<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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 IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1746 COLE BOULEVARD, SUITE 265
GOLDEN, COLORADO 80401
(Address of principal executive offices)
(303)271-0505
(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
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
As of April 21, 1997, there were 4,228,440 shares of Common Stock,
$0.01 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one)
Yes X No
------ ------
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<PAGE> 2
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 SEC rules and
regulations, 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
statement of the information shown.
1
<PAGE> 3
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 4,057,600
Accounts receivable, less allowance for doubtful accounts of $50,000 1,511,100
Inventory 959,800
Prepaid expenses and other 268,100
-----------
Total current assets $ 6,796,600
FURNITURE AND EQUIPMENT 633,600
Less accumulated depreciation (123,900)
-----------
FURNITURE AND EQUIPMENT, NET $ 509,700
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET (Note 5) $ 6,066,800
OTHER ASSETS 21,900
-----------
$13,395,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 626,000
Accrued liabilities 663,000
Payroll related liabilities 353,200
Deferred revenue 1,511,600
Deferred tax liabilities 40,000
-----------
Total current liabilities $ 3,193,800
LONG-TERM DEBT, due stockholder (Note 3) 1,500,000
-----------
TOTAL LIABILITIES 4,693,800
STOCKHOLDERS' EQUITY (Notes 3, 4, 6 and 7)
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $0.01 par value, 10,000,000 shares authorized,
4,228,500 shares issued and outstanding 42,300
Additional paid-in capital 17,626,300
Accumulated deficit (8,967,400)
-----------
TOTAL STOCKHOLDERS' EQUITY $ 8,701,200
-----------
$13,395,000
===========
</TABLE>
2
<PAGE> 4
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
(Note 2)
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------ -----------------------------
March 31 March 31 March 31 March 31
1996 1997 1996 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 379,800 $ 1,431,900 $ 2,261,700 $ 2,283,000
COST OF SALES 49,500 636,600 1,351,500 1,228,800
------------ ------------ ----------- -----------
GROSS PROFIT 330,300 795,300 910,200 1,054,200
------------ ------------ ----------- -----------
OPERATING EXPENSES
Research and development . . . . . . 23,200 23,700 23,200 23,700
Selling, marketing and administrative 337,600 611,900 1,007,000 864,100
------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES 360,800 635,600 1,030,200 887,800
------------ ------------ ----------- -----------
INCOME (LOSS) FROM OPERATIONS (30,500) 159,700 (120,000) 166,400
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE)
Interest income . . . . . . . . . . . -- 38,400 10,600 40,700
Interest expense . . . . . . . . . . (116,300) (46,200) (134,300) (52,300)
Amortization of excess of cost over
net assets acquired . . . . . . . . . -- (98,900) (148,400) (148,400)
Other (2,000) -- (2,000) 7,500
------------ ------------ ----------- -----------
(118,300) (106,700) (274,100) (152,500)
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (148,800) 53,000 (394,100) 13,900
INCOME TAXES -- 10,400 -- 9,500
------------ ------------ ----------- -----------
NET INCOME (LOSS) (148,800) 42,600 (394,100) 4,400
============ ============ =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
(Note 7) $ (0.15) $ 0.02 $ (0.19) $ 0.00
============ ============ =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,024,615 2,875,339 2,074,615 3,371,172
============ ============ =========== ===========
</TABLE>
3
<PAGE> 5
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE ADDITIONAL
------------------------ PAID-IN ACCUMULATED
Shares Amount CAPITAL DEFICIT TOTAL
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 612,800 $ 6,100 $ 5,363,900 $(9,010,000) $(3,640,000)
Issuance of common stock for
acquisition (Notes 1 and 3) 1,312,500 13,100 4,666,900 4,680,000
Initial public offering of common
stock at $4.00 per share, net of
offering costs of $1,594,000 (Note 4) 2,045,000 20,500 6,565,500 6,586,000
Issuance of common stock for
conversion of notes payable and
accrued interest (Note 4) 258,200 2,600 1,030,000 1,032,600
Net income 42,600 42,600
