of such fractional share (determined in
such reasonable manner as the Board of Directors of the Company shall
determine), and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, pursuant to the
provisions of this Warrant.
2. RESERVATION OF WARRANT SHARES.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of this
Warrant, such number of shares of the Common Stock and such amount of other
securities and properties as from time to time shall be deliverable to the
Holder upon the exercise of this Warrant, free and clear of all
restrictions on sale or transfer (except such as may be imposed under
applicable federal and state securities laws) and free and clear of all
preemptive rights and all other rights to purchase securities of the
Company.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute to the holders of its outstanding Common
Stock, (i) securities, other than shares of Common Stock, or (ii)
property, other than cash, without payment therefor, with respect to
Common Stock, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities
and property which the Holder would hold on the date of such exercise
if, on the date of this Warrant, the Holder had been the holder of
record of the number of shares of the Common Stock subscribed for upon
such exercise and, during the period from the date of this Warrant to
and including the date of such exercise, had retained such shares and
the securities and properties receivable by the Holder during such
period. Notice of each such distribution shall be forthwith mailed to
the Holder.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall (i) pay a dividend or make a distribution on its
capital stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares,
(iii) combine its outstanding shares of Common Stock into a smaller
number of shares or (iv) issue by reclassification of its Common Stock
any shares of capital stock of the Company, the Per Share Warrant
Price in effect immediately prior to such action shall be adjusted so
that the Holder of any Warrant thereafter exercised shall be entitled
to receive the number of shares of Common Stock or other capital stock
of the Company which he would have owned or been entitled to received
immediately following the happening of any of the events described
above had such Warrant been exercised immediately prior thereto. An
adjustment made pursuant to this (b) shall become effective
immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after
<PAGE>
the effective date in the case of a subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant to
this (b), the holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital
stock of the Company, the Board of Directors (whose reasonable
determination shall be conclusive and shall be described in a written
notice to the Holder of any Warrant promptly after such adjustment)
shall determine the allocation of the adjusted Per Share Warrant Price
between or among shares of such classes or capital stock or shares of
Common Stock and other capital stock.
(c) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any shares of Common Stock for less than $0.50 per share, the
Per Share Warrant Price shall be adjusted as of the date of such
issuance or sale so that the same shall equal the price determined by
dividing (i) the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by
the Per Share Warrant Price plus (B) the consideration received by the
Company upon such issuance or sale by (ii) the total number of shares
of Common Stock outstanding after such issuance or sale.
(d) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any rights, options, warrants or securities convertible into
Common Stock entitling the holders thereof to purchase the Common
Stock or to convert such securities into Common Stock at a less than
$0.50 per share, the Per Share Warrant Price shall be adjusted as of
the date of such issuance or sale so that the same shall equal the
price determined by dividing (i) the sum of (A) the number of shares
of Common Stock outstanding on the date of such issuance or sale
multiplied by the Per Share Warrant Price plus (B) the Total
Consideration by (ii) the number of shares of Common Stock outstanding
on the date of such issuance or sale plus the maximum number of
additional shares of Common Stock issuable upon exercise or conversion
of such securities.
(e) No adjustment in the Per Share Warrant Price shall be required in the
case of (i) the issuance of up to 1,000,000 shares of Common Stock
upon the exercise of options which may be granted under the Company's
official stock option plan as in effect on the date hereof, or (ii)
the issuance of shares pursuant to the exercise of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange
of securities with another entity (including any exchange effected in
connection with a merger of any other corporation with the Company),
the Holder of this Warrant shall have the right thereafter to convert
such Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale
or conveyance had this Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale
or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests
thereafter of the Holder of this Warrant to the end that the
provisions set forth in this
<PAGE>
Section 3 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock or
other securities or property thereafter deliverable on the exercise
of this Warrant. The above provisions of this 3(f) shall similarly
apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance, and of said provisions so
proposed to be made, shall be mailed to the Holder not less than
twenty (20) days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration
consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes.
(g) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least
$0.05 per share of Common Stock; PROVIDED, HOWEVER, that any
adjustments which by reason of this (g) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment; AND PROVIDED FURTHER, however, that adjustments shall be
required and made in accordance with the provisions of this Section 3
(other than this (g)) not later than such time as may be required in
order to preserve the tax-free nature of a distribution to the Holder
of this Warrant or Common Stock. All calculations under this Section
3 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be. Anything in this Section 3 to the contrary
notwithstanding, the Company shall be entitled to make such reductions
in the Per Share Warrant Price, in addition to those required by this
Section 3, as it in its reasonable discretion shall deem to be
advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of
this Warrant in accordance with this Section 3, the Company shall, at
its own expense, within ten (10) days of such adjustment or
modification, deliver to the holder of this Warrant a certificate of
the principal financial officer of the Company setting forth the Per
Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of
the facts requiring such adjustment or modification and the manner of
computing the same.
(i) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Stock, other
than out of earned surplus, the Company shall mail notice thereof to
the Holder not less than twenty (20) days prior to the record date
fixed for determining shareholders entitled to participate in such
dividend or other distribution.
4. FULLY PAID STOCK; TAXES.
The Company agrees that the shares of the Common Stock represented by each
and every certificate for Warrant Shares delivered on the exercise of this
Warrant in accordance with the terms hereof shall, at the time of such
delivery, be validly issued and outstanding, fully paid and non-assessable
and not subject to preemptive rights, or other contractual rights to
purchase securities of the Company, and the Company will take all such
actions as may be necessary to assure that the par value or stated value,
if any, per share of the Common Stock is at all times equal to or less than
the then Per Share Warrant Price.
<PAGE>
The Company further covenants and agrees that it will pay, when due and
payable, any and all federal and state stamp, original issue or similar
taxes which may be payable in respect of the issue of any Warrant Share
or certificate therefor.
5. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) The Company agrees that if, at any time during the period commencing
on February 2, 1999 and ending on February 2, 2004, the Board of
Directors of the Company shall authorize the filing of a registration
statement under the 1933 Act, in connection with the proposed offer of
any of its securities by it or any of its shareholders, the Company
will (i) promptly notify the Holder in writing not less than thirty
(30) days prior to filing such Registration Statement with the
Commission, and the Holder shall have the right to register all but
not less than twenty percent (20%) of the Warrant Shares by notifying
the Company in writing within fifteen (15) days of receipt of the
Company notice, requesting registration of such Warrant Shares and
setting forth the intended method of distribution and such other date
or information as the Company or its counsel shall reasonably require.
Such registration shall be without cost to the Holder except for its
counsel fees and sales commissions incurred if the underlying shares
of Warrant Shares are sold. In the event such offering is underwritten
by a broker/dealer other than JWGenesis, than Holder's right to
register its Warrant Stock in such Registration Statement shall be
subject to the approval of such underwriter, and the Company agrees to
use its reasonable efforts to obtain such approval.
(b) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the
Company shall (i) furnish each holder of any such Warrant Shares and
each underwriter of such Warrant Shares with such copies of the
prospectus, including the preliminary prospectus, conforming to the
Act (and such other documents as each such holder or each such
underwriter may reasonably request) in order to facilitate the sale or
distribution of the Warrant Shares, (ii) use its best efforts to
register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or jurisdictions as the
holders of any such Warrant Shares and each underwriter of Warrant
Shares being sold by such holders shall reasonably request and (iii)
take such other actions as may be reasonably necessary or advisable to
enable such holders and such underwriters to consummate the sale or
distribution in such jurisdiction or jurisdictions in which such
holders shall have reasonably requested that the Warrant Shares be
sold.
