<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] 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)
6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3200
(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 August 14, 2000, there were 11,067,700 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ........................................................................ 3
(i) Condensed Consolidated Balance Sheet at June 30, 2000 ............................... 3
(ii) Condensed Consolidated Statements of Operations for the
three months and nine months ended June 30, 1999 and 2000 .......................... 4
(iii) Condensed Consolidated Statement of Stockholders' Equity
comprehensive loss ................................................................. 5-6
(iv) Condensed Consolidated Statement of Cash Flow for the
nine months ended June 30, 1999 and 2000 ........................................... 7-8
(v) Notes to the Condensed Consolidated Financial Statements ............................ 9-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION ......................................................................... 14-27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING ............................................................................. 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .................................................... 28
ITEM 5. OTHER INFORMATION ............................................................................ 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 28-29
SIGNATURES ........................................................................................... 30
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2
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<TABLE>
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PART I
FINANCIAL INFORMATION
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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JUNE 30, 2000
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<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $4,232,000
Restricted cash 116,400
Accounts receivable, less allowance for doubtful accounts of $396,100 3,347,100
Inventory 2,066,000
Advance payment on future lease obligation (Note 8) 2,000,000
Prepaid expenses and other 329,400
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TOTAL CURRENT ASSETS 12,090,900
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PROPERTY AND EQUIPMENT 4,265,300
Less accumulated depreciation (1,264,200)
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PROPERTY AND EQUIPMENT, NET 3,001,100
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Excess cost over net assets acquired of NHAN NA, net of accumulated amortization of
$437,500 312,500
Excess of cost over net assets acquired of INFOTEL, net of accumulated amortization of
$427,100 1,995,000
Capitalized software, including acquired software of $7.0 million 7,383,400
Deferred finance costs (Notes 3 and 8) 683,800
Other assets 193,900
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$25,660,600
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 3,012,100
Accrued liabilities 3,202,500
Deferred revenue 1,969,500
Income tax payable 264,700
Note payable 212,900
Convertible debentures, net of discount (Note 3) 5,443,600
Capital lease obligations, current portion 155,900
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TOTAL CURRENT LIABILITIES 14,261,200
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 220,300
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TOTAL LIABILITIES 14,481,500
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STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 20,000,000 shares authorized, 11,067,700 shares issued and
outstanding 110,400
Additional paid-in capital 32,395,700
Accumulated deficit (21,090,100)
Cumulative translation loss (236,900)
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TOTAL STOCKHOLDERS' EQUITY 11,179,100
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$25,660,600
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</TABLE>
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<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
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<S> <C> <C> <C> <C>
NET REVENUES $6,652,800 $4,273,000 $15,629,300 $22,016,100
Cost of sales 4,309,200 3,094,600 10,252,100 14,831,100
---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 2,343,600 1,178,400 5,377,200 7,185,000
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OPERATING EXPENSES
Selling, general and administrative 1,901,900 3,323,600 5,863,100 8,037,700
Restructuring charges -- -- 189,000 --
Amortization of excess of cost over net assets acquired 110,700 124,800 331,900 374,500
---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,012,600 3,448,400 6,384,000 8,412,200
---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 331,000 (2,270,000) (1,006,800) (1,227,200)
OTHER INCOME (EXPENSE)
Interest income 37,100 44,700 81,300 159,500
Interest expense (131,000) (1,329,300) (246,100) (1,615,100)
Other 15,800 (166,900) 30,300 (169,100)
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Total other expense (78,100) (1,451,500) (134,500) (1,624,700)
INCOME (LOSS) BEFORE INCOME TAXES 252,900 (3,721,500) (1,141,300) (2,851,900)
INCOME TAXES 1,100 146,600 1,100 270,500
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NET INCOME (LOSS) $251,800 $(3,868,100) ($1,142,400) $(3,122,400)
PREFERRED STOCK DIVIDENDS (717,200) -- (724,000) (2,400)
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NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(465,400) $(3,868,100) ($1,866,400) $(3,124,800)
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BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 6) ($.08) ($.36) ($.32) ($.32)
SHARES USED IN PER SHARE CALCULATION-BASIC & DILUTED 6,201,000 10,883,900 5,912,400 9,899,700
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</TABLE>
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<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED)
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PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
PAR VALUE PAR VALUE PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS (1) TOTAL
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1999 11,300 $854,800 8,219,700 $82,200 $24,472,800 ($17,965,300) ($208,600) $7,235,900
Preferred Shares converted
into Common Stock (11,300) (854,800) 1,056,500 $10,300 $844,500 -- -- --
Dividends on preferred stock
converted to common shares -- -- 23,700 $200 $23,900 ($2,400) -- $21,700
Common Stock and warrants
issued for Trimark, Inc.
acquisition -- -- 750,000 $7,500 $3,011,800 -- -- $3,019,300
Exercise of warrants for
Common Stock -- -- 737,200 $7,400 $241,000 -- -- $248,400
Acquisition of software
assets from SVG Software -- -- 250,000 $2,500 $2,175,000 -- -- $2,177,500
Cost of warrants issued to
consultants -- -- -- -- $90,100 -- -- $90,100
Cost of severance benefit
associated with accelerated
vesting on options -- -- -- -- $230,700 -- -- $230,700
Value ascribed to warrants
issued to Cisco in
connection with planned
capital lease of software -- -- -- -- $683,800 -- -- $683,800
Value ascribed to warrants
in connection with equity
line, ($1.8 million) -- -- -- -- -- -- -- --
Interest expense for
beneficial conversion
feature on debenture -- -- -- -- $1,088,100 -- -- $1,088,100
Share buy back - former
Infotel stockholders -- -- (216,500) ($2,200) ($788,900) -- -- ($791,100)
Exercise of options for
Common Stock -- -- 247,100 $2,500 $322,900 -- -- $325,400
Comprehensive loss:
Net loss -- -- -- -- -- ($3,122,400) -- $(3,122,400)
Cumulative translation loss -- -- -- -- -- -- ($28,300) ($28,300)
---------------------------- ----------- --------- ------------ --------- ------------ ------------ --------- ------------
Total comprehensive loss ($3,122,400) ($28,300) ($3,150,700)
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Balance at June 30, 2000 -- -- 11,067,700 $110,400 $32,395,700 ($21,090,100) ($236,900) $11,179,100
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</TABLE>
5
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(1) For the quarter ended June 30, 2000, the cumulative translation loss
was $29,800 and the total comprehensive loss was $3,897,900.
For the quarter ended June 30, 1999, the cumulative translation gain
was $48,000 and the total comprehensive income was $299,800.
For the nine months ended June 30, 2000, the cumulative translation
loss was $28,300 and the total comprehensive loss was $3,150,700.
For the nine months ended June 30, 1999, the cumulative translation
loss was $28,500 and comprehensive loss was $1,170,900.