--------- --------- ----------- ----------- -----------
BALANCE, March 31, 1997 4,228,500 $ 42,300 $17,626,300 $(8,967,400) 8,701,200
========= ========= =========== =========== ===========
</TABLE>
4
<PAGE> 6
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MARCH 31, 1996 MARCH 31, 1997
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . $ (148,800) $ 42,600
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED
IN OPERATING ACTIVITIES:
DEPRECIATION . . . . . . . . . . . . . . . . . . . . 8,800 27,300
AMORTIZATION OF EXCESS COST OVER NET ASSETS ACQUIRED 98,900
AMORTIZATION OF DEBT ISSUANCE COSTS ON NOTES PAYABLE 41,600
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE . . . . . . . . . . . . . . . (2,000) 420,000
INVENTORY . . . . . . . . . . . . . . . . . . . . 17,400
PREPAID EXPENSES AND OTHER . . . . . . . . . . . . (9,400) (220,300)
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 51,700
ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES . . (212,300) (2,405,000)
-------------------- --------------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . $ (322,100) $ (1,967,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
CASH ACQUIRED FROM VPI ACQUISITION . . . . . . . . . 851,900
PURCHASE OF FURNITURE AND EQUIPMENT . . . . . . . . . (3,700) (35,200)
-------------------- --------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES . . . . $ (3,700) $ 816,700
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM INITIAL PUBLIC OFFERING OF COMMON STOCK,
NET OF OFFERING COSTS . . . . . . . . . . . . . . 6,962,200
PREPAID STOCK OFFERING COSTS . . . . . . . . . . . . (71,600)
PROCEEDS FROM LONG-TERM DEBT . . . . . . . . . . . . 327,500
PRINCIPAL PAYMENT OF LONG-TERM DEBT . . . . . . . . . (21,800) (1,814,000)
-------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . $ 234,100 $ 5,148,200
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . $ (91,700) $ 3,997,500
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . 170,400 60,100
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . $ 78,700 $ 4,057,600
-------------------- --------------------
</TABLE>
5
<PAGE> 7
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On February 3, 1997, the Company acquired all outstanding shares of common
stock of Voice Plus, Inc. in exchange for 1,312,500 shares of the Company's
Common Stock with an estimated value of $4,680,000 and two promissory notes in
an aggregate principal amount of $1,500,000. See Notes 1 and 3.
<TABLE>
<S> <C>
Total Consideration:
1,312,500 shares of Common Stock $ 4,680,000
Promissory notes 1,500,000
-------------------
$ 6,180,000
Cost of acquisition 270,100
-------------------
$ 6,450,100
===================
Consideration was used for:
Net assets acquired 555,100
Excess of cost over net assets acquired 5,895,000
-------------------
$ 6,450,100
===================
</TABLE>
On February 4, 1997, the Company completed its initial public offering (see
Note 4). In connection therewith, the Company converted certain notes and
related accrued interest in an aggregate amount of $1,032,600 into shares of
its Common Stock.
6
<PAGE> 8
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation (the "Company"),
was incorporated in October 1996 as a holding company and successor to
the business of BioFactors, Inc. ("BFI"), a Delaware corporation. On
February 3, 1997, prior to the February 4, 1997 consummation of the
initial public offering (the "IPO") of the Company's common stock (see
Note 4), BFI merged with a subsidiary of the Company whereupon BFI, as
the surviving corporation, became a wholly owned subsidiary of the
Company (the "BFI Merger"). Also on February 3, 1997, the Company
acquired Voice Plus, Inc. ("VPI"), a California corporation, a systems
integrator and national distributor of voice processing equipment,
pursuant to a transaction by which VPI merged with a subsidiary of the
Company, whereupon VPI, as the surviving corporation, became a wholly
owned subsidiary of the Company (the "VPI Acquisition"). The business
of the Company is conducted by its operating company subsidiaries, BFI
and VPI (see Note 3).
2. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARD
The accompanying consolidated financial statements as of March 31,
1997, and for the three months ended March 31, 1997 and 1996, are
unaudited. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") have been omitted.