(c) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this
Section, except for the attorneys' fees and expenses of the holder(s)
of the Warrant Shares covered by such registration incurred in
connection with such registration or other action, underwriting
discounts and applicable transfer taxes relating to the Warrant
Shares.
(d) The exercise price per Warrant Share shall be 110% of the offering
price. The exercise price may be paid in cash, by chick or by the
surrender to the Company of that number of the Warrant Shares which is
calculated by multiplying (I) the total number of Warrants by (ii) the
exercise price and (iii) by dividing the product of (I) and (ii) by
the then current market price for the Company's
<PAGE>
Common Stock, on the date of exercise (the "Cashless Exercise
Price"). The Cashless Exercise Price may be tendered pro rata by
the Holder of less than all the warrants.
(e) The market price of Common Stock shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the last
reported sale price of the Common Stock as reported on the NASDAQ
National Market System ("NASDAQ") or, if there is no such reported
sale on the day in question, on the basis of the average of the
closing bid and asked quotations as so reported or, if the Common
Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the
Common Stock is listed or, if the Common Stock is not listed on any
national securities exchange, on the basis of the average of the
closing bid and asked quotations on the day in question in the
over-the-counter market as reported by the National Association of
Securities Dealers' Automated Quotations System or, if not so quoted,
as reported by National Quotation Bureau, Incorporated or any similar
organization.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each selling holder
of Warrant Shares and each person who controls any such selling holder
within the meaning of Section 15 of the Act, and each and all of them,
from and against any and all losses, claims, damages, liabilities or
actions, joint or several, to which any selling holder of Warrant
Shares or they or any of them may become subject under the Act or
otherwise and to reimburse the persons indemnified as above for any
legal or other expenses (including the cost of, and for the personnel
time spent in connection with, any investigation, testimony and
preparation) incurred by them in connection with any litigation or
threatened litigation, whether or not resulting in any liability, but
only insofar as such losses, claims, damages, liabilities or actions
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration
statement pursuant to which Warrant Shares were registered under the
Act (hereinafter called a "Registration Statement"), any preliminary
prospectus, the final prospectus or any amendment or supplement
thereto (or in any application or document filed in connection
therewith) or document executed by the Company based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify the Warrant Shares under
the securities laws thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (ii) the
employment by the Company of any device, scheme or artifice to
defraud, or the engaging by the Company in any act, practice or course
of business which operates or would operate as a fraud or deceit, or
any conspiracy with respect thereto, in which the Company shall
participate, in connection with the issuance and sale of any of the
Warrant Shares; PROVIDED, HOWEVER, that (i) the indemnity agreement
contained in this (a) shall not extend to any selling holder of
Warrant Shares in respect of any such losses, claims, damages,
liabilities or actions arising out of, or based upon, any such untrue
statement or alleged untrue statement, or any such omission or alleged
omission, if such statement or omission was based upon and made in
conformity with information furnished in writing to the Company by a
selling holder of Warrant Shares specifically for use in connection
with the preparation of such Registration Statement, any
<PAGE>
final prospectus, any preliminary prospectus or any such amendment
or supplement thereto. The Company agrees to pay any legal and
other expenses for which it is liable under this (a) from time to
time within thirty (30) days after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers
who shall have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of Section 15 of the
Act to the same extent as the foregoing indemnity from the Company,
but in each case to the extent, and only to the extent, that any
statement in or omission from or alleged omission from such
Registration Statement, any final prospectus, any preliminary
prospectus or any amendment or supplement thereto was made in reliance
upon information furnished in writing to the Company by such selling
holder specifically for use in connection with the preparation of the
Registration Statement, any final prospectus or the preliminary
prospectus or any such amendment or supplement thereto; PROVIDED,
HOWEVER, that the total obligation of any holder of Warrant Shares to
indemnify any and all such indemnified parties under the provisions of
this (b) shall be limited to the product of the number of Warrant
Shares being sold by the selling holder and the market price of the
Common Stock on the date of the sale to the public of these Warrant
Shares. Each selling holder of Warrant Shares agrees to pay any legal
and other expenses for which it is liable under this (b) from time to
time within thirty (30) days after receipt of a bill therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing 5 (a) or (b) (an "indemnified party") in
respect of which indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such 5 (a) or
(b), such indemnified party shall promptly notify such indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party of any such action shall not release the
indemnifying party from any liability it may have to such indemnified
party in accordance with (a) or (b) of this Section 6. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying party
against which a claim is to be made will be entitled to participate
therein at its own expense and, to the extent that it may wish, to
assume at its own expense the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that (i) if
the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have
reasonably concluded based upon advice of counsel that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the
indemnifying party, the indemnified party shall have the right to
select separate counsel to assume such legal defenses and otherwise to
participate in the defense of such action on behalf of such
indemnified party or parties and (ii) in any event, the indemnified
party shall be entitled to have counsel chosen by such indemnified
party participate in, but not conduct, the defense at the expense of
the indemnifying party. Upon receipt of notice from the indemnifying
party to such indemnified party of its election to so assume the
defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in
accordance with provisos (i) or (ii) to the preceding
<PAGE>
sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate
counsel), (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after
notice of commencement of the action or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. An indemnifying
party shall not be liable for any settlement of any action or
proceeding effected without its written consent, which consent
shall not be unreasonably withheld.
(d) In order to provide for an equitable contribution in circumstances in
which the indemnity agreement provided for in (a) of this Section 6 is
unavailable to a selling holder of Warrant Shares in accordance with
its terms, the Company and the selling holder of Warrant Shares shall
contribute to the aggregate losses, claims, damages and liabilities,
of the nature contemplated by said indemnity agreement, incurred by
the Company and the selling holder of Warrant Shares, in such
proportions as is appropriate to reflect the relative benefits
received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; PROVIDED, HOWEVER, that if such
allocation is not permitted by applicable law or if the indemnified
party failed to give the notice required under (c) of this Section 6,
then the relative fault of the Company and the selling holder of
Warrant Shares in connection with the statements or omissions which
resulted in such losses, claims, damages and liabilities and other
relevant equitable considerations will be considered together with
such relative benefits and PROVIDED, HOWEVER, that the limitations in
the proviso in (b) of this Section 6 shall apply in all cases.
(e) The respective indemnity and contribution agreements by the Company
and the selling holder of Warrant Shares in (a), (b), (c) and (d) of
this Section 6 shall remain operative and in full force and effect
regardless of (i) any investigation made by any selling holder of
Warrant Shares or by or on behalf of any person who controls such
selling holder or by the Company or any controlling person of the
Company or any director or any officer of the Company, (ii) payment
for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and
any successor of the Company, or of any selling holder of Warrant
Shares, or of any person who controls the Company or any selling
holder of Warrant Shares, as the case may be, shall be entitled to the
benefit of such respective indemnity and contribution agreements. The
respective indemnity and contribution agreements by the Company and
the selling holder of Warrant Shares contained in (a), (b), (c) and
(d) of this Section 6 shall be in addition to any liability which the
Company and the selling holder of Warrant Shares may otherwise have.