6
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<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JUNE 30,
1999 2000
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,142,400) ($3,122,400)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Depreciation and other amortization 300,300 355,000
Amortization of excess cost over net assets acquired 331,900 374,500
(Gain) loss on sale of fixed assets (11,600) 1,000
Compensation related to stock options and warrants 71,700 320,800
Interest expense related to beneficial conversion feature on debenture -- 1,088,100
Amortization of discount on convertible debenture -- 46,600
Other 18,100 --
Changes in operating assets and liabilities:
Accounts receivable (1,402,300) 2,350,800
Inventory (166,500) (707,000)
Prepaid expenses and other (100,300) (91,200)
Other assets 221,500 (135,200)
Income tax payable (174,700) 214,000
Accounts payable and other current liabilities 2,001,800 (405,000)
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CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (52,500) 290,000
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash 93,100 70,000
Payments on note receivable from related party 12,100 296,800
Proceeds on sale of fixed assets 145,800 17,000
Cash acquired in connection with the purchase of Trimark -- 44,700
Development of software assets -- (353,900)
Purchase of property and equipment (192,200) (727,400)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 58,800 (652,800)
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CASH FLOWS FROM FINANCING ACTIVITIES
Share repurchase -- (791,100)
Net borrowing (repayment) under line of credit 856,400 (539,600)
Advance payment on future lease obligation -- (2,000,000)
Repayment of note payable to related party -- (150,000)
Proceeds from sale of preferred stock 1,485,000 --
Proceeds from warrants and options exercised for common stock -- 573,800
Proceeds from issuance of convertible debenture, net of issuance costs
of $403,000 -- 5,397,000
Principal payments on capital leases (50,200) (119,500)
Principal payment on notes payable (741,600) (119,300)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,549,600 2,251,300
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Effect of exchange rate changes on cash (22,000) 14,400
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,533,900 1,902,900
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,677,200 2,329,100
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,211,100 $4,232,000
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</TABLE>
7
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<TABLE>
<S> <C> <C>
SUPPLEMENTAL DATA:
Interest paid $317,000 $134,500
Income taxes paid -- $5,800
</TABLE>
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In December 1999, the Company accepted cabling and wiring improvements
of $53,200 made to its leased office by a related party in lieu of payment on a
note due from this related party.
In the nine months ended June 30, 2000, property and equipment
additions of $350,800 were financed by capital lease obligations. Further, the
Company plans to finance purchase of $1,019,000 made during the nine months
ended June 30, 2000 through capital lease arrangement that will be consummated
during the fourth quarter. As of June 30, 2000, the Company's obligations for
these purchases are included in the accounts payables and accrued liabilities.
During the nine months ended June 30, 1999, property and equipment
additions of $150,400 were financed by capital lease obligations.
On June 7, 1999, the Company issued 116,600 shares of its Common Stock
for conversion of $116,600 of debt from a stockholder.
On June 15, 1999, the Company recorded the final additional purchase
consideration of $494,600 based on Infotel's profits in fiscal year 1999. The
Company issued 559,100 shares of its Common Stock for conversion of $634,600 of
the additional consideration due to the former stockholders of Infotel.
------------------------------------------------
8
<PAGE>
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(UNAUDITED)
1. MANAGEMENT'S REPRESENTATIONS
The accompanying condensed consolidated financial statements as of June
30, 2000, and for the three and nine months ended June 30, 2000 and 1999 are
unaudited. 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 (the "Commission"), although the
Company believes the disclosures made are adequate to make the information
presented not misleading.
In the opinion of management of NHancement Technologies, Inc. (the
"Company"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to present fairly its financial
position as of June 30, 2000 and the results of its operations and changes in
its cash flows for all periods presented. These adjustments represent normal
recurring items.
These condensed consolidated unaudited financial statements should be
read in conjunction with the audited financial statements for the year ended
September 30, 1999. The results for the nine months ended June 30, 2000 are not
necessarily indicative of the results of operations for a full year or of future
periods.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts or
revenues and expenses during the reported period.
Actual results could differ from these estimates.
2. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The Company's fiscal year ends on September 30.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued Statement
of Financial Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities"("FAS 133") which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet, and to measure them at fair
market value. If certain conditions are met, a derivative may be specially
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition as the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the risk, or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. FAS No. 133 is effective for all
fiscal years beginning after June 15, 2000, and the Company will not be adopting
FAS 133 until fiscal year 2001. Historically, the Company has not entered into
derivative contracts for speculative purpose. In the quarter ended June 30,
2000, the Company's subsidiary, INFOTEL Technologies Pte Ltd
9
<PAGE>
("INFOTEL"), entered into a derivative contract for trade hedging purpose.
Management may enter into derivative contracts to hedge foreign currency risks
in the future.
In December 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2,
"Software Revenue Recognition" and the Company has adopted the statement for all
applicable transactions. The adoption of this statement did not have a material
impact on the Company's operating results, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March 2000. The Company has considered the
guidance under the provisions of SAB 101 for its fiscal year 2000, and also
believes that its current policies are in compliance.
3. STOCK OPTIONS AND WARRANTS
During the nine months ended June 30, 2000, the Company issued 50,000
warrants to an independent consultant for services rendered; 150,000 warrants to
the former owner of Voice Plus, Inc. in lieu of consulting fees under a
consulting agreement rendered in the past and for services to be rendered in
future periods; 175,000 warrants to outside advisors to assist the Company with
acquisitions and additional financing during the next three quarters; and
100,000 to the President and Chief Executive Officer. All the above warrants
have an exercise price of $3.4275 per share.
During the three months ended June 30, 2000, the Company cancelled
50,000 warrants previously issued to a director who had resigned. The exercise
price of these warrants was $11.50 per share.
On May 1, 2000, the Company issued to CISCO 45,613 warrants to
purchase shares of Common Stock of the Company at an exercise price of $15.50
per share. The exact number of warrants that are exercisable may be reduced
based on the extent to which the Company finances its purchase through the
lease. The warrants are immediately exercisable and expire five years from
the date of issuance. The total deferred financing charges as per
Black-Scholes's model computation was approximately $683,800.
The Company had granted to Kedrick Investments Limited 120,000 warrants
in lieu of providing them with a minimum aggregate draw down commitment pursuant
to that certain Common Stock Purchase Agreement entered into on May 24, 2000.
The warrants are immediately exercisable and expire three years from the date of
issuance. The exercise price on the date of issuance was $20.82 per share.
4. FINANCING ACTIVITIES
The Company's INFOTEL subsidiary completed a line of credit agreement
providing for banking facilities up to SGD 3.5 million (approximately US$ 2.0
million) bearing interest at the Singapore prime rate plus 1.25%, collateralized
by the assets of the subsidiary and the Company's guarantee.
On May 19, 2000 and amended as of June 15, 2000, we entered into a
convertible debentures purchase agreement with certain investors in the
aggregate principal amount of $5,800,000.
