<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 March 31, 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 May 15, 2000, there were 10,717,600 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 (the "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
and the accompanying notes. These condensed unaudited financial statements
should be read in conjunction with the audited financial statements for the year
ended September 30, 1999. The results for the six months ended March 31, 2000
are not necessarily indicative of the results of operations for a full year or
of future periods.
2
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
================================================================================================================
MARCH 31, 2000
================================================================================================================
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 2,103,800
Restricted cash 308,100
Funds held in escrow (note 8) 791,100
Accounts receivable, less allowance for doubtful accounts of $176,400 8,638,200
Inventory 1,782,200
Current portion of notes receivable from related parties 546,800
Prepaid expenses and other 318,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 14,488,200
- ---------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 2,959,400
Less accumulated depreciation (1,187,900)
- ---------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,771,500
- ---------------------------------------------------------------------------------------------------------------
Excess cost over net assets acquired of NHAN NA, net of accumulated amortization of
$375,000 375,000
Excess of cost over net assets acquired of INFOTEL, net of accumulated amortization of
$364,800 2,057,300
Capitalized software 7,269,600
Other assets 160,600
- ---------------------------------------------------------------------------------------------------------------
$ 26,122,200
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 1,673,600
Accounts payable 5,067,900
Accrued liabilities 2,249,200
Deferred revenue 1,850,400
Income tax payable 140,000
Loan note from third parties 1,280,100
Capital lease obligations, current portion 169,600
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,430,800
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 254,200
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,685,000
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 20,000,000 shares authorized, 10,717,600 shares issued
and outstanding 107,200
Additional paid-in capital 30,759,100
Accumulated deficit (17,222,000)
Cumulative translation loss (207,100)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,437,200
- ---------------------------------------------------------------------------------------------------------------
$ 26,122,200
===============================================================================================================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
=======================================================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 2000 1999 2000
=======================================================================================================================
<S> <C> <C> <C> <C>
NET REVENUES $ 5,714,600 $ 9,002,200 $ 8,976,500 $ 17,743,100
Cost of sales 3,679,700 5,739,200 5,942,800 11,736,500
- -----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 2,034,900 3,263,000 3,033,700 6,006,600
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 1,710,800 2,528,900 3,961,200 4,714,100
Restructuring charges 189,000 -- 189,000 --
Amortization of excess of cost over net assets acquired 110,700 124,900 221,200 249,700
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,010,500 2,653,800 4,371,400 4,963,800
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 24,400 609,200 (1,337,700) 1,042,800
OTHER INCOME (EXPENSE)
Interest income 11,300 75,800 22,500 117,600
Interest expense (32,400) (171,300) (97,600) (285,900)
Other 18,600 75,400 18,600 (5,000)
- -----------------------------------------------------------------------------------------------------------------------
Total other income (expense) (2,500) (20,100) (56,500) (173,300)
INCOME (LOSS) BEFORE INCOME TAXES 21,900 589,100 (1,394,200) 869,500
INCOME TAXES -- 86,400 -- 123,800
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 21,900 $ 502,700 ($ 1,394,200) 745,700
PREFERRED DIVIDENDS (3,400) -- (6,800) (2,400)
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 18,500 $ 502,700 ($ 1,401,000) $ 743,300
- -----------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE (NOTE 7) -- $ 0.05 $ (0.24) $ 0.08
DILUTED NET INCOME (LOSS) PER COMMON SHARE (NOTE 7) -- $ 0.04 $ (0.24) $ 0.07
=======================================================================================================================
SHARES USED IN PER SHARE CALCULATION-BASIC 5,800,200 10,186,900 5,769,400 8,815,700
=======================================================================================================================
SHARES USED IN PER SHARE CALCULATION-DILUTED 6,497,500 13,142,200 5,769,400 10,945,900
=======================================================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED)
===================================================================================================================================
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, 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 $ 10,600 $ 844,200 -- -- --
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 -- -- 417,700 $ 4,200 $ 165,200 -- -- $ 169,400
Acquisition of software
assets from SVG Software -- -- 250,000 $ 2,500 $ 2,175,000 -- -- $ 2,177,500
Cost of warrant issued to
consultants -- -- -- -- $ 66,200 -- -- $ 66,200
Comprehensive income: --
Net income -- -- -- -- -- $ 745,700 -- $ 745,700
Cumulative translation gain -- -- -- -- -- -- $ 1,500 $ 1,500
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 743,300 $ 1,500 $ 747,200
===================================================================================================================================
Balance at March 31, 2000 -- -- 10,717,600 $107,200 $30,759,100 ($17,222,000) ($207,100) $13,437,200
===================================================================================================================================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
========================================================================================================
SIX MONTHS ENDED
MARCH 31,
1999 2000
========================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,394,200) $ 745,700
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and other amortization 202,000 208,400
Amortization of excess cost over net assets acquired, including
impairment loss 221,200 249,700
Gain on sale of fixed assets (11,600) 1,000
Compensation related to stock options and warrants 34,700 66,200
Other (10,600) 11,000
Changes in operating assets and liabilities:
Accounts receivable 85,500 (2,945,300)
Inventory (20,900) (191,500)
Prepaid expenses and other 11,400 (67,000)
Other assets 221,500 (112,300)
Income tax payable (86,800) 90,000
Accounts payable and other current liabilities 907,900 1,014,700
- --------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 181,300 (929,400)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash 112,700 (120,000)
Note receivable from related party 12,100 --
Loss on sale of fixed assets 116,000 17,000
Cash acquired in connection with the purchase of Trimark -- 44,700
Purchase of software assets -- (240,100)
Purchase of property and equipment (178,800) (375,800)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 62,000 (674,200)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds in escrow -- (791,100)
Net borrowing under line of credit 561,100 1,133,900
Proceeds from warrants exercised for common stock -- 169,400
Proceeds from issuance of notes payable -- 950,000
Principal payments on capital leases (16,400) (63,100)
Principal payment on notes payable (700,800) (2,110)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (156,100) 1,397,000
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (53,000) (18,700)
- --------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 34,200 (206,600)
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,677,200 2,359,100
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,711,400 $ 2,103,800
========================================================================================================
SUPPLEMENTAL DATA:
Interest paid $ 134,400 $ 139,500
Income taxes paid -- $ 6,100
</TABLE>
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
6
<PAGE>
In the six months ended March 31, 2000, property and equipment additions of
$341,900 were financed by capital lease obligations.
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.
During the six months ended March 31, 2000, property and equipment
additions of $127,400 were financed by capital lease obligations.
------------------------------------------------
7
<PAGE>
NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 2000
(UNAUDITED)
1. MANAGEMENT'S REPRESENTATIONS
The accompanying condensed consolidated financial statements as of
March 31, 2000, and for the three and six months ended March 31, 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 March 31, 2000 and the results of its operations and changes
in its cash flows for all periods presented as of March 31, 1999 and 2000.