7. LIMITED TRANSFERABILITY.
(a) This Warrant is not transferable or assignable by the Holder except in
whole or part (i) to JWGenesis or any successor firm or corporation of
Genesis, (ii) to one or more of any of the principals, members,
officers or employees of JWGenesis or of any such successor firm or
(iii) in the case of an individual, pursuant to such individual's last
will and testament or the laws of descent and distribution and is so
transferable only upon the books of the Company which it shall cause
to be maintained for the purpose. The Company may treat the
registered holder of this Warrant as he or its appears on the
Company's books at any time as the Holder for all purposes. The
Company shall
<PAGE>
permit any holder of a Warrant or his duly authorized attorney,
upon written request during ordinary business hours, to inspect and
copy or make extracts from its books showing the registered holders
of Warrants. All Warrants will be dated the same date as this
Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon
the exercise of this Warrant will be acquired, by the Holder solely
for the account of such Holder and not with a view to the
fractionalization and distribution thereof and will not be sold or
transferred except in accordance with the applicable provisions of the
Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, and the Holder agrees that neither
this Warrant nor any of the Warrant Shares may be sold or transferred
except under cover of a Registration Statement under the Act which is
effective and current with respect to such Warrant Shares or pursuant
to an opinion, in form and substance reasonably acceptable to the
Company's counsel, that registration under the Act is not required in
connection with such sale or transfer. Any Warrant Shares issued upon
exercise of this Warrant shall bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and are restricted
securities within the meaning thereof. Such securities may not
be sold or transferred except pursuant to a registration
statement under such Act which is effective and current with
respect to such securities or pursuant to an opinion of counsel
reasonably satisfactory to the issuer of such securities that
such sale or transfer is exempt from the registration
requirements of such Act."
8. LOSS, ETC. OF WARRANT.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon
surrender and cancellation of this Warrant, if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor
and denomination.
9. WARRANT HOLDER NOT SHAREHOLDERS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a
shareholder of the Company, as such, in respect of any matters whatsoever,
or any other rights or liabilities as a shareholder, prior to the exercise
hereof.
10. COMMUNICATION.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and shall
be deemed to have been given if, the same is in writing and is mailed by
first-class mail, postage prepaid, addressed to:
<PAGE>
(a) the Company at 39420 Liberty Street, Suite 250, Fremont, CA 94538
or such other address as the Company has designated in writing to the
Holder; or
(b) the Holder at 980 North Federal Highway, Boca Raton, Florida
33432, or such other address as the Holder has designated in writing to the
Company.
11. HEADINGS.
The headings of this Warrant have been inserted as a matter of convenience
and shall not affect the construction hereof.
12. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to the principles of
conflicts of law thereof.
IN WITNESS WHEREOF, N. Bruce Walko has caused this Warrant to be signed by
its Chairman of the Board and attested by its Assistant Secretary on this
10th day of February, 1999.
ATTEST:
By: /s/ Linda V. Moore By: /s/ N. Bruce Walko
------------------------ --------------------------
Linda V. Moore N. Bruce Walko
Assistant Secretary Chairman of the Board
<PAGE>
SUBSCRIPTION
The undersigned,__________________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase
____________________shares of the Common Stock of______________________________
_________covered by said Warrant, and makes payment therefor in full at the
price per share provided by said Warrant.
Dated:_____________________ Signature:_____________________________
Address:_______________________________
SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION
The undersigned,_______________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe to that number
of shares of the Common Stock as are issuable in accordance with the formula set
forth in Section 1(b) of the Warrant, and makes payment therefor in full by
surrender and delivery of this Warrant.
Dated:_____________________ Signature:_____________________________
Address:_______________________________
ASSIGNMENT
<PAGE>
FOR VALUE RECEIVED,____________________________hereby sells, assigns and
transfers unto__________________________the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint______________
___________, attorney, to transfer said Warrant on the books of_____________
_________________________.
Dated:_____________________ Signature:_____________________________
Address:_______________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED,_______________________________________________hereby
assigns and transfers unto________________________________________the right to
purchase_____________shares of the Common Stock of___________________________
_____________by the foregoing Warrant, and a proportionate part of said Warrant
and the rights evidenced hereby, and does irrevocably constitute and appoint
___________________________, attorney, to transfer that part of said Warrant on
the books of________________________________________________.
Dated:_____________________ Signature:_____________________________
Address:_______________________________
<PAGE>
Exhibit 4.9
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
Shares 75,000
FOR VALUE RECEIVED, NHancement Technologies Inc. (the "Company"), a
Delaware corporation, hereby certifies that Mark Goldberg or his permitted
assigns are entitled to purchase from the Company, at any time or from time
to time commencing on February 2, 1999 and prior to 5:00 P.M., New York City
time then current, on February 2, 2004, 75,000 fully paid and non-assessable
shares of the common stock, $0.01 par value, of the Company at the purchase
price of $75,000 (computed on the basis of $1 per share). (Hereinafter, (i)
said common stock, together with any other equity securities which may be
issued by the Company with respect thereto or in substitution therefor, is
referred to as the "Common Stock," (ii) the shares of the Common Stock
purchasable hereunder are referred to as the "Warrant Shares," (iii) the
aggregate purchase price payable hereunder for the Warrant Shares is referred
to as the "Aggregate Warrant Price," (iv) the price payable hereunder for
each of the shares of the Warrant Shares is referred to as the "Per Share
Warrant Price" and (v) this warrant and all warrants hereafter issued in
exchange or substitution for this warrant are referred to as "Warrants.")
The Aggregate Warrant Price is not subject to adjustment. The Per Share
Warrant Price is subject to adjustment as hereinafter provided; in the event
of any such adjustment, the number of Warrant Shares shall be adjusted by
dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect
immediately after such adjustment.
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised, in whole at any time or in part from
time to time [commencing on February 2, 1999 (the "Commencement Date")
and] prior to 5:00 P.M., New York City time then current, on February
2, 2004 (the "Expiration Date"), by the holder of this Warrant (the
"Holder") by the surrender of this Warrant (with the subscription form
at the end hereof duly executed) at the address set forth in
Subsection 10(a) hereof, together with proper payment of the Aggregate
Warrant Price, or the proportionate part thereof if this Warrant is
exercised in part. Payment for the Warrant Shares shall be made by
check, payable to the order of the Company. If this Warrant is
exercised in part, this Warrant must be exercised for a number of
whole shares of the Common Stock, and the Holder is entitled to
receive a new Warrant covering the number of Warrant Shares in respect
of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such
Warrant Shares. Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, if this Warrant is
exercised in whole, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, pay cash equal to the
fair value of such fractional share (determined in such reasonable
manner as the Board of Directors of the Company shall determine), and
(ii) deliver the other securities and properties receivable upon the
exercise of this Warrant, or the proportionate part thereof if this
Warrant is exercised in part, pursuant to the provisions of this
Warrant.