10
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The convertible debentures mature on May 30, 2001 with interest
accruing at 8% per annum from the date such convertible debentures were issued
until the earlier of conversion into shares of our common stock or May 30, 2001.
Interest is payable quarterly in arrears, on July 1, October 1, January 1 and
May 1 of each year, commencing July 1, 2000.
The convertible debentures are convertible by the holder into shares of
our common stock at any time prior to the close of business on May 30, 2001. The
conversion price, as amended, is equal to the lesser of $13.00 per share, or 91%
of the average of the three lowest closing bid prices during the ten trading
days immediately preceding the date on which the holder of the debenture gives
us notice of the intent to convert the debenture, provided that the conversion
price shall not be less than $8.00 per share. The Company has the right to
redeem the convertible debentures for the sum of 105% of the unpaid principal
and any accrued or unpaid interest. The Company is obligated to reserve for
issuance upon conversion a sufficient number of shares of common stock and to
register such reserved shares of common stock and maintain an effective
registration statement for such shares of common stock. The beneficial
conversion feature associated with the issuance of the convertible debenture and
subsequent amendment of the conversion terms resulted in a charge of $1,088,100
to interest expense during the third quarter of our current fiscal year.
The Company received proceeds from the sale of the debentures in the
amount of $5,800,000, less financing costs of approximately $0.4 million.
On June 6, 2000, the Company exercised its right under the terms of the
Infotel Purchase and Sale Agreement to repurchase 216,000 shares of our common
stock at a price of approximately $3.65 per share from the former Infotel
stockholders. The reacquired shares were originally issued to the Infotel
stockholders in connection with the Company's acquisition of Infotel in June
1998.
The Company signed a common stock purchase agreement, dated May 24,
2000 and amended as of June 30, 2000, with Kedrick Investments Limited, a
British Virgin Islands corporation, for the future issuance and purchase of
shares of its common stock. The common stock purchase agreement establishes what
is sometimes referred to as an "equity line" or an "equity draw down facility".
Kedrick Investments Limited will receive an eight percent (8%) discount
to the average daily market price of our common stock for the 18-day period,
weighted by trading volume. The Company will receive the amount of each draw
down less an escrow agent fee of $1,500 and a 2% placement fee.
The Company is under no obligation to request a draw for any period. We
may make up to a maximum of twelve (12) draws; however, the aggregate total of
all draws cannot exceed $50 million, and no single draw can exceed $4 million
unless otherwise agreed to by Kedrick Investments Limited.
In lieu of providing Kedrick Investments Limited with a minimum
aggregate drawdown commitment, we have issued to Kedrick Investments Limited
stock purchase warrants to purchase 120,000 shares of our common stock with an
exercise price of $20.82. The warrants expire May 24, 2003.
In addition, the common stock purchase agreement does not permit the
Company to draw down funds if the issuance of shares of common stock to Kedrick
Investments Limited pursuant to the draw down would result in Kedrick
Investments Limited owning more than 9.9% of our outstanding
11
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common stock on the date we exercise a draw down.
5. UNAUDITED PRO FORMA FINANCIAL DATA
The condensed unaudited pro forma statements of operations combine the
results of operations of the Company and TRIMARK for the nine months ended June
30, 2000 and June 30, 1999, as if the acquisition had occurred at the beginning
of the period, after giving effect to certain adjustments including amortization
of the excess of cost 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
TRIMARK acquisition occurred at the beginning of the period presented, nor is it
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
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UNAUDITED UNAUDITED
PRO FORMA PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $17,042,800 $22,704,600
Net loss ($1,154,800) ($3,657,500)
Preferred stock dividends ($724,000) ($2,400)
Net loss applicable to common stockholders ($1,878,800) ($3,659,900)
Net loss per common share ($0.27) ($0.36)
Weighted average common and common equivalent shares
outstanding 6,951,000 10,207,400
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
</TABLE>
6. EARNINGS PER SHARE
Earnings per share were computed under the provisions of SFAS 128,
Earnings Per Share. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
NET LOSS - NUMERATOR 1999 2000 1999 2000
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $251,800 ($3,868,100) ($1,142,400) ($3,122,400)
Preferred stock dividends (717,200) -- (724,000) (2,400)
-------------------------------------------------------------------------------------------------------
Basis and diluted net (loss)
applicable to common stock ($465,400) $3,868,100) ($1,866,400) ($3,124,800)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
COMMON SHARES - DENOMINATOR
Basic and diluted weighted average
common shares outstanding 6,201,000 10,883,900 5,912,400 9,899,700
</TABLE>
Options and warrants to purchase 3,056,700 shares of Common Stock
were outstanding as of June 30, 2000, and options and warrants to purchase
2,568,900 shares and Preferred Stock convertible into approximately 1,750,000
shares of Common Stock were outstanding at June 30, 1999 but were not
included in the computation of diluted loss per common share because the
effect would be antidilutive.
12
<PAGE>
7. SEGMENT REPORTING
NHancement's reportable operating segments include NHancement
Technologies North America, Inc. ("NHAN NA"), INFOTEL and Nhancement
Technologies Software Group, Inc. ("NHAN SWG"). NHAN NA is a systems integrator
and distributor of voice processing equipment, which includes equipment
installation, technical support and ongoing maintenance. NHAN NA derives
substantially all of its revenues from sales in the United States. INFOTEL is a
provider and integrator of infrastructure communications equipment products
operating in Singapore, providing radar system integration, turnkey project
management services and test instrumentation. INFOTEL derives substantially all
of its revenue from sales in Asia. NHAN SWG was formed late in fiscal year 1999
to develop and sell integration and application software products. TRIMARK,
headquartered in San Diego and acquired on January 21, 2000, designs,
manufactures and markets profile selling software products to corporate clients.
Corporate expenses have been charged to the Company under the heading "OTHER."
Financial information for these segments includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
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NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $1,555,300 $2,448,000 -- $269,700 -- $4,273,000
Income (loss) from continuing
operations ($1,928,300) 380,800 (23,500) (451,000) (1,846,100) ($3,868,100)
Total assets (includes goodwill) 3,495,600 8,881,200 2,122,400 3,273,900 7,887,500 25,660,600
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</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $4,062,000 $2,590,800 -- -- -- $6,652,800
Income (loss) from continuing
operations 615,300 240,300 -- -- (603,800) $251,800
Total assets (includes goodwill) 5,306,400 8,027,000 -- -- 2,238,600 15,572,000
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</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $12,290,700 $9,010,200 -- $715,200 -- $22,016,100
Income (loss) from continuing
operations (764,100) 1,022,400 (171,700) (443,800) (2,765,200) ($3,122,400)
Total assets (includes goodwill) 3,495,600 8,881,200 2,122,400 3,273,900 7,887,500 25,660,600
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
NHAN NA INFOTEL NHAN SWG TRIMARK OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $9,096,000 $6,533,300 -- -- -- $15,629,300
Income (loss) from continuing
operations 649,000 480,000 -- -- ($2,271,400) ($1,142,400)
Total assets (includes goodwill) 5,306,400 8,027,000 -- -- 2,238,600 15,572,000
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
8. COMMITMENTS
On April 21, 2000, the Company had entered into an agreement with
Cisco Systems Capital Corporation (CISCO") to lease $10,100,000 of Unified
Open Network Exchange software ("UONE") for the Company's new business model.