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 six months ended March 31, 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 Pronouncement
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 current quarter, the Company did enter through
its INFOTEL Technologies Pte Ltd ("INFOTEL") subsidiary a derivative contract
for trade hedging purpose. In light of its recent acquisition of INFOTEL,
management may enter into derivative contracts to hedge its foreign currency
risk in the future.
8
<PAGE>
3. STOCK OPTIONS AND WARRANTS
During the six months ended March 31, 2000, the Company issued
50,000 warrants to an independent sales professional for services to be
rendered over the next two quarters; 150,000 warrants to the former owner of
Voice Plus, Inc. and currently a consultant of the Company in lieu of
consulting fees under his 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 with an exercise price of $3.4275
per share.
During the three months ended March 31, 2000, the Company issued 50,000
warrants to a director with an exercise price of $11.50 per share.
4. FINANCING ACTIVITIES
The Company's INFOTEL subsidiary has completed a line of credit
agreement providing for banking facilities up to SGD3.5 million (approximately
USD2.0 million) bearing interest at the Singapore prime rate plus 1.25%,
collateralized by the assets of the subsidiary and the Company's guarantee.
There were no outstanding balances as at March 31, 2000.
The Company received $950,000 as a loan from third parties in March
2000. In April 2000, the Company repaid $100,000. The Company is in the
process of finalizing the terms and conditions of the loan.
5. ACQUISITION TRANSACTION AND UNAUDITED PRO FORMA FINANCIAL DATA
On January 21, 2000, the Company entered into a Plan and Agreement
of Reorganization (the "Agreement") whereby the Company acquired all the
outstanding shares of common stock of Nhancement Enterprise Software
Solutions, Inc., dba Triad Marking, formerly Nhancement Acquisition
Corporation, being the surviving corporation that was merged with Trimark
Incorporated ("TRIMARK"), in exchange for 750,000 shares of the Company's
common stock and warrants to purchase 250,000 shares of the Company's common
stock. TRIMARK is a California corporation headquartered in San Diego, that
designs, manufactures and markets profile selling software products to
corporate clients. The warrants have a term of three years and are
exercisable at a price of $1.5250. The Company's Board of Directors
determined the fair value of the TRIMARK business; no independent appraisal
was obtained. This acquisition was disclosed in the Company's report on Form
8-K which was filed with the Securities and Exchange Commission on February
7, 2000. The acquisition is being accounted for as a purchase.
The Agreement also provides for a subsequent adjustment to the
consideration delivered to the shareholders of TRIMARK in the event that the
average price of a share of the Company's common stock for the five consecutive
trading days, ending on the last trading day immediately prior to the first
anniversary and second anniversary of the Validation Date is less than $4.00 per
shares. Such additional consideration may be paid, at the Company's option, in
cash or by delivery of shares of the Company's common stock at then current
market value (or combination of the foregoing).
9
<PAGE>
As of March 31, 2000, the purchase price of TRIMARK and the net assets
acquired recorded in connection with the TRIMARK acquisition are summarized as
follows:
<TABLE>
<S> <C>
Common Stock - 750,000 shares and 250,000 warrants
subject to a share price guarantee $3,019,300
----------
Net asset acquired consists principally of the following:
Cash and cash equivalents $44,700
Accounts receivable 1,400
Property and equipment 72,100
Software asset 3,365,000
Other assets 63,800
Accounts payable and accrued expenses (527,700)
----------
$3,019,300
==========
</TABLE>
On February 4, 2000, the Company had acquired all the shares of
Enhancement Technologies (India) Pte. Ltd. ("NHAN INDIA") a company
incorporated in Chennai, India that engages in the business of web design and
software products development for a cash payment of $50,000. The results of
NHAN INDIA have been excluded from the pro forma financial data presented
below as they are not material.
The condensed unaudited pro forma statements of operations combine
the results of operations of the Company and TRIMARK for the six months ended
March 31, 2000 and March 31, 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>
================================================================================================================
UNAUDITED UNAUDITED
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 2000
================================================================================================================
<S> <C> <C>
Net revenues $9,809,300 $18,161,900
Net (loss) income ($1,430,800) 614,100
Net (loss) income per common share ($0.22) $0.06
Weighted average common and common equivalent shares
outstanding 6,519,500 11,590,700
================================================================================================================
</TABLE>
10
<PAGE>
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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
NET LOSS - NUMERATOR 1999 2000 1999 2000
===================================================================================================
<S> <C> <C> <C> <C>
Net income (loss) $ 21,900 $ 502,700 ($ 1,394,200) $ 745,700
Preferred stock dividends (3,400) -- (6,800) (2,400)
- ---------------------------------------------------------------------------------------------------
Basis net income (loss) applicable to
common stock $ 18,500 502,700 ($ 1,401,000) $ 743,300
===================================================================================================
Preferred dividends $ 3,400 $ 6,800 $ 2,400
===================================================================================================
Diluted net income (loss) applicable
to common stock $ 21,900 $ 502,700 ($ 1,394,200) $ 745,700
===================================================================================================
COMMON SHARES - DENOMINATOR
Basic weighted average common shares
outstanding 5,800,200 10,186,900 5,769,400 8,815,700
Option and warrants 23,900 2,945,000 -- 1,901,200
Preferred stock if converted 496,200 10,300 -- 224,800
Other contingently issuable shares 177,200 -- -- 4,200
===================================================================================================
Diluted weighted average common
shares outstanding 6,497,500 13,142,200 5,769,400 10,945,900
===================================================================================================
</TABLE>
7. SEGMENT REPORTING
NHancement's reportable operating segments include NHancement
Technologies North America, Inc. ("NHAN NA", formerly Voice Plus, Inc.),
INFOTEL and Nhancement Technologies Software Group, Inc. ("NHAN SWG"). NHAN
NA, operating in the United States, 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, turkey 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
internally 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. NHAN INDIA, a company based in Chennai, India that engages
in the business of web designs and software products development has been
excluded from segmental reporting as the expenses for the three months ended
March 31, 2000 was insignificant. Corporate expenses have been charged to the
Company under the heading "OTHER."