<PAGE>
(b) In lieu of exercising this Warrant in the manner set forth in
paragraph 1(a) above, this Warrant may be exercised [between the
Commencement Date and] on or prior to the Expiration Date by surrender
of the Warrant without payment of any other consideration, commission
or remuneration, together with the cashless exercise subscription form
at the end hereof, duly executed. The number of shares to be issued
in exchange for the Warrant shall be the product of (x) the EXCESS OF
the market price of the Common Stock on the date of surrender of the
Warrant and the exercise subscription form OVER the Per Share Warrant
Price and (y) the number of shares subject to issuance upon exercise
of the Warrant, divided by the market price of the Common Stock on
such date. Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of
the Holder for the largest number of whole shares of the Common Stock
to which the Holder shall be entitled and, in lieu of any fractional
share of the Common Stock to which the Holder shall be entitled, pay
cash equal to the fair value of such fractional share (determined in
such reasonable manner as the Board of Directors of the Company shall
determine), and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, pursuant to the
provisions of this Warrant.
2. RESERVATION OF WARRANT SHARES.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of this
Warrant, such number of shares of the Common Stock and such amount of other
securities and properties as from time to time shall be deliverable to the
Holder upon the exercise of this Warrant, free and clear of all
restrictions on sale or transfer (except such as may be imposed under
applicable federal and state securities laws) and free and clear of all
preemptive rights and all other rights to purchase securities of the
Company.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute to the holders of its outstanding Common
Stock, (i) securities, other than shares of Common Stock, or (ii)
property, other than cash, without payment therefor, with respect to
Common Stock, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities
and property which the Holder would hold on the date of such exercise
if, on the date of this Warrant, the Holder had been the holder of
record of the number of shares of the Common Stock subscribed for upon
such exercise and, during the period from the date of this Warrant to
and including the date of such exercise, had retained such shares and
the securities and properties receivable by the Holder during such
period. Notice of each such distribution shall be forthwith mailed to
the Holder.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall (i) pay a dividend or make a distribution on its
capital stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares,
(iii) combine its outstanding shares of Common Stock into a smaller
number of shares or (iv) issue by reclassification of its Common Stock
any shares of capital stock of the Company, the Per Share Warrant
Price in effect immediately prior to such action shall be adjusted so
that the Holder of any Warrant thereafter exercised shall be entitled
to receive the number of shares of Common Stock or other capital stock
of the Company which he would have owned or been entitled to received
immediately following the happening of any of the events described
above had such Warrant been exercised immediately prior thereto. An
adjustment made pursuant to this (b) shall become effective
immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after
<PAGE>
the effective date in the case of a subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant
to this (b), the holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other
capital stock of the Company, the Board of Directors (whose
reasonable determination shall be conclusive and shall be described
in a written notice to the Holder of any Warrant promptly after
such adjustment) shall determine the allocation of the adjusted Per
Share Warrant Price between or among shares of such classes or
capital stock or shares of Common Stock and other capital stock.
(c) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any shares of Common Stock for less than $0.50 per share, the
Per Share Warrant Price shall be adjusted as of the date of such
issuance or sale so that the same shall equal the price determined by
dividing (i) the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by
the Per Share Warrant Price plus (B) the consideration received by the
Company upon such issuance or sale by (ii) the total number of shares
of Common Stock outstanding after such issuance or sale.
(d) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any rights, options, warrants or securities convertible into
Common Stock entitling the holders thereof to purchase the Common
Stock or to convert such securities into Common Stock at a less than
$0.50 per share, the Per Share Warrant Price shall be adjusted as of
the date of such issuance or sale so that the same shall equal the
price determined by dividing (i) the sum of (A) the number of shares
of Common Stock outstanding on the date of such issuance or sale
multiplied by the Per Share Warrant Price plus (B) the Total
Consideration by (ii) the number of shares of Common Stock outstanding
on the date of such issuance or sale plus the maximum number of
additional shares of Common Stock issuable upon exercise or conversion
of such securities.
(e) No adjustment in the Per Share Warrant Price shall be required in the
case of (i) the issuance of up to 1,000,000 shares of Common Stock
upon the exercise of options which may be granted under the Company's
official stock option plan as in effect on the date hereof, or (ii)
the issuance of shares pursuant to the exercise of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange
of securities with another entity (including any exchange effected in
connection with a merger of any other corporation with the Company),
the Holder of this Warrant shall have the right thereafter to convert
such Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale
or conveyance had this Warrant been exercised immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale
or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests
thereafter of the Holder of this Warrant to the end that the
provisions set forth in this
<PAGE>
Section 3 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock or
other securities or property thereafter deliverable on the exercise
of this Warrant. The above provisions of this 3(f) shall similarly
apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance, and of said provisions so
proposed to be made, shall be mailed to the Holder not less than
twenty (20) days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration
consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes.
(g) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least
$0.05 per share of Common Stock; PROVIDED, HOWEVER, that any
adjustments which by reason of this (g) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment; AND PROVIDED FURTHER, however, that adjustments shall be
required and made in accordance with the provisions of this Section 3
(other than this (g)) not later than such time as may be required in
order to preserve the taxfree nature of a distribution to the Holder
of this Warrant or Common Stock. All calculations under this Section
3 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be. Anything in this Section 3 to the contrary
notwithstanding, the Company shall be entitled to make such reductions
in the Per Share Warrant Price, in addition to those required by this
Section 3, as it in its reasonable discretion shall deem to be
advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of
this Warrant in accordance with this Section 3, the Company shall, at
its own expense, within ten (10) days of such adjustment or
modification, deliver to the holder of this Warrant a certificate of
the principal financial officer of the Company setting forth the Per
Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of
the facts requiring such adjustment or modification and the manner of
computing the same.
(i) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Stock, other
than out of earned surplus, the Company shall mail notice thereof to
the Holder not less than twenty (20) days prior to the record date
fixed for determining shareholders entitled to participate in such
dividend or other distribution.
4. FULLY PAID STOCK; TAXES.
The Company agrees that the shares of the Common Stock represented by each
and every certificate for Warrant Shares delivered on the exercise of this
Warrant in accordance with the terms hereof shall, at the time of such
delivery, be validly issued and outstanding, fully paid and non-assessable
and not subject to preemptive rights, or other contractual rights to
purchase securities of the Company, and the Company will take all such
actions as may be necessary to assure that the par value or stated value,
if any, per share of the Common Stock is at all times equal to or less than
the then Per Share Warrant Price.
<PAGE>
The Company further covenants and agrees that it will pay, when due and
payable, any and all federal and state stamp, original issue or
similar taxes which may be payable in respect of the issue of any
Warrant Share or certificate therefor.
5. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) The Company agrees that if, at any time during the period commencing
on February 2, 1999 and ending on February 2, 2004, the Board of
Directors of the Company shall authorize the filing of a registration
statement under the 1933 Act, in connection with the proposed offer of
any of its securities by it or any of its shareholders, the Company
will (i) promptly notify the Holder in writing not less than thirty
(30) days prior to filing such Registration Statement with the
Commission, and the Holder shall have the right to register all but
not less than twenty percent (20%) of the Warrant Shares by notifying
the Company in writing within fifteen (15) days of receipt of the
Company notice, requesting registration of such Warrant Shares and
setting forth the intended method of distribution and such other date
or information as the Company or its counsel shall reasonably require.
Such registration shall be without cost to the Holder except for its
counsel fees and sales commissions incurred if the underlying shares
of Warrant Shares are sold. In the event such offering is underwritten
by a broker/dealer other than JWGenesis, than Holder's right to
register its Warrant Stock in such Registration Statement shall be
subject to the approval of such underwriter, and the Company agrees to
use its reasonable efforts to obtain such approval.