The three-year lease will be treated as a capital lease and requires the
Company to make an initial cash deposit of $3.5 million of which $2.0 million
has been paid as of June 30, 2000. The Company received the equipment in
July, 2000. Under the terms of the agreement, the Company is required to make
a monthly lease payments of approximately $221,900 per month starting August
2000. In addition, the Company issued to CISCO 45,613 warrants to purchase
shares of Common Stock of the Company at an exercise price of $15.50 per
share. The exact number of warrants that are exercisable may be reduced based
on the extent to which the Company finances its purchase through the lease.
The fair value of the warrants issued using the Black-Scholes' model totaled
$683,800 and has been recorded as deferred finance charges.
On June 9, 2000, the Company entered into a Project Development
Agreement ("PDA") with Hewlett-Packard Company ("Hewlett-Packard") to help
design and build its Personalized Communication Hub network architecture and
infrastructure. Ninety-percent of the total project costs related to consulting
services and 100% of the hardware and other product costs will be financed by a
capital lease to be structured by Hewlett-Packard. The Company anticipates that
as it implements its new business plan it will require additional material
capital to fund needed capital equipment, and that such funding needs may be
financed through similar capital equipment leases which will not require
significant direct outlays of cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NHancement Technologies Inc. ("NHancement" or the "Company") is a
software applications and services company that specializes in unified
communications and information, collaborative commerce and multimedia solutions
to help companies improve internal and external communications. These solutions
include the facilitation of an enterprise's electronic business transactions and
customer service interactions. The Company's telephony solutions and services
work in both Internet-enabled environments and over standard telephone lines.
Our products facilitate client use of telephone, e-mail, faxing, paging and
Internet based communications to keep in touch with customers and with one
another. We have developed an end-to-end solutions suite to enable companies to
do business in the office and on the road. By simplifying business
communications and improving access to distributed corporate information (data)
resources, our products are designed to help clients build solid customer
relationships and maximize revenue opportunities.
Our primary objective is to become a leading provider of communications
and data software products, systems and services for enterprise customers. Our
management believes that increased
14
<PAGE>
competition, and the reduced importance of geographical borders make it
imperative that corporations achieve and maintain state-of-the-art communication
and information systems that provide a unified view of an enterprise's business
functions on a worldwide basis. We provide corporations and other businesses
with communication systems, data products and technological innovations designed
to enhance efficiency.
In addition, we design, develop, market and service profile selling
software products and services to corporate enterprises. This software is
designed to ascertain one-to-one customer-selling opportunities based on
marketing characteristics that are unique to the individual customer.
On May 23, 2000, we announced our plan to introduce "Personal
Communications Hub", a new product offering suite that is intended to provide
our customers with unifying communications and unifying information solutions.
Personal Communications Hub will utilize CISCO Systems' unified communications
platform, Unified Open Network Exchange. Our management believes that the
Personal Communications Hub suite of products and applications on the Unified
Open Network Exchange platform will provide our customers with scaled, carrier
grade IP-based solutions seamlessly across multiple channels. We expect to incur
substantial expenditures for equipment, systems, research and development,
consultants and personnel to implement this new service. As a result, our
short-term operating results and cash flows and overall financial condition may
be adversely affected for several quarters.
The Company's condensed consolidated financial statements include the
results of the Company and four of its operating subsidiaries: NHancement
Technologies North America, Inc. ("NHAN NA"), INFOTEL Technologies (Pte) Ltd
("INFOTEL"), NHancement Technologies Software Group, Inc. ("NHAN SWG") and
Nhancement Acquisition Corp. (formerly, Trimark Incorporated, "TRIMARK"). The
condensed consolidated financial statements contain results of operations from
NHancement and its NHAN NA, INFOTEL subsidiaries for all periods presented, and
those of NHAN SWG for the three and nine months ended June 30, 2000, and those
of TRIMARK for the period from January 21, 2000 to June 30, 2000.
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 ans Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectation, hopes, intentions or strategies regarding the future.
Forward-looking statements include: statements regarding future product or
product development; statement regarding future research and development
spending and the Company's product development strategies; statements
regarding the levels of international sales; statements regarding future
expansion or utilization of manufacturing capacity; statements regarding
future expenditures; andstatements regarding current or future acquisitions.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements
(or industry results, performance or achievements) expressed or implied by
these forward-looking statements to be substantially different from those
predicted. The factors that could affect our actual results include the
following:
- general economic and business conditions, both nationally and
in the regions in which we operate
15
<PAGE>
- adoption of our new recurring revenue service model
- competition
- changes in business strategy or development plans
- delays in the development or testing of our products
- technological, manufacturing, quality control or other
problems that could delay the sale of our products
- our inability to obtain appropriate licenses from third
parties, protect our trade secrets, operate without infringing
upon the proprietary rights of others, or prevent others from
infringing on our proprietary rights
- our inability to obtain sufficient financing to continue to
expand operations
- changes in demand for products by our customers
Certain of these factors are discussed in more detail elsewhere in this
Report, including under the caption "Risks Factors; Factors That May Affect
Operating Results".
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this Report or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.
GENERAL
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the consolidated
financial statements included herein. Further, this third quarter report on Form
10-QSB should be read in conjunction with the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in its 1999
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 and nine month period ended June 30, 2000, as compared to the
corresponding periods in 1999 and discusses its financial condition at June 30,
2000. The discussion of financial condition includes changes taking place or
believed to be taking place in the software, voice processing, data processing
and communications industry, and how the Company expects these changes to
influence future results of operations; and liquidity and capital resources,
including discussions of capital financing activities and uncertainties that
could affect future results.
16
<PAGE>
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings
for the three and nine month periods ended June 30, 2000 and June 30, 1999. The
Company then explains variances within revenues and expenses for these same
periods.