11
<PAGE>
Financial information for these segments includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
===================================================================================================================
NHAN NHAN
NA INFOTEL SWG TRIMARK OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $ 5,792,500 $ 2,764,200 $ 445,500 -- $ 9,002,200 --
Income (loss) from continuing
operations 685,200 344,100 (92,200) 7,200 (441,600) $ 502,700
Total assets (includes goodwill) 8,161,400 8,763,300 1,823,400 3,565,400 3,808,700 26,122,200
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
===================================================================================================================
NHAN NHAN
NA INFOTEL SWG TRIMARK OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $ 3,637,100 $ 2,077,500 -- -- -- $ 5,714,600
Income (loss) from continuing
operations 576,900 50,600 -- -- (605,600) $ 21,900
Total assets (includes goodwill) 3,848,400 7,666,400 -- -- 458,300 11,973,100
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 2000
===================================================================================================================
NHAN NHAN
NA INFOTEL SWG TRIMARK OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $10,735,400 $ 6,562,200 -- $ 445,500 -- $17,743,100
Income (loss) from continuing
operations 1,167,000 641,500 (148,100) 7,200 (921,900) $ 745,700
Total assets (includes goodwill) 8,161,400 8,763,300 1,823,400 3,565,400 3,808,700 26,122,200
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1999
===================================================================================================================
NHAN NHAN
NA INFOTEL SWG TRIMARK OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales to external customers $ 5,034,000 $ 3,942,500 -- -- -- $ 8,976,500
Income (loss) from continuing
operations 33,700 239,600 -- -- (1,667,500) ($1,394,200)
Total assets (includes goodwill) 3,848,400 7,666,400 -- -- 458,300 11,973,100
===================================================================================================================
</TABLE>
8. SUBSEQUENT EVENTS
On March 14, 2000, the Company exercised its rights under Clause
Section 4(D)(i) of a Sales and Purchase Agreement dated January 19, 1998 to
repurchase 216,513 shares of the Company's common stock from the former vendors
of INFOTEL for approximately $3.60 per share. This transaction had not been
completed as of March 31, 2000, but is expected to be completed during the next
quarter. The Company has placed $791,100 in escrow to execute this transaction.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NHancement Technologies Inc. ("NHancement" or the "Company") is a
unified communication solution company that integrates and distributes voice and
data processing equipment and telecommunications systems in the United States
and Asia.
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" formerly Voice Plus, Inc.), 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 six months ended March 31,
2000, and those of TRIMARK for the period from January 21, 2000 to March 31,
2000.
Certain statements contained in this Report, including, without
limitation, statements containing the words "believes," anticipates," "may,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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
- 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".
We do not undertake any obligation to publicly update or revise any
forward-looking
13
<PAGE>
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 second
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 and
discusses its financial condition for the three and six month periods ended
March 31, 2000, as compared to the corresponding periods in 1999. 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.
RESULTS OF OPERATIONS
In this section, the Company provides the components of its earnings
for the three and six month periods ended March 31, 2000 and March 31, 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 six-month periods ended March 31, 2000 and March 31,
1999:
<TABLE>
<CAPTION>
NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
=============================================================== =========================== ===========================
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 2000 1999 2000
=============================================================== ============= ============= ============= =============
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0 % 100.0 % 100.0 %
Cost of sales 64.4% 63.8 % 66.2 % 66.1 %
Gross profit 35.6% 36.2 % 33.8 % 33.9 %
Restructuring, selling,, general and administrative expenses 33.2% 28.1 % 46.2 % 26.6 %
Amortization of excess costs over net asset acquired 1.9% 1.4 % 2.5 % 1.4 %
(Loss) income from operations 0.4% 6.8 % (14.9)% 5.9 %
Other income (expense) 0.0% (0.2)% (0.6)% (1.0)%
(Loss) income before taxes 0.4% 6.5 % (15.5)% 4.9 %
Income tax 0.0% 1.0 % 0.0 % 0.7 %
Net (loss) income 0.4% 5.6 % (15.5)% 4.2 %
=============================================================== ============= ============= ============= =============
</TABLE>
14
<PAGE>
Revenues
Company revenue for the quarter ended March 31, 2000, increased $3.3
million or 57.5% to $9.0 million for the three months ended March 31, 2000 as
compared to $5.7 million for the same period in 1999. On a year-to-date
basis, the Company revenues increased by 97.6% or $8.7 million from $9.0
million during the six months ended March 31, 1999 to $17.7 million during
the six months ended March 31, 2000. The increases in revenues for the three
and six months ended March 31, 2000, were due primarily to: (i) increased
INFOTEL revenues associated with test and measurement equipment in the
quarter ended March 31, 2000 and the six months ended March 31, 2000, and
(ii) increased NHAN NA legacy systems sales for quarter ended March 31, 2000.
NHAN NA's net revenue on a stand-alone basis increased 61.1% or $2.2 million
from $3.6 million for the three months ended March 31, 1999 to $5.8 million
for the three months ended March 31, 2000. On a year-to-date basis, NHAN NA's
net revenue increased by 114 % or $5.7 million from $5.0 million for the six
months ended March 31, 1999 to $10.7 million for the six months ended March
31, 2000. The 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.
Revenues for the Company's INFOTEL subsidiary located in Singapore on a
stand-alone basis increased 33.3% from $2.1 million at March 31, 1999, to $2.8
million for the same period in 2000. On a year-to-date basis, revenues grew by
60.1% from $ 4.1 million for the six months ended March 31, 1999 to $6.6 million
for the six months ended March 31, 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 $0.5 million for the quarter ended March 31, 2000, from profile
selling software products to corporate clients. On a stand-alone pro forma
basis, TRIMARK's net sales for the second quarter increased by 25% from $0.4
million in March 31, 1999, to $0.5 for the same period in 2000. On a
year-to-date pro forma basis, revenues are up 12.5% from $0.8 million to $0.9
million. The increases were derived from marketing communication information
files ("MCIF") sales.
Backlog for the Company products decreased to $4.0 million at March 31,
2000 as compared to $5.3 million for the quarter ended December 31, 1999. NHAN
NA's order backlog decreased slightly from $2.4 to $2.2 million and INFOTEL's
backlog decreased substantially to $1.3 million at March 31, 2000 from $2.4
million at December 31, 1999. Backlog for NHAN SWG as of March 31, 2000 was
about $0.5 million and TRIMARK's backlog was insignificant for the quarter ended
March 31, 2000.
Gross Margin
Company gross margins for the three months ended March 31, 2000,
increased slightly to 36.2% as compared to the 35.6% for same period in 1999.
For the six months ended March 31, 1999 and 2000, the Company gross margin
remained constant in the 33.8% to 33.9% range. NHAN NA's gross margin on a
stand-alone basis decreased slightly from 37.9% to 36.7% for the quarter ended
March 31, 2000, as compared to the same period of 1999. For the six months ended
March 31, 2000, NHAN NA's gross margin improved from 34.6% for the period ended
March 31, 1999 to 36.2% due to the economies of scale associated with a
significantly higher level of sales. INFOTEL's gross margin on a stand-alone
basis improved from 21.8% to 26.8% for the quarter ended March 31, 2000.
15
<PAGE>
This increase in gross margin was due to (i) improved gross margins for test
equipment product which represents 48% of total revenue and (ii) lower operating
expenses. For the six months ended March 31, 1999 and 2000, INFOTEL's gross
margin remained constant at 26%. TRIMARK had, on a pro forma stand-alone basis,
a gross margin increase from 82.9% in 1999 to 86.4% for the quarter ended March
31, 2000, an increase from 79.2% in 1999 to 84.4% for the six month ended March
31, 2000. This increase in gross margin for the three and six months are due to
the minimal costs associated with MCIF sales.