(b) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the
Company shall (i) furnish each holder of any such Warrant Shares and
each underwriter of such Warrant Shares with such copies of the
prospectus, including the preliminary prospectus, conforming to the
Act (and such other documents as each such holder or each such
underwriter may reasonably request) in order to facilitate the sale or
distribution of the Warrant Shares, (ii) use its best efforts to
register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or jurisdictions as the
holders of any such Warrant Shares and each underwriter of Warrant
Shares being sold by such holders shall reasonably request and (iii)
take such other actions as may be reasonably necessary or advisable to
enable such holders and such underwriters to consummate the sale or
distribution in such jurisdiction or jurisdictions in which such
holders shall have reasonably requested that the Warrant Shares be
sold.
(c) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this
Section, except for the attorneys' fees and expenses of the holder(s)
of the Warrant Shares covered by such registration incurred in
connection with such registration or other action, underwriting
discounts and applicable transfer taxes relating to the Warrant
Shares.
(d) The exercise price per Warrant Share shall be 110% of the offering
price. The exercise price may be paid in cash, by chick or by the
surrender to the Company of that number of the Warrant Shares which is
calculated by multiplying (I) the total number of Warrants by (ii) the
exercise price and (iii) by dividing the product of (I) and (ii) by
the then current market price for the Company's
<PAGE>
Common Stock, on the date of exercise (the "Cashless Exercise
Price"). The Cashless Exercise Price may be tendered pro rata by
the Holder of less than all the warrants.
(e) The market price of Common Stock shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the last
reported sale price of the Common Stock as reported on the NASDAQ
National Market System ("NASDAQ") or, if there is no such reported
sale on the day in question, on the basis of the average of the
closing bid and asked quotations as so reported or, if the Common
Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the
Common Stock is listed or, if the Common Stock is not listed on any
national securities exchange, on the basis of the average of the
closing bid and asked quotations on the day in question in the
over-the-counter market as reported by the National Association of
Securities Dealers' Automated Quotations System or, if not so quoted,
as reported by National Quotation Bureau, Incorporated or any similar
organization.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each selling holder
of Warrant Shares and each person who controls any such selling holder
within the meaning of Section 15 of the Act, and each and all of them,
from and against any and all losses, claims, damages, liabilities or
actions, joint or several, to which any selling holder of Warrant
Shares or they or any of them may become subject under the Act or
otherwise and to reimburse the persons indemnified as above for any
legal or other expenses (including the cost of, and for the personnel
time spent in connection with, any investigation, testimony and
preparation) incurred by them in connection with any litigation or
threatened litigation, whether or not resulting in any liability, but
only insofar as such losses, claims, damages, liabilities or actions
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any registration
statement pursuant to which Warrant Shares were registered under the
Act (hereinafter called a "Registration Statement"), any preliminary
prospectus, the final prospectus or any amendment or supplement
thereto (or in any application or document filed in connection
therewith) or document executed by the Company based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify the Warrant Shares under
the securities laws thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (ii) the
employment by the Company of any device, scheme or artifice to
defraud, or the engaging by the Company in any act, practice or course
of business which operates or would operate as a fraud or deceit, or
any conspiracy with respect thereto, in which the Company shall
participate, in connection with the issuance and sale of any of the
Warrant Shares; PROVIDED, HOWEVER, that (i) the indemnity agreement
contained in this (a) shall not extend to any selling holder of
Warrant Shares in respect of any such losses, claims, damages,
liabilities or actions arising out of, or based upon, any such untrue
statement or alleged untrue statement, or any such omission or alleged
omission, if such statement or omission was based upon and made in
conformity with information furnished in writing to the Company by a
selling holder of Warrant Shares specifically for use in connection
with the preparation of such Registration Statement, any
<PAGE>
final prospectus, any preliminary prospectus or any such amendment
or supplement thereto. The Company agrees to pay any legal and
other expenses for which it is liable under this (a) from time to
time within thirty (30) days after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers
who shall have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of Section 15 of the
Act to the same extent as the foregoing indemnity from the Company,
but in each case to the extent, and only to the extent, that any
statement in or omission from or alleged omission from such
Registration Statement, any final prospectus, any preliminary
prospectus or any amendment or supplement thereto was made in reliance
upon information furnished in writing to the Company by such selling
holder specifically for use in connection with the preparation of the
Registration Statement, any final prospectus or the preliminary
prospectus or any such amendment or supplement thereto; PROVIDED,
HOWEVER, that the total obligation of any holder of Warrant Shares to
indemnify any and all such indemnified parties under the provisions of
this (b) shall be limited to the product of the number of Warrant
Shares being sold by the selling holder and the market price of the
Common Stock on the date of the sale to the public of these Warrant
Shares. Each selling holder of Warrant Shares agrees to pay any legal
and other expenses for which it is liable under this (b) from time to
time within thirty (30) days after receipt of a bill therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing 5 (a) or (b) (an "indemnified party") in
respect of which indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such 5 (a) or
(b), such indemnified party shall promptly notify such indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party of any such action shall not release the
indemnifying party from any liability it may have to such indemnified
party in accordance with (a) or (b) of this Section 6. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying party
against which a claim is to be made will be entitled to participate
therein at its own expense and, to the extent that it may wish, to
assume at its own expense the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that (i) if
the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have
reasonably concluded based upon advice of counsel that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the
indemnifying party, the indemnified party shall have the right to
select separate counsel to assume such legal defenses and otherwise to
participate in the defense of such action on behalf of such
indemnified party or parties and (ii) in any event, the indemnified
party shall be entitled to have counsel chosen by such indemnified
party participate in, but not conduct, the defense at the expense of
the indemnifying party. Upon receipt of notice from the indemnifying
party to such indemnified party of its election to so assume the
defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in
accordance with provisos (i) or (ii) to the preceding
<PAGE>
sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate
counsel), (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after
notice of commencement of the action or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. An indemnifying
party shall not be liable for any settlement of any action or
proceeding effected without its written consent, which consent
shall not be unreasonably withheld.
(d) In order to provide for an equitable contribution in circumstances in
which the indemnity agreement provided for in (a) of this Section 6 is
unavailable to a selling holder of Warrant Shares in accordance with
its terms, the Company and the selling holder of Warrant Shares shall
contribute to the aggregate losses, claims, damages and liabilities,
of the nature contemplated by said indemnity agreement, incurred by
the Company and the selling holder of Warrant Shares, in such
proportions as is appropriate to reflect the relative benefits
received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; PROVIDED, HOWEVER, that if such
allocation is not permitted by applicable law or if the indemnified
party failed to give the notice required under (c) of this Section 6,
then the relative fault of the Company and the selling holder of
Warrant Shares in connection with the statements or omissions which
resulted in such losses, claims, damages and liabilities and other
relevant equitable considerations will be considered together with
such relative benefits and PROVIDED, HOWEVER, that the limitations in
the proviso in (b) of this Section 6 shall apply in all cases.