The following table shows results of operations, as a percentage of net
sales, for the three and nine-month periods ended June 30, 2000 and June 30,
1999:
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.8% 72.4% 65.6% 67.4%
Gross profit 35.2% 27.6% 34.4% 32.6%
Restructuring, selling, general and administrative expenses 28.6% 77.8% 38.7% 36.5%
Amortization of excess costs over net asset acquired 1.7% 2.9% 2.1% 1.7%
Income (loss) from operation 5.0% (55.1)% (6.4)% (5.6)%
Other income (expense) 1.2% (33.9)% (0.9)% (7.4)%
Income (loss) before taxes 3.8% (87.0)% (7.3)% (13.0)%
Income tax 0.0% 3.4% 0.0 % 1.2 %
Net (loss) income 3.8% (90.5)% (7.3)% (14.2)%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Revenues
Company revenues for the quarter ended June 30, 2000 decreased $2.3
million or 34.8% to $4.3 million for the three months ended June 30, 2000 as
compared to $6.6 million for the same period in 1999. On a year-to-date basis,
the Company's revenues increased by $6.2 million to $22.0 million or 39.2%
during the nine months ended June 30, 2000, from $15.8 million during the nine
months ended June 30, 1999. The substantial decrease in revenue for the three
months period ended June 30, 2000 from the same period in 1999 was due primarily
to (i) the transition of our company to a service-based, unified communications
and information provider operating a recurring revenue model from our historic
systems integrator model; and (ii) the decline in legacy system revenue which
made up approximately 64.1% of our total revenue and 80.7% of our North America
revenue for the quarter ended March 31, 2000 as many of our customers have
postponed purchase decisions until we release our new Personal Communications
Hub suite of unified communication and unified information solutions. The
increases in revenues for the nine months ended June 30, 2000, were due
primarily to: (i) increased INFOTEL revenues associated with test and
measurement for the nine months ended June 30, 2000, and (ii) strong NHAN NA
legacy systems sales for quarter ended March 31, 2000.
NHAN NA's net revenue on a stand-alone basis decreased $2.5 million or
61.7% to $1.6 million for the three months ended June 30, 2000, from $4.1
million for the three months ended June 30, 1999. The decrease in NHAN revenue
was due to a decrease in legacy sales in voicemail system revenue as many
customers have delayed purchasing decision pending the Company's new hosted
services. On a year-to-date basis, NHAN NA's net revenue increased by $3.2
million or 35.2% to $12.3 million for the nine months ended June 30, 2000, from
$9.1 million for the nine months ended June 30, 1999. The year-to-date increase
in NHAN NA revenues came from increased enterprise information center product
sales as well as legacy system sales within its existing customer base and from
new customers in the past two quarters of fiscal year 2000.
Revenues for the Company's INFOTEL subsidiary on a stand-alone basis
decreased slightly by 7.7% or $0.2 million from $2.6 million for the quarter
ended June 30, 1999 to $2.4 million for the same period in 2000 due to lower
demand for test instrument products in that quarter. On a year-to-date basis,
revenues grew by $2.3 million or 34.3% or from $ 6.7 million for the nine months
ended June 30, 1999 to $9.0 million for the nine months ended June 30, 2000. The
increase in revenues occurred within the test instrument products and networking
business segments due to high demand from key customers.
The Company's TRIMARK subsidiary, acquired on January 21, 2000, added
revenues of $0.3 million for the quarter ended June 30, 2000 from profile sales
of software products to corporate clients. On a stand-alone pro forma basis,
TRIMARK's net sales for the third quarter decreased by 50% or $0.3 million from
$0.6 million in June 30, 1999 to $0.3 million for the same period in 2000. On a
year-to-date pro forma basis, revenues decreased by $0.3 million or 21.4% from
$1.4 million to $1.1 million. The decreases were due to declining sales of
marketing communication information files ("MCIF") sales for both periods.
The Company's backlog increased to $7.2 million at June 30, 2000 as
compared to $4.0 million as of March 31, 2000. NHAN NA's order backlog increased
slightly to $2.7 from $2.4 million and INFOTEL's backlog increased substantially
to $4.4 million at June 30, 2000 from $1.3 million at March 31, 2000. Backlog
for NHAN SWG as of June 30, 2000 was about $0.1 million and TRIMARK's backlog
was insignificant at June 30, 2000.
18
<PAGE>
Gross Margin
Company gross margin for the three months ended June 30, 2000,
decreased to 27.6% as compared to the 35.2% for same the period in 1999. The
decrease was mainly due to substantial reduction in revenues coupled with the
fixed nature of operating costs in our NHAN NA operation. For the nine months
ended June 30, 1999 and 2000, gross margin remained constant and was 32.6% to
34.4% for these periods respectively. NHAN NA's gross margin percentage on a
stand-alone basis decreased substantially from 38.8% to 6.8% for the quarter
ended June 30, 2000, as compared to the same period of 1999 due to substantial
reduction in revenues coupled with the fixed nature of operating costs, and the
migration to our unified communications and unified information solutions
business. NHAN NA's gross margin percentage decreased slightly from 36.4% for
the period ended June 30, 1999 to 32.5% for the nine months ended June 30, 2000.
INFOTEL's gross margin percentage on a stand-alone basis improved from 23.3% to
36.4% for the quarter ended June 30, 2000. For the nine months ended June 30,
1999 and 2000, INFOTEL's gross margin also improved from 25.0% to 29.0%. This
increase in gross margin was due to (i) improved selling prices for test
equipment product and project management services which represents 56.7% and
68.8% of total revenue for the three and nine months period ended June 30, 2000
respectively, and (ii) lower operating expenses. On a pro forma stand-alone
basis TRIMARK had, a gross margin decrease from 75.0% for the quarter ended June
30, 1999 to 67.3% for the quarter ended June 30, 2000, and increase from 77.5%
for the nine months ended June 30, 1999 to 80.3% for the nine month ended June
30, 2000. The decrease in gross margin for the three months were due to lower
billing levels for the MCIF sales. The direct costs associated with MCIF sales
is minimal.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses ("SG&A")
including goodwill and amortization, as a percentage of net sales increased to
80.7% for the three months ended June 30, 2000 compared to 30.3% for the same
period in 1999. For the nine months ended June 30, 2000, the Company's SG&A
declined to 38.2% from 40.8% for the nine months ended June 30, 1999. SG&A for
NHAN NA on a stand-alone basis increased to 105.6% for the third fiscal quarter
of 2000 as compared to 21.2% for the same period in 1999. For the nine months
ended June 30, 2000, NHAN NA's SG&A expenses as a percentage of revenue also
increased to 33.3% from 27.1% for the nine months ended June 30, 1999. The
increases were due primarily increase in salary expenses for significant
additional hires of sales, marketing, and administrative personnel; and sales
and marketing related expenses and other expenses in relation to the
introduction of our new hosted unified communication and information business
model.
On a stand-alone basis, INFOTEL's SG&A as a percentage of revenues
increased to 19.7% for the three months ended June 30, 2000, compared to 16.9%
for the three months ended June 30, 1999. For the nine months ended June 30,
2000, INFOTEL's SG&A expenses as a percentage of revenue declined to 18% from
20.6% for the nine months ended June 30, 1999. INFOTEL's SG&A expenses as a
percentage of revenues decreased mainly because of the significant increase in
INFOTEL's revenues during the second quarter of 2000 and for the nine months
ended June 30, 2000.