Selling, General and Administrative Expenses
Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net sales decreased to 29.5% for the three months ended March 31,
2000 versus 35.2% for the same period in 1999. For the six months ended March
31, 2000, SG&A declined to 28.0% from 48.7% on a Company-wide basis. SG&A for
NHAN NA on a stand-alone basis increased slightly to 22.0% for the second fiscal
quarter of 2000 compared to 20.7% for the same three-month period in 1999. For
the six months ended March 31, 2000, NHAN NA's SG&A expenses as a percentage of
revenue declined to 22.9% from 32.5%. The decrease was due primarily to
decreases in salary expenses as a percentage of revenue; a decrease in other
expenses including outside services, legal & audit as a percentage of revenue
and a decrease in relocation costs related to the former Chief Executive Officer
which was incurred in the same period in the prior year.
On a stand-alone basis, INFOTEL's SG&A as a percent of revenues
decreased to 17.4% for the three months ended March 31, 2000, compared to 23.4%
for the three months ended March 31, 1999. For the six months ended March 31,
2000, INFOTEL's SG&A expenses as a percentage of revenue declined to 17.4% from
23.7%. INFOTEL's SG&A expenses as a percent of revenues decreased mainly because
of the significant increase in INFOTEL's revenues during the second quarter and
for the six months ended March 31, 2000.
On a stand-alone pro forma basis, TRIMARK's SG&A as a percent of
revenues increased to 97.7% for the three months ended March 31, 2000 compared
to 91.9% for the three months ended March 31, 1999. On a pro forma basis, for
the six months ended March 31, 2000, TRIMARK's SG&A expenses as a percentage of
revenue increased to 95.6% from 81.2%. TRIMARK's SG&A expenses as a percent of
revenues increased mainly because of the significant increase in marketing team
to support a large project during the second quarter and for the six months
ended March 31, 2000.
NHancement's corporate overhead costs decreased by $0.2 million for the
three months ended March 31, 2000, compared to $0.6 million for the same period
in the prior year due primarily to a decrease in salaries and relocation costs.
For the six months ended March 31, 2000, NHancement's corporate overhead costs
decreased by 47.1% or $0.8 million from $1.7 million to $0.9 million.
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 March 31, 2000, 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 income tax of
$124,000 shown in the condensed consolidated statement of operations relates
to accrued tax liabilities for our subsidiary in Singapore.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2000, net cash used in operating
activities was $0.9 million. Utilization of cash consisted primarily of
increases in accounts receivable and in inventory which were offset by an
increase in net income before depreciation and amortization and increases in
accounts payable. Net cash provided by investing and financing activities
totaled $0.7 million consisting of increased borrowings under the Company's line
of credit and proceeds from issuance of notes payable which were offset by
purchases of software, property and equipment. At March 31, 2000, the Company's
working capital was $2.1 million, an improvement of $0.1 million over the
quarter ended December 31, 1999. The Company had a cash balance of $2.4 million
(including restricted cash of $308,100) at March 31, 2000.
As of March 31, 2000, the Company's credit line allowed borrowing of up
to $1.5 million as advances against 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.
As of March 31, 2000, the Company had no commitment for material
capital expenditures. However, the Company anticipates material capital
expenditure during the remainder of the fiscal year, a substantial portion of
which will be financed through equipment leases and will not require
significant direct outlays of cash.
Based upon its present earnings and cost reduction plans, management
believes that operating cash flow, available cash and available credit are
adequate to meet the working capital needs of the Company and its subsidiaries
during the next 12 months. Although the Company intends to issue shares of
Common Stock as its primary method of financing acquisitions, it anticipates
that additional funds will be required to successfully implement its acquisition
program. 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 acquisition or
general working capital purposes.
RISK FACTORS
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 A HISTORY OF NET LOSSES AND WE CANNOT BE CERTAIN OF FUTURE
PROFITABILITY.
Although we recorded net income of approximately $502,700 on net
revenues of $9.0 million for our second quarter ended March 31, 2000, and net
income of $745,700 on $17.7 million in revenue for the six months ended March
31, 2000, we sustained significant losses for the fiscal year ended September
30, 1999 and for the nine-month period ended September 30, 1998.
While we have recently returned to profitability, our financial
condition and results of operations will be adversely affected if we fail to
continue to produce positive operating results. This could also:
17
<PAGE>
- 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 is an element
of our business strategy. Our ability to engage in acquisition activity depends
on our ability to obtain debt or equity financing, neither of which may be
available or, if available, may not be on terms acceptable to us. Our inability
to obtain such financing would have a material adverse effect on our acquisition
strategy.
Both debt and equity financing involve certain risks. Debt financing
may require us to pay significant amounts of interest and principal payments,
reducing the resources available to us to expand our existing businesses. Equity
financing may be dilutive to our stockholders' interest in our assets and
earnings. For example, of a total of 12,500 shares of our Series A convertible
preferred stock sold in April 1998, those shares plus accrued dividends were
converted into 1,231,180 shares of our common stock at an average price per
share of approximately $1.05. Prior to the issuance of such shares of our
preferred stock in April 1998, a total of approximately 4,437,000 shares of our
common stock had been outstanding. As of December 31, 1999, 17,200 shares of our
preferred stock plus accrued dividends had been converted into about 1.7 million
shares of our common stock at an average price of $1.04 resulting in a dilutive
effect on our existing stockholders. At March 31, 2000, 300 shares of our
preferred stock had been converted into 10,435 shares of our common stock at an
average price per share of $2.90. No preferred stock remains outstanding as of
March 31, 2000. In addition, common stock issued as consideration in an
acquisition transaction may be dilutive under certain circumstances to our
existing stockholders.
WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS AND WE ARE DEPENDENT
UPON SIGNIFICANT CUSTOMERS.
Our North American subsidiary 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 distributor agreements with a number of equipment
manufacturers, a major portion of our revenues are based upon products
manufactured by three companies. In this regard, we rely to a significant extent
on products manufactured (and services provided) by Centigram Communications
Corporation, products manufactured by Baypoint Innovations, a division of Mitel,
Inc., that purchased the customer premises equipment business of Centigram
Communications Corporation, and on products manufactured by Interactive
Intelligence, Inc., principally its enterprise information center product, a
next-generation communications server that merges voice and data functions into
a single computer-based system. Revenues from the sale of enterprise information
center products accounted for approximately 10% of our North American
subsidiaries revenues for the last two quarters ended September 30, 1999 and
approximately 8.3% of our North American subsidiaries revenues for the quarter
ended March 31, 2000. Enterprise information center revenues are expected to
increase rapidly in future quarters.
18
<PAGE>
Legacy voicemail systems revenues (which includes customer premises
equipment revenues) made up approximately 80.7% of our total revenues for the
quarter ended March 31, 2000. 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 systems, which integrate several
diverse messaging technologies, such as voicemail, email and facsimile. Our
ability to transition our revenue to the new unified messaging platforms will be
critical, not only for our future growth but also to maintain our current
revenue levels. Any disruption in our relationships with Centigram
Communications Corporation, Baypoint Innovations, a division of Mitel, Inc. 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. Further, any material change in our other distributor
relationships could adversely affect our financial condition.