(e) The respective indemnity and contribution agreements by the Company
and the selling holder of Warrant Shares in (a), (b), (c) and (d) of
this Section 6 shall remain operative and in full force and effect
regardless of (i) any investigation made by any selling holder of
Warrant Shares or by or on behalf of any person who controls such
selling holder or by the Company or any controlling person of the
Company or any director or any officer of the Company, (ii) payment
for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and
any successor of the Company, or of any selling holder of Warrant
Shares, or of any person who controls the Company or any selling
holder of Warrant Shares, as the case may be, shall be entitled to the
benefit of such respective indemnity and contribution agreements. The
respective indemnity and contribution agreements by the Company and
the selling holder of Warrant Shares contained in (a), (b), (c) and
(d) of this Section 6 shall be in addition to any liability which the
Company and the selling holder of Warrant Shares may otherwise have.
7. LIMITED TRANSFERABILITY.
(a) This Warrant is not transferable or assignable by the Holder except in
whole or part (i) to JWGenesis or any successor firm or corporation of
Genesis, (ii) to one or more of any of the principals, members,
officers or employees of JWGenesis or of any such successor firm or
(iii) in the case of an individual, pursuant to such individual's last
will and testament or the laws of descent and distribution and is so
transferable only upon the books of the Company which it shall cause
to be maintained for the purpose. The Company may treat the
registered holder of this Warrant as he or its appears on the
Company's books at any time as the Holder for all purposes. The
Company shall
<PAGE>
permit any holder of a Warrant or his duly authorized attorney,
upon written request during ordinary business hours, to inspect and
copy or make extracts from its books showing the registered holders
of Warrants. All Warrants will be dated the same date as this
Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon
the exercise of this Warrant will be acquired, by the Holder solely
for the account of such Holder and not with a view to the
fractionalization and distribution thereof and will not be sold or
transferred except in accordance with the applicable provisions of the
Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, and the Holder agrees that neither
this Warrant nor any of the Warrant Shares may be sold or transferred
except under cover of a Registration Statement under the Act which is
effective and current with respect to such Warrant Shares or pursuant
to an opinion, in form and substance reasonably acceptable to the
Company's counsel, that registration under the Act is not required in
connection with such sale or transfer. Any Warrant Shares issued upon
exercise of this Warrant shall bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and are restricted
securities within the meaning thereof. Such securities may not be
sold or transferred except pursuant to a registration statement
under such Act which is effective and current with respect to such
securities or pursuant to an opinion of counsel reasonably
satisfactory to the issuer of such securities that such sale or
transfer is exempt from the registration requirements of such Act."
8. LOSS, ETC. OF WARRANT.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon
surrender and cancellation of this Warrant, if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor
and denomination.
9. WARRANT HOLDER NOT SHAREHOLDERS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a
shareholder of the Company, as such, in respect of any matters whatsoever,
or any other rights or liabilities as a shareholder, prior to the exercise
hereof.
10. COMMUNICATION.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and shall
be deemed to have been given if, the same is in writing and is mailed by
first-class mail, postage prepaid, addressed to:
<PAGE>
(a) the Company at 39420 Liberty Street, Suite 250, Fremont, CA 94538
or such other address as the Company has designated in writing to the
Holder; or
(b) the Holder at 980 North Federal Highway, Boca Raton, Florida
33432, or such other address as the Holder has designated in writing
to the Company.
11. HEADINGS.
The headings of this Warrant have been inserted as a matter of convenience
and shall not affect the construction hereof.
12. APPLICABLE LAW.
This Warrant shall be governed by and construed in accordance with the laws
of the State of New York without giving effect to the principles of
conflicts of law thereof.
IN WITNESS WHEREOF, N. Bruce Walko has caused this Warrant to be signed by
its Chairman of the Board and attested by its Assistant Secretary on this
10th day of February, 1999.
ATTEST:
By: /s/ Linda V. Moore By: /s/ N. Bruce Walko
------------------------- -------------------------
Linda V. Moore N. Bruce Walko
Assistant Secretary Chairman of the Board
<PAGE>
SUBSCRIPTION
The undersigned,_________________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase
____________________shares of the Common Stock of______________________________
_________covered by said Warrant, and makes payment therefor in full at the
price per share provided by said Warrant.
Dated:__________________ Signature:_____________________________
Address:_______________________________
SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION
The undersigned,________________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe to that number
of shares of the Common Stock as are issuable in accordance with the formula set
forth in Section 1(b) of the Warrant, and makes payment therefor in full by
surrender and delivery of this Warrant.
Dated:__________________ Signature:_____________________________
Address:_______________________________
ASSIGNMENT
<PAGE>
FOR VALUE RECEIVED,____________________________hereby sells, assigns and
transfers unto__________________________the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint______________
___________, attorney, to transfer said Warrant on the books of_____________
_________________________.
Dated:__________________ Signature:_____________________________
Address:_______________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED,_________________________________________________hereby
assigns and transfers unto________________________________________the right to
purchase______________shares of the Common Stock of___________________________
______________by the foregoing Warrant, and a proportionate part of said Warrant
and the rights evidenced hereby, and does irrevocably constitute and appoint
____________________________, attorney, to transfer that part of said Warrant on
the books of___________________________________________________.
Dated:__________________ Signature:_____________________________
Address:_______________________________
<PAGE>
February 2, 1999
PRIVATE & CONFIDENTIAL
Douglas S. Zorn
NHancement Technologies Inc.
39420 Liberty Street
Suite 250
Fremont, CA 94538
Dear Mr. Zorn:
We are writing this letter to confirm our agreement ("Agreement") that
JWGenesis Capital Markets, LLC ("JWGenesis") is exclusively authorized to
represent NHancement Technologies Inc. and its affiliates and related
entities (collectively, the "Company") and to assist the Company as its
exclusive financial advisor in connection with the possible sale of the
Company or any of its assets, business or equity, debt or other securities or
any other business combination. This authorization covers such a sale by
means of any merger, consolidation, recapitalization, business combination,
exchange offer or purchase or sale of securities or assets. Also covered by
this authorization is any other transaction resulting in a change of control
of the Company or its assets, securities or business. For the purposes of
this Agreement, any of the foregoing shall constitute a "Transaction."
This Agreement shall become effective upon the execution hereof by the
Company and JWGenesis, and the term of this Agreement and the exclusive
appointment provided for herein (the "Term") shall end on the first
anniversary of the date of such execution by the Company. The Company agrees
to use reasonable efforts to effect a Transaction acceptable to it during the
term.
I. PERFORMANCE OF SERVICES
Under this Agreement, JWGenesis will work with the Company and use
reasonable efforts to attempt to consummate a satisfactory Transaction,
subject to a final review (prior to marketing the Company and or its
securities) by JWGenesis and the Company which concludes that the Transaction
being considered is financially feasible, including the following services as
reasonably requested by the Company:
1. Provide corporate finance professionals as reasonably required to assist in
this engagement.
2. Advise and assist the Company in estimating a fair market value for the
Company and identifying and screening potential acquirers or merger
candidates.
3. Discuss and evaluate with the Company various alternative marketing
strategies and advise on how to structure and implement a Transaction
designed to further the Company's stated objectives.
4. Assist the Company in preparing a descriptive memorandum of the Company, if
appropriate, for use in discussions with potential acquirers or merger
candidates.
5. Submit the names of potential acquirers or merger candidates to the Company
for the purpose of establishing which potential acquirers or merger
candidates should be approached.
<PAGE>
6. Contact acceptable potential acquirers and merger candidates and establish
and attend exploratory meetings, when appropriate.