On a stand-alone pro forma basis, TRIMARK's SG&A as a percentage of
revenues increased to 226.1% for the three months ended June 30, 2000 compared
to 70.7% for the three months ended June 30, 1999. On a pro forma basis, for the
nine months ended June 30, 2000, TRIMARK's SG&A expenses as a percentage of
revenue increased to 126.6% from 76.9%. TRIMARK's SG&A expenses as a percentage
of revenues increased mainly because of a significant decline in revenue for the
19
<PAGE>
subject periods and because of the re-focus of TRIMARK personnel to the
Company's new hosted unified communications and unified information business. In
addition, there was significant increase in marketing team to support a large
project during the three and for the nine months ended June 30, 2000.
NHancement's corporate overhead costs increased by $1.2 million or 200%
for the three months ended June 30, 2000, compared to $0.6 million for the same
period in the prior year due primarily to an interest expense related to a
beneficial conversion feature associated with debentures issued. NHancement's
corporate overhead costs increased by 27.1% or $0.5 million from $2.3 million
for the nine months ended June 30, 1999 to $2.8 million for the nine months
ended June 30, 2000.
Income taxes
The Company currently has approximately $7 million in US federal net
operating loss carry-forwards. The majority of these net operating losses are
subject to an annual limitation of $250,000. At June 30, 2000, the Company
provided a 100% reserve against its deferred tax assets. The Company believes
that since sufficient uncertainty exists regarding the realizability of the
deferred tax assets, a full valuation allowance is required. Income taxes of
$270,000 shown in the condensed consolidated statement of operations relates to
accrued income tax liabilities for Infotel, our subsidiary in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2000, net cash provided by
operating activities was $0.3 million. Although we incurred a loss of $3.1
million during this period, $2.2 million of this loss was attributed to various
non-cash charges. Further, this loss was offset by a substantial decrease in
accounts receivables. Net cash provided by investing and financing activities
totaled $1.5 million consisting of proceeds from issuance of convertible
debenture, which were offset by the down payment of $2.0 million towards the
purchase of the Cisco software, the repayments of the Company's line of credit,
repurchase of Company's Common Stock from former owners of Infotel and purchases
of software, property and equipment. At June 30, 2000, the Company had negative
working capital of $2.1 million, a decrease of $4.2 million from the quarter
ended March 31, 2000. The Company had a cash balance of $4.2 million (including
restricted cash of $116,000) at June 30, 2000.
During the quarter ended June 30, 2000, the Company paid off
approximately $1.7 million on a credit line secured by its receivables.
The Company, through its INFOTEL subsidiary, has completed a credit
line with a major Singapore bank for S$3.5 million (approximately US$2.0
million) with interest at 1.25% above the bank prime rate to be used for
INFOTEL's overdraft protection, letters of credit, letters of guarantee,
foreign exchange and revolving credit. This credit line is guaranteed by the
Company.
On April 21, 2000, the Company had entered into an agreement with
Cisco Systems Capital Corporation ("CISCO") to lease $10,100,000 of Unified
Open Network Exchange software ("UONE") for the Company's new business model.
The Company anticipates receiving the software during the fourth quarter of
2000 and recording a capital lease obligation upon such receipt. During the
quarter ended June 30, 2000, the Company issued 45,613 warrants to CISCO at
an exercise price of $15.50 per share and paid $2.0 million in connection
with the acquisition of the UONE software.
20
<PAGE>
On June 9, 2000, the Company entered into a Project Development
Agreement ("PDA") with Hewlett-Packard Company ("Hewlett-Packard") to help
design and build its Personalized Communication Hub network architecture and
infrastructure. Ninety-percent of the total project costs related to consulting
services and 100% of the hardware and other product costs will be financed by a
capital lease structured by Hewlett-Packard. The Company anticipates that as it
implements its new business plans it will require significant additional capital
to fund needed capital equipment, and that such funding needs may be financed
through similar capital equipment leases which may require significant direct
outlays of cash.
Despite its negative working capital of $2.1 million at June 30, 2000,
management believes that the available cash and financing available through its
equity line of $50.0 million, and potential other credit facilities are adequate
to meet the working capital needs of the Company and its subsidiaries during the
next 12 months. 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 working
capital and other needs.
RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors, as well as the risks described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may cause actual results to differ materially from those in any
forward-looking statements contained in the MD&A or elsewhere in this report or
made in the future by the Company or its representatives. Such forward-looking
statements involve known risks, unknown risks and uncertainties and other
factors, which may cause the actual results, performance or achievements
expressed or implied by such forward-looking statements to differ significantly
from such forward-looking statements.
WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE
CANNOT BE CERTAIN OF FUTURE PROFITABILITY.
We recorded net loss of approximately $3.5 million on net revenues of
$4.3 million for our third quarter ended June 30, 2000, and net loss of $2.7
million on $22.0 million in revenue for the nine months ended June 30, 2000 and
we also sustained significant losses for the fiscal year ended September 30,
1999 and for the nine-month period ended September 30, 1998. We also anticipate
incurring a net operating loss for our fiscal year ended September 30, 2000.
While we have recently returned to a loss position after five
consecutive profitable quarters, our financial condition and results of
operations will be adversely affected if we fail to continue to produce positive
operating results. This could also:
- Adversely affect the future value of our common stock
- Adversely affect our ability to obtain debt or equity
financing on acceptable terms
- Prevent us from engaging in acquisition activity
OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE
ACQUISITIONS.
The acquisition of complementary businesses and products has been and
may continue to be a key to our business strategy. Our ability to engage in
acquisition activities depends on us obtaining
21
<PAGE>
debt or equity financing, neither of which may be available or, if available,
may not be on terms acceptable to us. Our inability to obtain such financing
would have a material adverse effect on our acquisition strategy.
Both debt and equity financing involve certain risks. Debt financing
may require us to pay significant amounts of interest and principal payments,
reducing the cash resources we needed to expand or transform our existing
businesses. Certain types of equity financing may be dilutive to our
stockholders' interest in our assets and earnings.
OUR SALE OF SHARES UPON CONVERSION OF DEBENTURES AT A PRICE BELOW THE MARKET
PRICE OF OUR COMMON STOCK WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS.
We have issued debentures to certain investors that may be converted
into common stock at a discount to the then-prevailing market price of our
common stock. The issuance of shares upon conversion of the principal and
interest under the debentures may have a dilutive impact on our stockholders.
Discounted sales resulting from the conversion of the debentures could have an
immediate adverse effect on the market price of the common stock. To the extent
that debenture and warrant holders convert their securities and sell the
underlying shares into the market, the price of our shares may decrease due to
the additional shares in the market.
OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL.