These consolidated financial statements should be read in conjunction
with the audited financial statements and accompanying notes for the
year ended December 31, 1996 presented in the Company's latest annual
report on Form 10-KSB.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
The consolidated financial statements presented herein reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial condition and results of operations
for the periods presented.
The unaudited pro forma statements of operations combine the results
of operations of the Company and VPI for the three months ended March
31, 1997 and 1996, as if the VPI Acquisition had occurred at the
beginning of the respective periods, after giving effect to certain
adjustments, including the amortization of excess of costs over assets
acquired, interest expense on notes payable to stockholder, additional
salaries, and recalculation of estimated income taxes.
This unaudited pro forma summary does not necessarily reflect the
result of operations as they would have been had the VPI Acquisition
occurred at the beginning of the periods presented and is not
necessarily indicative of the results of operations for any future
period.
On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This pronouncement provides a
different method of calculating earnings per share than is currently
used in accordance with APB No. 15, "Earnings per Share." SFAS No.
128 provides for the calculation of Basic and Diluted earnings per
share. Basic earnings per share includes no dilution and is computed
by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted
earnings per share. Calculations under the new standard, which will
be adopted in the fourth quarter of 1997, are not expected to result
in a significant difference from those under the current method.
7
<PAGE> 9
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION AND MERGER TRANSACTIONS
Pursuant to the BFI Merger agreement, shares of the Company's common
stock ("Common Stock") were exchanged for all the issued and
outstanding common stock of BFI, in a ratio of three shares of Common
Stock for every four shares of BFI common stock. In addition, the
Company assumed (i) the obligations of BFI's outstanding stock
options, by which assumption the optionee has the right to purchase
5.625 shares of the Company's Common Stock for every 10 shares of BFI
common stock the optionee could have purchased prior to the BFI Merger
at an exercise price per share equal to 80% of the IPO Price, (ii) the
obligations of BFI's issued and outstanding warrants in accordance
with their terms, and (iii) the obligations of the Registration Rights
Agreement dated as of September 1, 1996. The Company also undertook
to issue to certain holders of BFI notes, warrants to purchase an
aggregate of 109,900 shares of the Company's Common Stock, exercisable
one year from the close of the IPO at an exercise price of 120% of the
IPO Price.
The VPI Acquisition agreement provided for the exchange of (i) the
Company's unsecured promissory note in a principal amount of
$1,000,000, bearing interest at the medium term T-bill rate, due on
the third anniversary of the consummation of the VPI Acquisition, (ii)
the Company's unsecured promissory note in a principal amount of
$500,000, bearing interest at the medium term T-bill rate, due on the
third anniversary of the consummation of the VPI Acquisition, and
(iii) shares of the Company's Common Stock with an estimated fair
market value of $4,680,000 (of which shares valued at $2,400,000 were
sold in the IPO, and the remainder of the shares are subject to
restrictions on transferability under the Securities Act of 1933, as
amended, and pursuant to a lock-up agreement with the underwriter of
the IPO), for all the issued and outstanding common stock of VPI. In
connection with the VPI Acquisition, the Company entered into a
three-year employment agreement with the president and sole
stockholder of VPI, pursuant to which the Company agreed to pay a base
salary of $150,000 per year, commissions of approximately $200,000 per
year and an annual performance based bonus. The employment agreement
provides that, if the Company materially breaches the agreement or
terminates the employee without "cause," the Company will continue to
pay base salary and 50% of the commissions for the duration of the
term and, in the event of a material breach by the Company, the two
promissory notes will be accelerated and immediately become due and
payable. In addition, the Company committed to pay signing bonuses in
the aggregate amount of $170,000 to three employees of VPI. The
bonuses, of which 50% was paid upon consummation of the IPO and the
remainder is due in August 1997, are not contingent upon continued
employment.
4. INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed its IPO of 2,300,000 shares
of $0.01 par value Common Stock, of which 1,700,000 shares were sold
by the Company and 600,000 shares, representing a portion of the
consideration for the outstanding shares of VPI, were sold by a
stockholder of the Company. On February 11, 1997, the underwriters
exercised an option to purchase from the Company an additional 345,000
shares of Common Stock to cover over-allotments. The Company raised
approximately $6.6 million of funds, net of underwriting commissions,
printing costs, legal and accounting fees and other offering expenses,
totaling approximately $1,594,000, from the offering (including the
over-allotment shares) and did not receive any of the proceeds from
the sale of shares by the stockholder. The Company's Common Stock is
quoted on The Nasdaq Stock Market SmallCap System.