7. Develop judgments as to the relative values and financial implications to
the Company of any proposed Transactions, and then, in consultation with
the Company and legal, accounting and/or tax advisors, advise the Company
on appropriate negotiating strategies and, to the extent deemed
appropriate, assist and/or direct negotiations leading to a conclusion of
the proposed Transaction.
8. Assist the Company in evaluating various financing alternatives.
II. COMPENSATION OF SERVICES
A. In partial payment for its services hereunder, JWGenesis shall receive from
the Company a nonrefundable $25,000 performance fee within 45 days from the
execution date of this agreement, payable upon the execution hereof which paid
amount shall be credited in full against the initial Transaction Fee (as
hereinafter defined) payable hereunder.
B. In addition, the Company shall issue to JWGenesis upon the execution hereof
300,000 warrants pursuant to Appendix B hereto.
C. If any Transaction is consummated during the Term or within twelve (12)
months after the end of the Term with a party introduced to the Company by
JWGenesis or contacted by JWGenesis or the Company during the Term, the Company
shall pay JWGenesis in cash at the closing of each such Transaction, a
transaction fee ("Transaction Fee") equal to the sum of: (i) ten percent (10%)
if equity (five percent (5%) if merger or acquisition) of the first ten million
dollars of the aggregate consideration of a Transaction (the "Aggregate
Consideration"); (ii) seven percent (7%) if equity (three and a half percent
(3.5%) if merger or acquisition) of the next ten million dollars of the
Aggregate Consideration; (iii) five percent (5%) if equity (two and a half
percent (2.5%) if merger or acquisition) of the next ten million dollars of the
Aggregate Consideration; and (iv) four percent (4%) if equity (two percent
(2%) if merger or acquisition) of the balance of the Aggregate Consideration,
subject to a minimum Transaction Fee of $500,000 on each completed Transaction.
Aggregate Consideration is defined and computed as follows:
1. The total sale proceeds and other consideration received by (i) the
Company, (ii) participants in the Company's phantom or other equity plans, (iii)
recipients of a share of the Transaction proceeds or similar incentive
arrangements and/or (iv) holders of the Company's stock, options, warrants and
convertible securities ((i), (ii), (iii) and (iv) collectively being defined as
the "Stakeholders") upon the consummation of any Transaction (including payments
made in installments, paid into escrow and/or deferred), inclusive of cash, debt
and equity securities, notes, property, shareholder payables and indebtedness
assumed or retired, agreements not to compete, consulting agreements and unusual
employment contracts, plus the total value of any interest-bearing liabilities
and long-term liabilities assumed or retired, the net value of any current
assets not sold in an assets Transaction, the aggregate amount of any dividends
(except regular dividends paid in conformity with past practice) or other
distributions paid by the Company to the Stakeholders after the date hereof and
the imputed value of any stock retained by the Stakeholders in a sale,
recapitalization, leveraged buyout or similar transaction.
2. If a portion of such consideration includes contingent payments,
Aggregate Consideration shall also include the value of such payments; provided
that if the Company and JWGenesis cannot in good faith agree on such value, then
the portion of the Transaction Fee attributable to such contingent payments
<PAGE>
shall be paid as such payments are received by Stakeholders. If the
Aggregate Consideration for the Transaction consists in whole or in part of
securities or other property, for the purposes of calculating the amount of
Aggregate Consideration, the value of such securities or other property will
be the value thereof on the day preceding the consummation of the Transaction
as the Company and JWGenesis agree, provided, however, that in the case of
securities for which there is a public trading market, the value will be
determined by the average last sales prices for such securities for the last
twenty trading days prior to such consummation or the average used for
calculating the merger consideration value, if used. In the case of debt
securities for which there is no public trading market, the value thereof
shall be the principal amount thereof. If there is no public trading market
for securities or other property other than debt securities received or
receivable as part of Aggregate Consideration and the parties are unable to
agree on their value, then each of JWGenesis and the Company will select an
investment banking firm respected in the merger and acquisition field to
determine a value and the midpoint between the two values established by the
two independent experts will be the fair market value for the purposes hereof.
D. If the Company and/or its shareholders receive a bona fide Transaction
proposal and the proposal is accepted by the Company from one or more third
parties with Aggregate Consideration with a value of at least five million
dollars, or the Company and/or its shareholders enter into a letter of intent
or other agreement with one or more third parties with respect to a
Transaction, and (except due to a breach by or failure of condition under the
control of each such third party) no Transaction is consummated by the
earlier to occur of the dates set forth in clauses (i) or (ii) of this
paragraph D whereby JWGenesis is paid a Transaction Fee by the Company, then
the Company shall pay JWGenesis an additional performance fee (the "Seller's
Remorse Fee") of $250,000 at the earlier of (i) twelve months after the Term
of this Agreement or (ii) when the Company has ceased using reasonable
efforts to consummate a Transaction.
E. The Company agrees to reimburse JWGenesis for all reasonable
out-of-pocket expenses incurred in carrying out the terms of this Agreement,
including telephone, travel, facsimile, courier and computer time charges,
attorneys' fees and disbursements and sales, use and similar taxes. Such
reimbursable expenses shall not exceed $25,000 without the Company's
approval, provided, however, that such limitation shall not apply to Appendix
A. These out-of-pocket expenses will be payable from time to time upon
invoicing by JWGenesis at any time after the commencement of this Agreement.
F. The provisions of this section II shall survive the termination and
expiration of this Agreement.
III. INDEMNIFICATION
The Company and JWGenesis hereby agree to the terms and conditions of
the Indemnification Agreement attached hereto as Appendix A with the same
force and effect and as if the terms and conditions were set forth at length
herein.
IV. COORDINATION OF EFFORTS AND EXCLUSIVITY
In order to coordinate the efforts of both JWGenesis and the Company,
and to maximize the possibility of completing a satisfactory Transaction
during the term of this Agreement, JWGenesis shall have the exclusive
authority to initiate discussions with potential acquirers. In the event the
Company, its directors, officers, employees or shareholders receive any
inquiries or conduct any discussions concerning the availability of the
Company for purchase, such inquiries and discussions shall be promptly
referred to JWGenesis.
<PAGE>
V. DISCLOSURE
Any financial or other advice, descriptive memoranda or other
documentation rendered by JWGenesis pursuant to this Agreement may not be
disclosed publicly or to any third party in any manner without the prior
written approval of JWGenesis. All non-public information provided by the
Company to JWGenesis will be considered as confidential information and shall
be maintained as such by JWGenesis, except as required by law or as required
to enable JWGenesis to perform its services pursuant to this Agreement, until
the same becomes known to third parties or the public without release thereof
by JWGenesis. The provisions of this paragraph shall survive the termination
and expiration of this Agreement.
The Company agrees to provide to JWGenesis, among other things, all
reasonable information requested or required by JWGenesis or a potential
acquirer, including, but not limited to, information concerning historical
and projected financial results and possible and known litigious,
environmental and other contingent liabilities of the Company. The Company
also agrees to make available to JWGenesis such representatives of the
Company, including, among others, directors, officers, employees, outside
counsel and independent certified public accountants, as JWGenesis may
reasonably request. The Company will promptly advise JWGenesis of any
material changes in its business, finances or shareholdings. The Company
represents that all information made available to JWGenesis by the Company,
including, without limiting the generality of the foregoing, any descriptive
memorandum or other information materials prepared by or approved by the
Company, will be complete and correct in all material respects and will not
contain any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in
light of the circumstances under which such statements are made. In rendering
its services hereunder, JWGenesis will be using and relying primarily on such
information without independent verification thereof or independent appraisal
of any of the Company's assets. JWGenesis does not assume responsibility for
the accuracy or completeness of the information to which reference is made
above.