We have announced a new product offering referred to as "personal
communications hub" that is intended to provide our customers with hosted and
non-hosted unifying communications and unifying information solutions. Personal
communications hub will utilize CISCO Systems' unified communications platform,
Unified Open Network Exchange. While we believe that the personal communications
hub suite of products and applications on the Unified Open Network Exchange
platform will provide our customers with scaled, carrier grade IP-based
solutions seamlessly across multiple channels, there can be no assurance of our
customers' acceptance or adoption of personal communications hub products.
Moreover, we will need to conform our existing products and applications onto
the CISCO's Unified Open Network Exchange platform. Such efforts could prove
unsuccessful, and could result in delays and cost overruns.
Further, we expect to incur substantial expenditures for equipment,
systems, research and development, consultants and personnel to implement this
new business model. As a result, our operating results and cash flows may be
adversely affected, and we anticipate incurring a net operating loss for our
fiscal year ended September 30, 2000. Although we believe that this new product
offering will ultimately result in profitable operations, there can be no
assurance that the implementation of our new business model will be successful.
WE PRESENTLY RELY UPON LEGACY VOICEMAIL SYSTEMS REVENUES.
For the quarter ended June 30, 2000, legacy voicemail systems revenues
(which includes customer premises equipment revenues) accounted for
approximately 81.3% of Company's total revenues and 48.5% of our North American
revenues. Management believes that future revenues from legacy voicemail systems
will steadily decline over the next two years, due to the introduction of new
unified messaging communication and information systems. Our ability to
transition our product sales
22
<PAGE>
to the new unified communication and information platforms will be critical
to our future growth. Revenue from the sales of enterprise information center
products accounted for approximately 10% of our North America subsidiaries
revenue for the last two quarters ended September 30, 1999, approximately
8.3% and 51.5% of our North America subsidiaries revenues for the quarters
ended March 31, 2000 and June 30, 2000, respectively.
WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS.
Our current North American operations are based upon the integration
of hardware, software, and communications and data processing equipment
manufactured by others into systems designed to meet the needs of our
customers. Although we have agreements with a number of equipment
manufacturers, a major portion of our revenues is generated from the sale of
products manufactured by three companies. In this regard, we rely to a
significant extent on products manufactured (and services provided) by
Centigram Communications Corporation, Baypoint Innovations, a division of
Mitel, Inc., and Interactive Intelligence, Inc. Any disruption in our
relationships with Centigram Communications Corporation, Baypoint
Innovations, or Interactive Intelligence, Inc. would have a significant
adverse effect on our business for an indeterminate period of time until new
supplier relationships could be established. On June 9, 2000, Centigram
Communications Corporation announced that it was being acquired by ADC
Telecommunications, Inc. We have not had a prior contractual relationship
with ADC Telecommunications, Inc. and, therefore, our relationship with
Centigram Communications Corporation may be adversely affected. Any
interruption in the delivery of products by key suppliers would materially
adversely affect our results of operations and financial conditions.
WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS.
We currently service approximately 1,000 customers worldwide. However,
the revenues from our four largest customers accounted for approximately 11.1%,
8.2%, 5.4% and 5.2%, respectively, of total revenues during the quarter ended
June 30, 2000. No other customer accounted for over 5% of total revenues during
this period. This concentration of revenue results in additional risk to our
operations, and any disruption of orders from our largest customers would
adversely affect on our results of operations and financial condition.
Our Singapore subsidiary, Infotel, offers a wide range of
infrastructure communications equipment products. It has an established business
providing test measuring instrumentation and testing environments, and is the
regional distributor and test and repair center for Rohde & Schwarz test
instruments. This subsidiary's profitability depends in part on a steady stream
of revenues relating to the services performed for Rohde & Schwarz test
instruments. Since the subsidiary's revenues constituted approximately 41% of
our total revenues for the fiscal year ended September 30, 1999, approximately
30.7% of our total revenues for the quarter ended March 31, 2000, and
approximately 57.3% of our total revenues for the quarter ended June 30, 2000,
any material change in our relationship with our manufacturers, including Rohde
& Schwarz, would materially adversely affect our results of operations and
financial condition.
23
<PAGE>
OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY
SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
The voice processing and customer premises equipment and related
software markets are highly competitive, and competition in this industry is
expected to further intensify with the introduction of new product enhancements
and new competitors. We currently compete with a number of larger integrated
companies that provide competitive voice-processing products and services as
subsets of larger product offerings. Our existing and potential competitors
include many large domestic and international companies that have better name
and product recognition in the market for our products and services and related
software, a larger installed base of customers, and substantially greater
financial, marketing and technical resources than ourselves.
Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., competes
against several large companies in Singapore that are better capitalized.
Although Infotel Technologies (Pte) Ltd. has in the past managed to compete
successfully against these larger companies on the basis of its engineerings,
systems and product management expertise, no assurances can be given that this
expertise will allow Infotel Technologies (Pte) Ltd. to compete effectively with
these larger companies in the future. Further, various large manufacturers
headquartered outside of Singapore have established their own branch offices in
Singapore and also compete with Infotel Technologies (Pte) Ltd.
OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE
COMPANIES WE ACQUIRE.
We have in the past pursued, and may continue to pursue, acquisition
opportunities. Acquisitions involve a number of special risks, including, but
not limited to:
- Adverse short-term effects on our operating results
- The disruption of our ongoing business
- The risk of reduced management attention to existing
operations
- Our dependence on the retention, hiring and training of key
personnel and the potential risk of loss of such personnel
- Our potential inability to successfully integrate the
personnel, operations, technology and products of acquired
companies
- Unanticipated problems or unknown legal liabilities
- Adverse tax or financial consequences
Two of our prior acquisitions, namely the acquisition of Voice Plus (now known
as NHancement Technologies North America, Inc.) and Advantis Network & Systems
Sdn Bhd, a Malaysian company ("Advantis"), in the past yielded operating results
that were significantly lower than expected. In fact, the poor performance of
Advantis led to its divestiture less than one year after we acquired the
company. Accordingly, no assurances can be given that the future performance of
our subsidiaries will be commensurate with the consideration paid to acquire
these companies. If we fail to establish the needed controls to manage growth
effectively, our operating results, cash flows and overall financial condition
will be adversely affected.
24
<PAGE>
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Infotel Technologies (Pte) Ltd., our Singapore subsidiary, accounted
for approximately 41% of our revenues for the fiscal year ended September 30,
1999, approximately 30.7% of our revenues for the quarter ended March 31, 2000,
and approximately 57.3% of our revenues for the quarter ended June 30, 2000.
There are risks associated with our international operations, including, but not
limited to:
- Our dependence on members of management of Infotel
Technologies (Pte) Ltd. and the risk of loss of customers in
the event of the departure of key personnel
- Unexpected changes in or impositions of legislative or
regulatory requirements
- Potentially adverse taxes and adverse tax consequences
- The burdens of complying with a variety of foreign laws
- Political, social and economic instability
- Changes in diplomatic and trade relationships
- Foreign exchange risks
Any one or more of these factors could negatively affect the performance of
Infotel Technologies (Pte) Ltd. and result in a material adverse change in our
business, results of operations and financial condition.