Infotel Technologies (Pte) Ltd., our Singapore subsidiary, offers a
wide range of infrastructure communications equipment products. Infotel
Technologies (Pte) Ltd. also has an established business providing test
measuring instrumentation and testing environments, and is the regional
distributor and test and repair center for Rohde & Schwarz test instruments.
Infotel Technologies (Pte) Ltd.'s profitability depends in part on a steady
stream of revenues relating to the services performed for Rohde & Schwarz test
instruments. Since Infotel Technologies (Pte) Ltd.'s revenues comprised
approximately 41% of our total revenues for the fiscal year ended September 30,
1999, and approximately 37% of our total revenues for the quarter ended March
31, 2000, any material change in Infotel Technologies (Pte) Ltd.'s relationship
with its manufacturers, including Rohde & Schwarz, and any interruption in the
delivery of products to Infotel Technologies (Pte) Ltd. by its key suppliers,
would materially adversely affect our results of operations and financial
condition.
We currently service approximately 1,000 customers. The revenues from
our three largest customers accounted for approximately 48.9%, 11.0% and 6.7%
respectively of total revenues during the second quarter ended March 31, 2000.
No other customer accounted for over 5% of total revenues during this period.
This concentration of revenues results in additional risk to us and our
operations, and any disruption of orders from our largest customers would have
an adverse effect on our results of operations and financial condition.
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 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 engineering and
product management expertise, no assurances can be given that this expertise
will
19
<PAGE>
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 plan to continue to pursue,
acquisition opportunities. Acquisitions involve a number of special risks,
including among others:
- Adverse short-term effects on our operating results
- The disruption of our ongoing business
- The risk of reduced management attention to normal daily
operations
- Our dependence on the retention, hiring and training of key
personnel and the potential risk of loss of such personnel
- Our potential inability to successfully integrate the
personnel, operations, technology and products of acquired
companies
- Unanticipated problems or unknown legal liabilities
- Adverse tax or financial consequences
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, in the past yielded operating results that were
significantly lower than expected. In fact, the poor performance of Advantis
Network & Systems Sdn Bhd led to its divestiture less than one year after the
company was acquired by us. 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 and to manage growth effectively, our operating results, cash
flows and overall financial condition will be adversely affected.
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 and approximately 30.7% of our revenues for the quarter ended March 31,
2000. There are risks associated with our international operations, including:
- 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
20
<PAGE>
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.
Management changes often have a disruptive effect on businesses and can
lead to the loss of key employees because of the uncertainty inherent in change.
In 1999, our President and Chief Executive Officer resigned his position and,
more recently, our Chief Financial Officer and the Secretary and General Counsel
of NHancement Technologies, Inc. left us to pursue other opportunities. Douglas
S. Zorn, our former Chief Financial Officer, was promoted to President and Chief
Executive Officer to fill these vacancies. John R. Zavoli was hired in May, 2000
as our Vice President of Finance and Chief Financial Officer. Ken Murray was
hired in May 2000 as our Executive Vice President, Global Sales.
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
Area 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.
21
<PAGE>
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 to adequately 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 adequately respond to
these changes, our revenues could decline. In connection with the introduction
of new products and enhancements, 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.
22
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The case of BOWNE OF DALLAS, INC. VS. NHANCEMENT TECHNOLOGIES INC.,
Case No. CC-99-06178-D filed in the Dallas County (Texas) Court on November 23,
1999, was settled on March 24, 2000, for a total of $40,000.
The case of BOWNE OF LOS ANGELES, INC. VS. NHANCEMENT TECHNOLOGIES
INC., Case No. B C222457 filed in the Los Angeles County Superior Court on
December 29, 1999, was settled on March 23, 2000, for a total of $25,000.
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
WARRANTS ISSUED DURING THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
TITLE OF AGGREGATE FORM OF
CLASS OF DATE OF NHANCEMENT NUMBER OF PURCHASE CONSIDER-
PURCHASERS(1) SALE SECURITIES SHARES PRICE ATION
- ------------------------------- ------------- ---------------------- ------------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
Warrants granted to Shares of
Director (2) 3/1/2000 Common Stock 50,000 (2) (2)
</TABLE>
(1) The issuance of warrants to the individuals identified in the table
above were made in reliance on Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"), and /or Regulation D promulgated
thereunder.
(2) The warrants were granted to a new director. The warrants are
immediately exercisable and expire one year from the date of issuance.
The exercise price on the date of issuance was $11.50 per share equal
to the closing price on February 29, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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>
4.23 Warrant dated March 1, 2000, issued to William M. Stephens.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on February 7, 2000
and later amended by a report on Form 8-K/A filed with the Commission on
February 15, 2000.
24
<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: May 15, 2000 Douglas S. Zorn
President and Chief Executive Officer and
Acting Chief Financial Officer
----------------------------------
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------ -------------------------------------------------------------------
<S> <C>
4.23 Warrant dated March 1, 2000, issued to William M. Stephens.
27 Financial Data Schedule
</TABLE>
26
<PAGE>
Exhibit 4.23
NHANCEMENT TECHNOLOGIES INC.
Issued as of the 1st day (1) Aggregate Price: $575,000.00
Of March, 2000 (2) Initial Warrant Price: $11.50
(3) Number of Shares Initially Subject
to Warrant: 50,000
NEITHER THIS WARRANT, NOR THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF,
HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933
SECURITIES ACT"), OR QUALIFIED OR REGISTERED UNDER CALIFORNIA OR OTHER
APPLICABLE SECURITIES LAWS ("STATE SECURITIES LAWS"), AND THIS WARRANT HAS BEEN,
AND THE COMMON STOCK TO BE ISSUED UPON EXERCISE HEREOF WILL BE, ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. NO SUCH SALE OR OTHER DISPOSITION MAY BE MADE WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 SECURITIES ACT AND COMPLIANCE
WITH THE APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SAID REGISTRATION IS NOT
REQUIRED UNDER THE 1933 SECURITIES ACT AND THAT APPLICABLE STATE SECURITIES LAWS
HAVE BEEN SATISFIED.
COMMON STOCK WARRANT
This certifies that WILLIAM M. STEPHENS, ("PURCHASER"), whose address for
notice is located at 23, Heron Drive, Mill Valley, CA 94941 or any party to whom
this Warrant is assigned in compliance with the terms hereof (Purchaser and any
such assignee being hereinafter sometimes referenced as "HOLDER"), is entitled
to subscribe for and purchase, during the period commencing at the issue date
set forth above and ending at 5:00 p.m., California, local time, on the first
(1st) anniversary of such issue date, the number of shares of fully paid and
nonassessable Common Stock ("COMMON STOCK") of NHANCEMENT TECHNOLOGIES INC, A
DELAWARE CORPORATION (the "COMPANY"), that have an aggregate purchase price
equal to the Aggregate Price as defined below. The purchase price of each such
share shall be equal to the Warrant Price, as defined below.
ARTICLE 1
DEFINITIONS
1.1 "AGGREGATE PRICE" shall be $575,000.00
1.2 "WARRANT PRICE" shall be $11.50 as adjusted herein.