The Company authorizes JWGenesis to make public notice in the form of a
"tombstone," at JWGenesis' expense, of any Transaction concluded under this
Agreement.
VI. OBLIGATIONS OF JWGENESIS SOLELY TO THE COMPANY
The services herein provided are to be rendered solely to the Board of
Directors of the Company. They are not being rendered by JWGenesis as a
fiduciary of the shareholders of the Company and JWGenesis shall not have any
liability or obligation with respect to its services hereunder to such
shareholders or any other person, firm or corporation.
VII. ENTIRE AGREEMENT, GOVERNING LAWS AND JURISDICTION, ETC.
This Agreement sets forth the entire understanding of the parties
relating to the subject matter hereof and supersedes and cancels any prior
communications, understandings and agreements between the parties. This
Agreement cannot be terminated or changed, nor can any of its provisions be
waived, except by written agreement signed by all parties hereto. This
Agreement shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, the undersigned
shareholders and JWGenesis.
This Agreement shall be governed by and construed to be in accordance
with the laws of the State of New York applicable to contracts made and to be
performed solely in such state by citizens thereof. Any dispute arising out
of this Agreement shall be adjudicated in the courts of the State of New York
or in the
<PAGE>
federal courts sitting in the Southern District of New York, and the Company
hereby agrees that service of process upon it by registered or certified mail
at its address set forth above shall be deemed adequate and lawful. The
parties hereto shall deliver notices to each other by personal delivery or by
registered or certified mail (return receipt requested) at the addresses set
forth above.
VIII. ACCEPTANCE
Please confirm that the foregoing is in accordance with your
understanding by signing upon behalf of the Company and returning an executed
copy of this Agreement, with an acknowledgment check for $25,000 drawn in
favor of "JWGenesis Capital Markets, LLC," will be sent in 45 days, whereupon
after execution by JWGenesis it shall become a binding agreement among the
Company, JWGenesis and the Company's shareholders. A telecopy of a signed
original of this Agreement shall be sufficient to bind the parties whose
signatures appear hereon.
Very truly yours,
JWGENESIS CAPITAL MARKETS, LLC
By: /s/ Jeffrey H. Lehman
-------------------------------
Jeffrey H. Lehman
Director of Corporate Finance
ACCEPTED AND AGREED TO:
NHANCEMENT TECHNOLOGIES INC. AND
ITS AFFILIATES AND RELATED ENTITIES
By: /s/ Douglas S. Zorn
-----------------------------------------
Douglas S. Zorn
CEO, President and CFO
Date: February 2, 1999
-----------------------------------------
<PAGE>
APPENDIX A
INDEMNIFICATION AGREEMENT
Appendix A to the letter engagement agreement (the "Agreement") dated
January 8, 1999 by and among Nhancement Technologies and its affiliates and
related entities (collectively, the "Company"), JWGenesis Capital Markets,
LLC ("JWGenesis") and the Company's shareholders.
The Company agrees to indemnify and hold JWGenesis and its current and
future affiliates, control persons, directors, officers, employees and agents
(each an "Indemnified Person") harmless from and against all losses, claims,
damages, liabilities, costs or expenses, including those resulting from any
threatened or pending investigation, action, proceeding or dispute whether or
not JWGenesis or any such other Indemnified Person is a party to such
investigation, action, proceeding or dispute, arising out of JWGenesis'
entering into or performing services under this Agreement or arising out of
any matter referred to in this Agreement. This indemnity shall also include
JWGenesis' and/or any such other Indemnified Person's reasonable attorneys'
and accountants' fees and out-of-pocket expenses incurred in, and the cost of
JWGenesis personnel whose time is spent in connection with, such
investigations, actions, proceedings or disputes which fees, expenses and
costs shall be periodically reimbursed to JWGenesis and/or to any such other
Indemnified Person by the Company as they are incurred; provided, however,
that the indemnity herein set forth shall not apply where a court of
competent jurisdiction has made a final determination that JWGenesis acted in
a grossly negligent manner or engaged in willful misconduct in the
performance of its services hereunder which gave rise to the loss, claim,
damage, liability, cost or expense sought to be recovered hereunder (but
pending any such final determination the indemnification and reimbursement
provisions hereinabove set forth shall apply and the Company shall perform
its obligations hereunder to reimburse JWGenesis and/or each such other
Indemnified Person periodically for its, his or their fees, expenses and
costs as they are incurred). The Company also agrees that neither JWGenesis
nor any other Indemnified Person shall have any liability (whether direct or
indirect, in contract or tort or otherwise) to the Company for or in
connection with any act or omission to act by JWGenesis as a result of its
engagement under this Agreement except for any such liability for losses,
claims, damages, liabilities or expenses incurred by the Company that is
found in a final determination by a court of competent jurisdiction to have
resulted from JWGenesis' gross negligence or willful misconduct.
If for any reason, the foregoing indemnification is unavailable to
JWGenesis or any such other Indemnified Person or insufficient to hold it
harmless, then the Company shall contribute to the amount paid or payable by
JWGenesis or any such other Indemnified Person as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect
not only the relative benefits received by the Company and its shareholders
on the one hand and JWGenesis or any such other Indemnified Person on the
other hand, but also the relative fault of the Company and JWGenesis or any
such other Indemnified Person, as well as any relevant equitable
considerations; provided that in no event will the aggregate contribution by
JWGenesis and any such other Indemnified Person hereunder exceed the amount
of fees actually received by JWGenesis pursuant to this Agreement. The
reimbursement, indemnity and contribution obligations of the Company
hereinabove set forth shall be in addition to any liability which the Company
may otherwise have and these obligations and the other provisions hereinabove
set forth shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, JWGenesis and any
other Indemnified Person.
The terms and conditions hereinabove set forth in this Appendix A shall
survive the termination and expiration of this Agreement and shall continue
indefinitely thereafter.
NHANCEMENT TECHNOLOGIES JWGENESIS CAPITAL MARKETS, LLC
AND ITS AFFILIATES AND RELATED ENTITIES
By: /s/ Douglas S. Zorn By: /s/ Jeffrey H. Lehman
------------------------------------ ----------------------------------
Douglas S. Zorn, CEO and President Jeffrey H. Lehman, Director of
Corporate Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,692
<SECURITIES> 0
<RECEIVABLES> 3,032
<ALLOWANCES> 268
<INVENTORY> 1,564
<CURRENT-ASSETS> 6,443
<PP&E> 2,181
<DEPRECIATION> 761
<TOTAL-ASSETS> 10,607
<CURRENT-LIABILITIES> 7,350
<BONDS> 0
58
0
<COMMON> 192
<OTHER-SE> 3,011
<TOTAL-LIABILITY-AND-EQUITY> 10,607
<SALES> 3,262
<TOTAL-REVENUES> 3,262
<CGS> 2,231
<TOTAL-COSTS> 2,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (1,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,416)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