In connection with the closing of the IPO, the Company repaid
principal amounts and the related accrued interest of various notes in
an aggregate amount of approximately $2,027,000. In addition, the
Company converted to its Common Stock certain notes and related
accrued interest in an aggregate amount of $1,032,600 and issued to
certain note holders warrants to purchase an aggregate of 109,900
shares of the Company's Common Stock at an exercise price of 120% of
the IPO price.
8
<PAGE> 10
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EXCESS OF COST OVER NET ASSETS ACQUIRED, NET
The excess of cost over net assets acquired is amortized over a
10-year period using the straight-line method. The carrying value is
periodically evaluated for impairment by the Company based on the
expected future undiscounted cash flows of the related business. As
of March 31, 1997, the excess of cost over net assets acquired
consisted of the following:
<TABLE>
<CAPTION>
Excess of Costs
over Net Assets Accumulated
Acquired Amortization Net
----------------- -------------- --------------
<S> <C> <C> <C>
Acquisition of Phonetics, Inc. by VPI
in October 1996 $ 280,900 $ (10,200) $ 270,700
VPI Acquisition 5,895,000 (98,900) 5,796,100
----------------- -------------- --------------
$ 6,175,900 $ (109,100) $ 6,066,800
================= ============== ==============
</TABLE>
The Company is in the process of valuing the net assets acquired from
VPI. Accordingly, the allocation of purchase price may be adjusted in
future periods.
6. STOCK OPTIONS
During the three months ended March 31, 1997, the Company granted
options to purchase approximately 453,000 shares of the Company's
Common Stock principally to employees, including option grants to
purchase 100,000 shares made in connection with the VPI Acquisition,
with exercise prices ranging from $3.20 to $4.00 per share.
7. NET INCOME (LOSS) PER SHARE
Net income (loss) per common and common equivalent share using the
weighted average of common and common equivalent shares outstanding
was computed by applying Securities and Exchange Commission Staff
Accounting Bulletin No. 83 (SAB 83) for the three months ended March
31, 1996. Pursuant to SAB 83, common and common equivalent shares
issued by the Company during the 12 months immediately preceding its
initial public offering at a price below the initial public offering
price, together with common share equivalents which result from the
grant of common stock options having exercise prices below the initial
public offering price during the same period, have been included in
the calculation of the shares used in computing net loss per share as
if they were outstanding for all periods prior to the initial public
offering. Net income (loss) per share for periods subsequent to the
initial public offering have been computed using the treasury stock
method, under which the number of shares outstanding includes an
assumed use of the proceeds from the issuance of such shares and from
the assumed exercise of such options and warrants to repurchase shares
of the Company's Common Stock at current market prices.
8. SUBSEQUENT EVENT
In April 1997, three of the Company's executive officers and
stockholders purchased a total of 150,000 shares of the Company's
Common Stock.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THREE MONTHS ENDED MARCH 31, 1997 VERSUS MARCH 31, 1996
The following contains forward-looking statements regarding future
events or the future financial performance of the Company that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors.
GENERAL
NHancement Technologies Inc. ("NTI") was formed in 1996 as a holding
company. On February 4, 1997, NTI completed the initial public offering of its
common stock pursuant to a registration statement filed with the Securities and
Exchange Commission. Immediately prior to the closing of the IPO, through two
separate mergers, BFI and VPI became wholly owned subsidiaries of NTI. The
VPI merger was accounted for as a purchase, and the BFI merger was accounted
for in a manner similar to a pooling-of-interests. Prior to these business
combinations, each of BFI and VPI had been operating as an independent entity.
