<PAGE> 1
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 September 30, 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 AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
As of November 14, 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
---- ----
<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 the rules and regulations
of the Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair statement of the information shown.
F-1
<PAGE> 3
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 2,326,300
Accounts receivable, less allowance for doubtful accounts of $50,000 1,866,700
Notes receivable from Advantis (note 8) 306,200
Note receivable from stockholder 61,900
Inventory 438,100
Prepaid expenses and other 308,100
Deferred tax assets 119,500
------------
Total current assets 5,426,800
FURNITURE AND EQUIPMENT 780,100
Less accumulated depreciation (200,900)
------------
FURNITURE AND EQUIPMENT, NET 579,200
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET (Note 5) 5,619,600
OTHER ASSETS 112,100
------------
$ 11,737,700
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 259,800
Accrued liabilities 941,100
Payroll related liabilities 178,100
Deferred revenue 1,084,500
Current portion of long-term debt, due stockholder (Note 3) 375,000
------------
Total current liabilities 2,838,500
LONG-TERM DEBT, due stockholder (Note 3) 62,500
------------
TOTAL LIABILITIES 2,901,000
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, 20,000,000 shares authorized,
4,228,500 shares issued and outstanding 42,300
Additional paid-in capital 17,574,400
Accumulated deficit (8,780,000)
------------
TOTAL STOCKHOLDERS' EQUITY 8,836,700
------------
$ 11,737,700
============
</TABLE>
F-2
<PAGE> 4
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1996 30, 1997 30, 1996 30, 1997
- ---------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
NET SALES $ 365,200 $ 2,648,700 $ 757,100 $ 6,720,800
COST OF SALES 36,500 1,354,100 108,300 3,513,400
----------- ----------- ----------- -----------
GROSS PROFIT 328,700 1,294,600 648,800 3,207,400
----------- ----------- ----------- -----------
OPERATING EXPENSES
Research and development 26,500 19,400 74,300 62,200
Selling, marketing and administrative 352,900 974,000 1,334,000 2,444,900
Amortization of excess of cost over net assets
acquired -- 150,800 -- 409,800
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 379,400 1,144,200 1,408,300 2,916,900
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (50,700) 150,400 (759,500) 290,500
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income -- 30,800 -- 103,300
Interest expense (72,300) (3,400) (435,100) (71,300)
----------- ----------- ----------- -----------
(72,300) 27,400 (435,100) 32,000
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (123,000) 177,800 (1,194,600) 322,500
INCOME TAXES -- 62,500 -- 92,500
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (123,000) $ 115,300 $(1,194,600) $ 230,000
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
(Note 7) $ (0.12) $ 0.03 $ (1.17) $ 0.06
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 1,024,615 4,279,259 1,024,615 3,799,875
=========== =========== =========== ===========
</TABLE>
F-3
<PAGE> 5
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMU-
PAR VALUE PAID-IN LATED
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 $1,649,700 (Note 4) 2,045,000 20,500 6,509,800 6,530,300
Issuance of common stock for conversion
of notes payable and accrued interest
(Note 4) 258,200 2,600 1,030,000 1,032,600
Compensation related to grant of stock
options to consultant (Note 6) 3,800 3,800
Net income 230,000 230,000
- ----------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1997 4,228,500 $ 42,300 $17,574,400 $(8,780,000) $ 8,836,700
================================================================================================================
</TABLE>
F-4
<PAGE> 6
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(1,194,600) $ 230,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 27,000 108,800
Amortization of deferred revenue (684,600) --
Amortization of excess cost over net assets acquired -- 409,800
Amortization of debt issuance costs on notes payable 202,300 --
Compensation related to grant of stock options and common
stock 34,100 3,800
Changes in assets and liabilities:
Accounts receivable (13,600) 64,400
Notes receivable, related party 700,000 --
Inventory 1,200 539,100
Prepaid expenses and other 27,700 (186,000)
Other assets -- (46,600)
Accounts payable and other current liabilities 445,300 (3,136,700)
----------- -----------
Net cash used in operating activities (455,200) (2,013,400)
Cash flows from investing activities:
Prepaid acquisition costs -- (52,400)
Cash acquired from VPI Acquisition -- 851,900
Note receivable from stockholder -- (61,900)
Note receivable from Advantis -- (306,200)
Purchase of furniture and equipment (12,500) (181,800)
----------- -----------
Net cash (used in) provided by investing activities (12,500) 249,600
Cash flows from financing activities:
Proceeds from initial public offering of common stock,
net of offering costs -- 6,906,500
Prepaid stock offering costs (172,100) --
Proceeds from long-term debt 670,000 --
Principal payment of long-term debt (117,800) (1,814,000)
Principal payment of long-term debt due stockholder -- (1,062,500)
----------- -----------
Net cash provided by financing activities 380,100 4,030,000
Net increase (decrease) in cash and cash equivalents (87,600) 2,266,200
Cash and cash equivalents, beginning of period 170,500 60,100
----------- -----------
Cash and cash equivalents, end of period $ 82,900 $ 2,326,300
=========== ===========
</TABLE>
F-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>
Total Consideration:
<S> <C>
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 $ 697,100
Excess of cost over net assets acquired 5,753,000
----------
$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.