ARTICLE 2
EXERCISE AND PAYMENT
2.1 CASH EXERCISE. The purchase rights represented by this Warrant may be
exercised by Holder, in whole or in part, by the surrender of this Warrant at
the principal office of the Company, located at the address set forth on the
signature page hereof, accompanied by the form of Notice of Cash Exercise
attached hereto as Exhibit "B-1", and by the payment to the Company, by cash or
by certified, cashier's or other check acceptable to the Company, of an amount
equal to the aggregate Warrant Price of the shares being purchased.
2.2 NET ISSUE EXERCISE. In lieu of exercising this Warrant pursuant to Section
2.1, Holder may elect to receive shares of Common Stock equal to the value of
this Warrant determined in the manner described below (or of any portion thereof
remaining unexercised) by surrender of this
<PAGE>
Common Stock Warrant
Page 2
Warrant at the principal office of the Company together with the form of Notice
of Cashless Exercise attached hereto as Exhibit "B-2", in which event the
Company shall issue to Holder a number of shares of the Company's Common Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = the fair market value of one share of the Company's Common
Stock (at the date of such calculation).
B = Warrant Price.
2.3 FAIR MARKET VALUE. For purposes of this Article II, fair market value of
one share of the Company's Common Stock shall mean:
(i) The average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary, the last reported sale price
of the Common Stock or the closing price quoted on the Nasdaq National
Market System ("NMS") or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the trading day prior to the date of determination
of fair market value; or
(ii) If the Common Stock is not traded Over-The-Counter, on the NMS or on
an exchange, the per share fair market value of the Common Stock shall be
as determined by mutual agreement of the Company and the Holder; provided,
however that if such agreement cannot be reached within twenty (20)
calendar days, such value shall be determined by an independent appraiser
appointed in good faith by the Company's Board of Directors. The cost of
such appraisal shall be borne equally by the Company and the Holder. Such
appraiser shall meet the following criteria: (a) it shall not be associated
or affiliated with the Company in any fashion and shall not have previously
provided services to the Company; (b) the appraiser shall have reasonable
qualifications to appraise the value of the Common Stock; (c) it is not
(and none of its affiliates is) a promoter, director or officer of the
Company or any of its affiliates or an underwriter with respect to any of
the securities of the Company; and (d) it does not provide any advice or
opinions of the Company except as an appraiser under this section. In the
event such an appraisal is required it should be conducted under the
following procedures: the Company shall select the appraiser within ten
(10) days of receipt of written notice from the Holder that agreement
cannot be reached and the Company shall submit the name of such appraiser
to Holder. Twenty (20) days after selection of the appraiser, the Company
and the Holder shall each submit to the appraiser a single value
representing such party's contention as to the fair market value of one
share of the Company's Common Stock. Within fifteen (15) days after receipt
of the submission of the Company and the Holder, the appraiser shall select
one of the two values submitted by the parties, and such value shall be the
fair market value of one share of the Common Stock for purpose of this
Warrant. The appraiser shall have no discretion to take any action other
than selection of one of the two values submitted to the appraiser. The
parties may submit to the appraiser and one another, at the time they
submit their respective single values, such supporting documentation as
they deem necessary or appropriate. The parties shall have the opportunity
seven (7) business days after receipt of the other party's proposed
valuation and supporting documentation to provide the appraiser and each
other with supplemental written information. The appraiser may, in its
discretion, hold a single six (6) hour hearing on valuation issues. If a
hearing is held, each party shall be allocated three (3) hours. The
appraiser may conduct the hearing in accordance with any rules of procedure
it deems appropriate. The value selected by the appraiser shall be final
and binding upon the parties without any further right of appeal.
<PAGE>
Common Stock Warrant
Page 3
2.4 STOCK CERTIFICATES. In the event of any exercise of the rights represented
by this Warrant, certificates for the shares of Common Stock so purchased shall
be delivered to Holder within a reasonable time and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the remaining
unexercised Aggregate Price shall also be issued to Holder at such time.
2.5 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees
that all Common Stock which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof
(excluding taxes based on the income of Holder). The Company further covenants
and agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved for issuance a sufficient number of shares of its Common Stock or other
securities as would be required upon the full exercise of the rights represented
by this Warrant (including conversion of all such Common Stock issuable
hereunder).
2.6 FRACTIONAL SHARES. No fractional share of Common Stock will be issued in
connection with any exercise hereof; in lieu of a fractional share upon complete
exercise hereof, Holder may purchase a whole share by delivering payment equal
to the appropriate portion of the then effective Warrant Price.
ARTICLE 3
CERTAIN ADJUSTMENTS OF NUMBER OF SHARES PURCHASABLE AND WARRANT PRICE
The number and kind of securities purchasable upon the exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
3.1 RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of: (i) any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant; (ii) any consolidation or merger of the Company with or into
another corporation (other than a merger with another corporation in which the
Company is a continuing corporation and which does not result in any
reclassification, change or exchange of outstanding securities issuable upon
exercise of this Warrant); or (iii) any sale or transfer to another corporation
of all, or substantially all, of the property of the Company, then, and in each
such event, the Company or such successor or purchasing corporation, as the case
may be, shall execute a new Warrant of like form, tenor and effect and which
will provide that Holder shall have the right to exercise such new Warrant and
purchase upon such exercise, in lieu of each share of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of securities, money
and property receivable upon such reclassification, change, consolidation,
merger, sale or transfer by a holder of one share of Common Stock issuable upon
exercise of this Warrant had this Warrant been exercised immediately prior to
such reclassification, change, consolidation, merger, sale or transfer. Such new
Warrant shall be as nearly equivalent in all substantive respects as practicable
to this Warrant and the adjustments provided in this Article III and the
provisions of this Section 3.1, shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
3.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company shall at any time
while this Warrant remains outstanding and less than fully exercised: (i) divide
its Company Stock, the Warrant Price shall be proportionately reduced; or (ii)
shall combine shares of its Common Stock, the Warrant Price shall be
proportionately increased.
3.3 STOCK DIVIDENDS. If the Company, at any time while this Warrant is
outstanding and unexpired, shall pay a dividend payable in, or make any other
distribution to holders of, Common Stock (except any distribution described in
Sections 3.1 and 3.2 hereof) then the Warrant Price shall be adjusted to that
price determined by multiplying the Warrant Price then in effect by a fraction,
the numerator of which shall be the total number of shares of Common Stock
outstanding
<PAGE>
Common Stock Warrant
Page 4
immediately prior to such dividend or distribution, and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such dividend or distribution.
3.4 TIME OF ADJUSTMENTS TO THE WARRANT PRICE. All adjustments to the Warrant
Price and the number of shares purchasable hereunder, unless otherwise specified
herein, shall be effective as of the earlier of:
(i) the date of issue of the security causing the adjustment;
(ii) the date of sale of the security causing the adjustment;
(iii) the effective date of a division or combination of shares;
(iv) the record date of any action of holders of any class of the
Company's capital stock taken for the purpose of entitling shareholders to
receive a distribution or dividend payable in equity securities, provided
that such division, combination, distribution or dividend actually occurs.