For accounting purposes, BFI is considered the acquiror; accordingly, the
financial data presented for the quarter ended March 31, 1996 include only BFI
results of operations. The financial data presented for the quarter ended
March 31, 1997 include three months' operating results of BFI and also includes
two months (February and March) operating results of VPI (VPI was a separate
company until February 4, 1997). The unaudited pro forma financial information
for the three months ended March 31, 1997 and 1996 gives effect to the BFI and
VPI mergers as if they occurred at the beginning of each period, with the
assets and liabilities of BFI reflected at historical amounts, and assets and
liabilities of VPI presented at estimated current fair values.
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
<TABLE>
<CAPTION>
QUARTERS ENDED
1996 1997
---- ----
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 13.0 % 44.5 %
Gross profit 87.0 % 55.5 %
Research, selling and administration 95.0 % 44.4 %
Income (loss) from operations (8.0)% 11.2 %
Other expense (31.2)% (7.5)%
Income (loss) before income taxes (39.2)% 3.7 %
Income taxes 0.0 % (0.7)%
Net income (loss) (39.2)% 3.0 %
</TABLE>
BFI is continuing development of its technology relating to employee
impairment testing systems and had insignificant revenues during the first
quarter of 1997. VPI is an integrator and distributor of voice processing and
telecommunications systems for businesses and had significant revenues during
the first quarter of 1997. Increased NTI revenue for the first quarter of 1997
of $1,052,100 (compared to $379,800 in the first quarter of 1996) was
exclusively due to the acquisition of VPI and the recording of $1,419,400 of
VPI revenues for February and March 1997; no such revenues were included in the
first quarter of 1996. NTI's gross margin for the first quarter of 1997
decreased to 55.5% from 87.0% as a result of recording VPI revenues for
February and March of 1997 with an associated gross margin of 56.8%. VPI's
gross margin for February and March are usually high due to the recording of
$250,000 in extremely high gross margin revenues during the period.
Management expects gross margin percentage in the low to mid- 40% range on
future VPI sales, which is slightly higher than historical gross margin
percentages, due to pricing adjustments
-10-
<PAGE> 12
from a key supplier. In the first quarter of 1996, BFI's net sales and gross
margins were attributed to a $350,000 royalty fee with significantly high gross
margin, and to early "beta" type customer installations of the FACTOR 1000
system with significant negative gross margins and high engineering and
customer installation costs. In the first quarter of 1997, BFI's gross margins
on revenues were negative as revenues were negligible with no royalty fees
collected.
Research, selling and administrative ("RS&A") expenses as a percentage
of net sales decreased during the first quarter of 1997 versus the first
quarter of 1996 ( 95.0% versus 44.4%) due to the acquisition of VPI, whose
significant revenues materially altered operating percentages. RS&A expenses
increased from $360,800, in the first quarter of 1996 to $635,600 in the first
quarter of 1997, due to the recording of two months of VPI operating expenses
offset by BFI's RS&A expenses, which decreased from $360,800 in the first
quarter of 1996 to $118,300 for the first quarter of 1997 due to expense
reductions and the allocation of expenses to the VPI operation.
Other expense decreased from $118,300 in the first quarter of 1996 to
$106,700 in the first quarter of 1997, primarily due to a decrease in interest
expense on bridge financings which were repaid or converted into shares of NTI
common stock upon consummation of the IPO. After the application of proceeds
from the IPO, the Company has no interest-bearing debt except $1.5 million in
promissory notes payable in connection with the VPI merger, and a capital lease
liability of approximately $4,000. This reduction in interest expense of
$70,100, and the increase in interest income of $38,400, was offset by the
recording of the amortization of excess of cost over net assets acquired
("goodwill") associated with the VPI merger of $98,900 during February and
March of 1997. The goodwill amount recorded and the associated amortization of
goodwill may be adjusted in future periods as management continues to assess
the proper valuation of the net assets acquired for the purpose of allocating
the purchase price of VPI. Management is required to finalize the allocation
of the purchase price within twelve months of the date of acquisition.