OUR STOCK PRICE COULD EXPERIENCE PRICE AND VOLUME FLUCTUATIONS.
The markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations during certain periods. Other
factors that also may adversely affect the market price of our common stock
include the following:
- New product developments
- Technological and other changes in the voice-messaging and
communications industries
- Fluctuations in the financial markets
- General economic conditions
- Quarterly variations in our results of operations
IT WOULD REQUIRE SIGNIFICANT TIME AND EFFORT TO REPLACE OUR KEY PERSONNEL.
Our business depends upon the services of its executives and certain
key personnel, including Douglas S. Zorn, our President and Chief Executive
Officer, John R. Zavoli, our Vice President of Finance and Chief Financial
Officer, and Ken Murray, our Executive Vice President, Global Sales. Management
changes often have a disruptive effect on businesses and can lead to the loss of
key
25
<PAGE>
employees because of the uncertainty inherent in change. In 1999 and early
2000, we had significant changes in our key personnel. We cannot be certain that
we will be able to successfully attract and retain key personnel since the job
market in the greater San Francisco Bay Area is intensely competitive. The loss
of the services of any one or more of such key personnel, if not replaced, or
the inability to attract such key personnel, could harm our business.
While hiring efforts are underway to fill the vacancies created by the
departure of other key employees, there is no assurance that these posts will be
filled in the near future since the job market in the greater San Francisco Bay
and Silicon Valley areas is intensely competitive. The loss of these or other
key employees could have a material adverse effect on our operations.
Furthermore, the recent changes in management may not be adequate to sustain our
profitability or to meet our future growth targets.
FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
ABILITY TO COMPETE.
We do not have any patents or copyrights, and while we intend to file
for copyright and patent protection, we currently rely on general common law and
confidentiality and non-disclosure agreements with our key employees to protect
our trade secrets. Our success depends on our ability adequately to protect our
intellectual property rights. Our efforts to protect our intellectual property
may not be sufficient against unauthorized third-party copying or use or the
application of reverse engineering, and existing laws afford only limited
protection. In addition, existing laws may change in a manner that adversely
affects our proprietary rights. Furthermore, policing the unauthorized use of
our product is difficult, and expensive litigation may be necessary in the
future to enforce our intellectual property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
We may be subject to legal proceedings and claims for alleged
infringement of proprietary rights of others, particularly as the number of
products and competitors in our industry grow and functionalities of products
overlap. This risk is higher in a new market in which a large number of patent
applications have been filed but are not yet publicly disclosed. We have limited
ability to determine which patents our products may infringe and take measures
to avoid infringement. Any litigation could result in substantial costs and
diversion of management's attention and resources. Further, parties making
infringement claims against us may be able to obtain injunctive or other
equitable relief, which could prevent us from selling our products or require us
to enter into royalty or license agreements which are not advantageous to us.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
Advances in technology could render our current products obsolete and
unmarketable. We believe that to succeed we must enhance our software products
and underlying technology, develop new products and technologies on a timely
basis, and satisfy the increasingly sophisticated requirements of our customers.
We may not successfully respond to technological change, evolving industry
standards or customer requirements. If we are unable to respond adequately to
these changes, our revenues could decline. In connection with the introduction
of new products and enhancements,
26
<PAGE>
we have experienced development delays and related cost overruns, which are not
unusual in the software industry. To date, these delays have not had a material
impact on our revenues. If new releases or products are delayed or do not
achieve broad market acceptance, we could experience a delay or loss of revenues
and customer dissatisfaction.
IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES.
Software as complex as ours often contains unknown and undetected
errors or performance problems. Many defects are frequently found during the
period immediately following the introduction of new software or enhancements to
existing software. Although we attempt to resolve all errors that we believe
would be considered serious by our customers, our software may not be
error-free. Undetected errors or performance problems may be discovered in the
future and errors considered minor by us may be considered serious by our
customers. This could result in lost revenues or delays in customer acceptance
and would be detrimental to our reputation, which could harm our business.
27
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any material litigation nor, to the
Company's knowledge, is any material litigation currently threatened against the
company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) RECENT SALES OF UNREGISTERED SECURITIES
WARRANTS ISSUED DURING THE QUARTER ENDED JUNE 30, 2000
On May 1, 2000, the Company issued 45,613 warrants to purchase
shares of common stock to Cisco Systems Capital Corporation in lieu of cash
payment for the lease of certain software product. The warrants are
immediately exercisable and expire five years from the date of issuance. The
exact number of warrants that are exercisable may be reduced based on the
extent to which the Company finances its purchase through the lease. The
exercise price on the date of issuance was $15.50 per share.
On May 24, 2000, the Company issued 120,000 warrants to purchase
shares of common stock to Kedrick Investments Limited in lieu of providing
them with a minimum aggregate drawdown commitment pursuant to that certain
Common Stock Purchase Agreement entered into on May 24, 2000. The warrants
are immediately exercisable and expire three years from the date of issuance.
The exercise price on the date of issuance was $20.82 per share.
ITEM 5. OTHER INFORMATION
On June 23, 2000, William M. Stephens resigned as Director of the
company. On June 23, 2000, the Company cancelled 50,000 warrants issued to Mr.
Stephens on March 1, 2000. These warrants had an issue price of $11.50 per share
equal to the closing price of February 29, 2000.
On April 21, 2000, the Company had entered into an agreement with
Cisco Systems Capital Corporation ("CISCO") to lease $10,100,000 of Unified
Open Network Exchange software ("UONE") for the Company's new business model.
The lease requires the Company to make a 35% down payment. In addition, the
Company issued to CISCO warrants up to 45,613 to purchase shares of Common
Stock of the Company at an exercise price of $15.50 per share.
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
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------- ----------------------------------------------------------------------------------------------
<S> <C>
4.29 Warrant dated May 1, 2000, issued to Cisco Systems Capital Corporation
4.30 Warrant dated May 24, 2000, issued to Kedrick Investments Limited
10.59 Master Agreement to lease equipment entered into as of April 21, 2000 with Cisco Systems
Capital Corporation
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
29
<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.
Date: August 14, 2000 By: /s/ Douglas S. Zorn
---------------------------------------
Douglas S. Zorn
President & Chief Executive Officer
By: /s/ John R. Zavoli
---------------------------------------
John R. Zavoli
Chief Financial Officer
30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------- ----------------------------------------------------------------------------------------------
<S> <C>
4.29 Warrant dated May 1, 2000, issued to Cisco Systems Capital Corporation
4.30 Warrant dated May 24, 2000, issued to Kedrick Investments Limited
10.59 Master Agreement to lease equipment entered into as of April 21, 2000 with Cisco Systems
Capital Corporation
27 Financial Data Schedule
</TABLE>
.
31