3.5 NOTICE OF ADJUSTMENTS. In each case of an adjustment in the Warrant Price
and the number of shares purchasable hereunder, the Company, at its expense,
shall cause the Chief Financial Officer of the Company to compute such
adjustment and prepare a certificate setting forth such adjustment and showing
in detail the facts upon which such adjustment is based. The Company shall
promptly mail a copy of each such certificate to Holder pursuant to Section 6.8
hereof.
3.6 DURATION OF ADJUSTED WARRANT PRICE. Following each adjustment of the
Warrant Price, such adjusted Warrant Price shall remain in effect until a
further adjustment of the Warrant Price.
3.7 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant Price
pursuant to this Article III, the number of shares of Common Stock purchasable
hereunder shall be adjusted to the nearest whole share, to the number obtained
by dividing the Aggregate Price by the Warrant Price as adjusted.
ARTICLE 4
TRANSFER, EXCHANGE AND LOSS
4.1 TRANSFER. This Warrant is transferable on the books of the Company at its
principal office by the registered Holder hereof upon surrender of this Warrant
properly endorsed, subject to compliance with federal and state securities laws.
The Company shall issue and deliver to the transferee a new Warrant or Warrants
representing the Warrants so transferred. Upon any partial transfer, the Company
will issue and deliver to Holder a new Warrant or Warrants with respect to the
Warrants not so transferred. Notwithstanding the foregoing, Holder shall not be
entitled to transfer a number of shares or an interest in this Warrant
representing less than five percent (5%) of the aggregate shares initially
covered by this Warrant (as presently constituted, with appropriate adjustment
being made in the event of stock splits, combinations, reorganizations and the
like occurring after the issue date hereof). Any transferee shall be subject to
the same restrictions on transfer with respect to this Warrant as the Purchaser.
4.2 SECURITIES LAWS. Upon any issuance of shares of Common Stock upon exercise
of this Warrant, it shall be the Company's responsibility to comply with the
requirements of: (1) the Securities Act of 1933, as amended; (2) the Securities
Exchange Act of 1934, as amended; (3) any applicable listing requirements of any
national securities exchange; (4) any state securities regulation or "Blue Sky"
laws; and (5) requirements under any other law or regulation applicable to the
issuance or transfer of such shares. If required by the Company, in connection
with each issuance of shares of Common Stock upon exercise of this Warrant, the
Holder will give: (i) assurances in writing, satisfactory to the Company, that
such shares are not being purchased with a view to the distribution thereof in
violation of applicable laws, (ii) sufficient information, in writing, to enable
the Company to rely on exemptions from the registration or qualification
requirements of applicable
<PAGE>
Common Stock Warrant
Page 5
laws, if available, with respect to such exercise, and (iii) its cooperation to
the Company in connection with such compliance.
4.3 EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants which represent, in the aggregate, the Aggregate Price
hereof; each new Warrant to represent the right to purchase such portion of the
Aggregate Price as Holder shall designate at the time of such exchange. Each new
Warrant shall be identical in form and content to this Warrant, except for
appropriate changes in the number of shares of Common Stock covered thereby, the
percentage stated in Section 4.1 above, and any other changes which are
necessary in order to prevent the Warrant exchange from changing the respective
rights and obligations of the Company and the Holder as they existed immediately
prior to such exchange.
4.4 LOSS OR MUTILATION. Upon receipt by the Company of evidence satisfactory to
it of the ownership of, and the loss, theft, destruction or mutilation of, this
Warrant and (in the case of loss, theft, or destruction) of indemnity
satisfactory to it, and (in the case of mutilation) upon surrender and
cancellation hereof, the Company will execute and deliver in lieu hereof a new
Warrant.
ARTICLE 5
HOLDER RIGHTS
5.1 NO SHAREHOLDER RIGHTS UNTIL EXERCISE. No Holder hereof, solely by virtue
hereof, shall be entitled to any rights as a shareholder of the Company. Holder
shall have all rights of a shareholder with respect to securities purchased upon
exercise hereof at the time: (i) the cash exercise price for such securities is
delivered pursuant to Section 2.1 hereof and this Warrant is surrendered, (ii)
of delivery of notice of cashless exercise pursuant to Section 2.2 hereof and
this Warrant is surrendered, or (iii) of automatic exercise hereof (even if not
surrendered) pursuant to Section 2.5 hereof.
ARTICLE 6
MISCELLANEOUS
6.1 GOVERNMENTAL APPROVALS. The Company will from time to time take all action
which may be necessary to obtain and keep effective any and all permits,
consents and approvals of governmental agencies and authorities and securities
acts filings under federal and state laws, which may be or become requisite in
connection with the issuance, sale, and delivery of this Warrant, and the
issuance, sale and delivery of the Common Stock or other securities or property
issuable or deliverable upon exercise of this Warrant.
6.2 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES HERETO THAT EXCEPT AS
SET FORTH BELOW, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF THIS
WARRANT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION AND ENFORCEMENT
OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO.
6.3 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise
provided in, this Warrant, each and all of the covenants, terms, provisions, and
agreements contained herein shall be binding upon, and inure to the benefit of
the permitted successors, executors, heirs, representatives, administrators and
assigns of the parties hereto.
6.4 SEVERABILITY. If any one or more provisions of this Warrant, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Warrant and the application of such
provisions to other persons or circumstances shall be interpreted so as best to
reasonably effect the intent of the parties hereto. The parties further agree to
replace any such void or unenforceable provisions of this Warrant with valid and
enforceable provisions which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provisions.
<PAGE>
Common Stock Warrant
Page 6
6.5 DEFAULT, AMENDMENT AND WAIVERS. This Warrant may be amended upon the
written consent of the Company and the holders in the aggregate of the right to
purchase a majority of the number of unexercised shares covered by the Warrant
initially issued by the Company pursuant to the Consulting Agreement. The waiver
by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default. The failure
to cure any breach of any term of this Warrant within ten (10) days of written
notice thereof shall constitute an event of default under this Warrant.
6.6 NO WAIVER. The failure of any party to enforce any of the provisions hereof
shall not be construed to be a waiver of the right of such party thereafter to
enforce such provisions.
6.7 ATTORNEYS' FEES. Should suit be brought to enforce or interpret any part of
this Warrant, the prevailing party shall be entitled to recover, as an element
of the costs of suit and not as damages, reasonable attorneys' fees to be fixed
by the court (including without limitation, costs, expenses and fees on any
appeal). The prevailing party shall be the party entitled to recover its costs
of suit, regardless of whether such suit proceeds to final judgment. A party not
entitled to recover its costs shall not be entitled to recover attorneys' fees.
No sum for attorneys' fees shall be counted in calculating the amount of a
judgment for purposes of determining if a party is entitled to recover costs or
attorneys' fees.
6.8 NOTICES. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Warrant, each such communication
shall be in writing and shall be effective only if it is delivered by personal
service or mailed, United States certified mail, postage prepaid, return receipt
requested, addressed as follows:
Company: NHancement Technologies Inc.