The effective income tax rate of 19.6% in the first quarter of 1997
was substantially different from the federal statutory income tax rate of 42%
principally due to the application of BFI's current losses and net operating
loss carrying forward which offset the profits of VPI on a consolidated tax
return basis. The zero effective income tax rate for the first quarter of 1996
reflects only BFI which operated at a significant loss during the period and
thus recorded no income tax expense. VPI operated as a Subchapter S
corporation status during 1996. NTI will file consolidated tax returns as a C
corporation in future periods.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997, net cash used in the operating
activities of NTI was $1,967,400. Net cash provided by investing and
financing activities totaled $5,964,900 due to NTI's completion of the
acquisition of VPI, which had $851,900 in cash, and to the completion of the
IPO with net proceeds of about $7.0 million to the Company of which $1.8
million repaid long-term debt, the remainder of which resulted in a net
increase in cash of about $4.0 million during the quarter. NTI's working
capital at March 31, 1997 was $3.7 million. The current ratio at March 31,
1997 was 2.1 to 1, primarily due to the completion of the IPO and acquisition
of Voice Plus, Inc.
As of March 31, 1997, NTI had outstanding debt of $1.5 million and
$12,200 of associated accrued interest all payable to its largest shareholder
(the former owner of VPI). The Company utilized proceeds from its IPO to repay
about $2.1 million of debt and interest accrued at rates between 10% and 12%
per annum. The Company intends to spend remaining IPO proceeds to fund
approximately $500,000 of product and market development costs for the FACTOR
1000 system and for general corporate purposes, including future acquisitions.
Management estimates that it will incur minimal capital expenditures
during 1997. However, the Company plans to relocate and consolidate its
corporate offices in California and, in connection with that move and
consolidation, may incur certain costs associated with new leasehold
improvements. It is anticipated that all other capital expenditures will be
financed through equipment leases and will not require significant direct
outlays of cash.
Based upon its present plans, management believes that operating cash
flow, available cash and available credit resources are adequate to make the
repayments of indebtedness described herein, to meet the working capital cash
needs of the Company and to meet anticipated capital needs during the next 12
months. Although the Company intends to issue shares of Common Stock as its
primary method of financing acquisitions, it anticipates that additional funds
will be required to implement successfully its
-11-
<PAGE> 13
acquisition program, and it will use various methods to finance acquisitions,
including the payment of cash, for this purpose.
ACCOUNTING STANDARDS
On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This pronouncement provides a different method
of calculating earnings per share than is currently used in accordance with APB
No. 15, "Earnings per Share." SFAS No. 128 provides for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. Calculations under the new standard, which will be adopted in the
fourth quarter of 1997, are not expected to result in a significant difference
from those under the current method.
PART II
OTHER INFORMATION
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>
3.1 -- Certificate of Incorporation with the Amended and Restated Certificate of
Incorporation (1)
3.2 -- Amended and Restated Bylaws (1)
10.2 -- Agreement and Plan of Merger, dated as of October 30, 1996, between the
Company, BFI Acquisition Corporation and BFI (1)
10.3 -- Agreement and Plan of Merger, dated as of October 25, 1996, between the
Company, VPI Acquisition Corporation, VPI and James S. Gillespie, together
with Forms of Promissory Notes (1)
10.12 -- Equity Incentive Plan (1)
10.13 -- Employment Agreement, dated as of October 30, 1996, between Douglas S. Zorn
and the Company (1)
10.14 -- Employment Agreement, dated as of October 25, 1996, between James S. Gillespie
and the Company (1)
10.15 -- Employment Agreement, dated as of October 30, 1996, between Esmond T. Goei and
the Company (1)
10.21 -- Stockholder Agreement, dated October 25, 1996, between the Company and James
S. Gillespie (1)
10.22 -- 1997 Management and Company Performance Bonus Plan (1)
10.23 -- Employment Agreement, dated as of November 1, 1996, between Diane E. Nowak and
VPI (1)
10.24 -- Employment Agreement, dated as of November 1, 1996, between Bradley Eickman
and VPI (1)
10.27 -- Registration Rights Agreement, dated October 25, 1996, between the Company and
James S. Gillespie (1)
11 -- Statement regarding computation of per share earnings
27 -- Financial Data Schedule
</TABLE>
_________________
(1) Incorporated by reference to the Registration
Statement on Form SB-2, File Number 333-15563, as
filed with the Securities and Exchange Commission on
January 30, 1997.