6663 Owens Drive
Pleasanton
California 94588
Attn: Douglas S. Zorn
Holder: William M. Stephens
23, Heron Drive
Mill Valley, CA 94941
Such communications shall be effective when they are received by the addressee
thereof; but if sent by certified mail in the manner set forth above, they shall
be effective three (3) business days after being deposited in the United States
mail. Any party may change its address for such communications by giving notice
thereof to the other party in conformity with this Section.
6.9 TIME. Time is of the essence of this Warrant.
6.10 CONSTRUCTION OF AGREEMENT. A reference in this Warrant to any Section shall
include a reference to every Section the number of which begins with the number
of the Section to which reference is specifically made (E.G., a reference to
Section 3 shall include a reference to Sections 3.5 and 3.7). The titles and
headings herein are for reference purposes only and shall not in any manner
affect the interpretation of this Warrant.
6.11 NO ENDORSEMENT. Holder understands that no federal or state securities
administrator has made any finding or determination relating to the fairness of
investment in the Company or purchase of the Common Stock hereunder and that no
federal or state securities administrator has recommended or endorsed the
offering of securities by the Company hereunder.
<PAGE>
Common Stock Warrant
Page 7
6.12 PRONOUNS. All pronouns and any variations thereof shall be deemed to refer
to the masculine, feminine or neuter, singular or plural, as the identity of the
person, persons, entity or entities may require.
6.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and to
give such further written assurances, as may be reasonably requested by any
other party to better evidence and reflect the transactions described herein and
contemplated hereby, and to carry into effect the intents and purposes of this
Warrant.
NHancement Technologies Inc., a Delaware corporation
By: /S/ Douglas S. Zorn
------------------------------------------
Douglas S. Zorn, Chief Executive Officer
<PAGE>
Common Stock Warrant
Page 8
EXHIBIT B-1
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
BY CASH PAYMENT OF WARRANT PRICE
DATE: __________________________
_________________________ Aggregate Price of Warrant
_________________________ Before Exercise: $_______________
_________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $________________
Warrant Price: $_________ per share
Number of Shares of Common Stock to
be Issued Under this Notice:_________
Remainder Aggregate
Price (if any) After Issuance: $_____
CASH EXERCISE
Gentlemen:
The undersigned registered Holder of the Common Stock Warrant delivered
herewith ("WARRANT"), hereby irrevocably exercises such Warrant for, and
purchases thereunder, shares of the Common Stock of NHancement Technologies,
Inc., a Delaware corporation, as provided below. Capitalized terms used herein,
unless otherwise defined herein, shall have the meanings given in the Warrant.
The portion of the Aggregate Price (as defined in the Warrant) to be applied
toward the purchase of Common Stock pursuant to this Notice of Exercise is
$___________ , thereby leaving a remainder Aggregate Price (if any) equal to
$______ . Such exercise shall be pursuant to the cash exercise provisions of
Section 2.1 of the Warrant. Therefore, Holder makes payment with this Notice of
Exercise by way of check payable to the Company in the amount of $_______ . Such
check is payment in full under the Warrant for ___________ shares of Common
Stock based upon the Warrant Price of $_________ per share, as currently in
effect under the Warrant. Holder requests that the certificates for the
purchased shares of Common Stock be issued in the name of and delivered to
"_______________________", __________________________________. To the extent the
foregoing exercise is for less than the full Aggregate Price, a Replacement
Warrant representing the remainder of the Aggregate Price and otherwise of like
form, tenor and effect should be delivered to Holder along with the share
certificates evidencing the Common Stock issued in response to this Notice of
Exercise.
By:
------------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly correspond
to the name of the Holder on the Warrant.
<PAGE>
Common Stock Warrant
Page 9
EXHIBIT B-2
NOTICE OF EXERCISE OF COMMON STOCK WARRANT
PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS
DATE: __________________________
_________________________ Aggregate Price of Warrant
_________________________ Before Exercise: $_______________
_________________________ Aggregate Price
Attention: Chief Financial Officer Being Exercised: $________________
Warrant Price: $_________ per share
Number of Shares of Common Stock to
be Issued Under this Notice:_________
Remainder Aggregate
Price (if any) After Issuance: $______
CASHLESS EXERCISE
Gentlemen:
The undersigned, registered Holder of the Common Stock Warrant delivered
herewith ("WARRANT", hereby irrevocably exercises such Warrant for, and
purchases thereunder, shares of the Common Stock of _NHancement Technologies
Inc., a Delaware corporation, as provided below. Capitalized terms used herein,
unless otherwise defined herein, shall have the meanings given in the Warrant.
The portion of the Aggregate Price (as defined in the Warrant) to be applied
toward the purchase of Common Stock pursuant to this Notice of Exercise is
$__________ , thereby leaving a remainder Aggregate Price (if any) equal to
$___________ . Such exercise shall be pursuant to the net issue exercise
provisions of Section 2.2 of the Warrant; therefore, Holder makes no payment
with this Notice of Exercise. The number of shares to be issued pursuant to this
exercise shall be determined by reference to the formula in Section 2.2 of the
Warrant which, by reference to Section 2.3, requires the use of the current per
share fair market value of the Company's Common Stock. The current fair market
value of one share of the Company's Common Stock shall be determined in the
manner provided in Section 2.3, which amount has been determined or agreed to by
Holder and the Company to be $___________ , which figure is acceptable to Holder
for calculations of the number of shares of Common Stock issuable pursuant to
this Notice of Exercise [SPECIFY ANY ALTERNATIVE ARRANGEMENTS TO THE FOREGOING,
IF NECESSARY OR APPLICABLE]. Holder requests that the certificates for the
purchased shares of Common Stock be issued in the name of and delivered to
"___________________________", ______________________. To the extent the
foregoing exercise is for less than the full Aggregate Price of the Warrant, a
replacement Warrant representing the remainder of the Aggregate Price (and
otherwise of like form, tenor and effect) shall be delivered to Holder along
with the share certificate evidencing the Common Stock issued in response to
this Notice of Exercise.
By:
------------------------------
[NAME]
NOTE
The execution to the foregoing Notice of Exercise must exactly correspond
to the name of the Holder on the Warrant.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,104
<SECURITIES> 0
<RECEIVABLES> 8,815
<ALLOWANCES> 176
<INVENTORY> 1,782
<CURRENT-ASSETS> 14,488
<PP&E> 2,959
<DEPRECIATION> 208
<TOTAL-ASSETS> 13,437
<CURRENT-LIABILITIES> 12,431
<BONDS> 0
107
0
<COMMON> 0
<OTHER-SE> 13,330
<TOTAL-LIABILITY-AND-EQUITY> 26,122
<SALES> 17,743
<TOTAL-REVENUES> 17,743
<CGS> 11,737
<TOTAL-COSTS> 16,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286
<INCOME-PRETAX> 870
<INCOME-TAX> 124
<INCOME-CONTINUING> 746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.07
</TABLE>