-12-
<PAGE> 14
(b) Reports on Form 8-K
Report on Form 8-K filed by the Company on April 7, 1997, reported on
the expiration of the letter of intent to acquire C.C. & Associates previously
disclosed in the Company's Prospectus.
(Rest of this page intentionally left blank)
-13-
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act , the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NHANCEMENT TECHNOLOGIES INC.
By: /s/ Esmond T. Goei
------------------------------------------
Date: May 1, 1997 Esmond T. Goei
Chairman of the Board, Chief Executive
Officer, President and Director
By: /s/ Douglas S. Zorn
------------------------------------------
Date: May 1, 1997 Douglas S. Zorn
Executive Vice President-Finance,
Secretary, Treasurer, Chief Operating
and Financial Officer and Director
-14-
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
3.1 -- Certificate of Incorporation with the Amended and Restated Certificate of
Incorporation (1)
3.2 -- Amended and Restated Bylaws (1)
10.2 -- Agreement and Plan of Merger, dated as of October 30, 1996, between the
Company, BFI Acquisition Corporation and BFI (1)
10.3 -- Agreement and Plan of Merger, dated as of October 25, 1996, between the
Company, VPI Acquisition Corporation, VPI and James S. Gillespie, together
with Forms of Promissory Notes (1)
10.12 -- Equity Incentive Plan (1)
10.13 -- Employment Agreement, dated as of October 30, 1996, between Douglas S. Zorn
and the Company (1)
10.14 -- Employment Agreement, dated as of October 25, 1996, between James S. Gillespie
and the Company (1)
10.15 -- Employment Agreement, dated as of October 30, 1996, between Esmond T. Goei and
the Company (1)
10.21 -- Stockholder Agreement, dated October 25, 1996, between the Company and James
S. Gillespie (1)
10.22 -- 1997 Management and Company Performance Bonus Plan (1)
10.23 -- Employment Agreement, dated as of November 1, 1996, between Diane E. Nowak and
VPI (1)
10.24 -- Employment Agreement, dated as of November 1, 1996, between Bradley Eickman
and VPI (1)
10.27 -- Registration Rights Agreement, dated October 25, 1996, between the Company and
James S. Gillespie (1)
11 -- Statement regarding computation of per share earnings
27 -- Financial Data Schedule
</TABLE>
_________________
(1) Incorporated by reference to the Registration Statement on Form SB-2,
File Number 333-15563, as filed with the Securities and Exchange
Commission on January 30, 1997.
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
--------------------- -----------------------
March 31 March 31 March 31 March 31
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period . . . . 93,225 612,800 93,225 612,800
Weighted average shares:
Issued pursuant to Staff Accounting Bulletin
No. 83 . . . . . . . . . . . . . . . . . . . . 931,390 668,890
Issued in connection with the VPI Acquisition . . 816,667 1,312,500 1,312,500
Issued in the IPO, including the over-allotment . 1,222,889 1,222,889
Issued to convert debt to common shares . . . . . 157,789 157,789
Common stock equivalent shares related to stock
options . . . . . . . . . . . . . . . . . . . . 65,194 65,194
Weighted average shares outstanding at end of
period . . . . . . . . . . . . . . . . . . . . 1,024,615 2,875,339 2,074,615 3,371,172
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,057,600
<SECURITIES> 0
<RECEIVABLES> 1,561,100
<ALLOWANCES> 50,000
<INVENTORY> 959,800
<CURRENT-ASSETS> 6,796,600
<PP&E> 633,600
<DEPRECIATION> 123,900
<TOTAL-ASSETS> 13,395,000
<CURRENT-LIABILITIES> 3,193,800
<BONDS> 0
0
0
<COMMON> 42,300
<OTHER-SE> 17,626,300
<TOTAL-LIABILITY-AND-EQUITY> 13,395,000
<SALES> 1,431,900
<TOTAL-REVENUES> 1,431,900
<CGS> 636,600
<TOTAL-COSTS> 636,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,200
<INCOME-PRETAX> 53,000
<INCOME-TAX> 10,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,600
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