F-6
<PAGE> 8
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 STANDARDS
The accompanying consolidated financial statements as of September 30,
1997 and for the three and nine months ended September 30, 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.
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
reflect 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.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), which establishes standards for reporting and
display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other
F-7
<PAGE> 9
disclosures, SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for
earlier periods to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if
any, the standard may have on future statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131), which supersedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise.
SFAS 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosure. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.
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
F-8
<PAGE> 10
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. As of September 30, 1997, $1,062,500 of the $1,500,000
unsecured promissory notes was paid based on the promissory note terms
which provide for accelerated payments to be made if certain profit
targets are met by 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 paid in August 1997, were 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 $6.5 million of funds, net of underwriting commissions,
printing costs, legal and accounting fees and other offering expenses,
totaling approximately $1,649,700, 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.
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
September 30, 1997, the excess of cost over net assets acquired
consisted of the following:
<TABLE>
<CAPTION>
Excess of Costs
ver Net Assets Accumulated
Acquired Amortization Net
========================================================================================================
<S> <C> <C> <C>
Acquisition of Phonetics, Inc. by VPI
in October 1996 $ 280,900 $ (24,200) $ 256,700
VPI Acquisition 5,753,000 (390,100) 5,362,900
--------------------------------------------------------------------------------------------------------
$ 6,033,900 $ (414,300) $ 5,619,600
========================================================================================================
</TABLE>
F-9
<PAGE> 11
The Company is continuing its 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 nine months ended September 30, 1997, the Company granted
options to purchase approximately 510,000 shares of the Company's
Common Stock principally to employees, directors and consultants,
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 and nine months ended
September 30, 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 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. PENDING ACQUISITION AND LEASE COMMITMENTS
In June 1997, the Company signed an agreement to acquire Advantis
Network & Systems, Sdn Bhd ("Advantis"), a Malaysian company providing
commercial data communications solutions by offering leading edge
networking products. Under the terms of the agreement, as proposed to
be amended, the Company would acquire all of the outstanding Common
Stock of Advantis in exchange for 300,000 shares of the Company's
Common Stock which would be issued to Advantis at the close of the
transaction, currently expected to occur in November 1997, with an
additional 230,000 shares, the issuance of which would be contingent on
the future profitability of Advantis over a two year period. All shares
of the Company's Common Stock issued to Advantis in connection with the
transaction would be subject to restrictions on transferability,
including restrictions under the Securities Act of 1933, as amended.
The agreement to acquire Advantis is contingent upon several issues
being resolved in a manner acceptable to the Company, including the
completion of the proposed amendment documentation and the Company's
due diligence investigation. The Company has obtained approval from a
Malaysian quasi-governmental authority for the acquisition of Advantis.
In July 1997, the Company loaned Advantis $300,000 for its operations
subject to a promissory note secured by the assets of Advantis and
certain personal guarantees.
The Company has signed a three-year lease on a new 7,200 square foot
facility located at 39420 Liberty Street, Fremont, California 94538.
The Company relocated its headquarters from Golden, Colorado and
consolidated its VPI and BFI subsidiaries into this facility that also
serves as its new corporate headquarters. The move was completed in
August 1997. The Company
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<PAGE> 12
believes that the new facility will be adequate for its current needs
and that additional space will be available in the future at
commercially reasonable rates. Under the terms of the lease, annual
minimum lease payments range from $138,200 to $147,700 through August
31, 2000.
9. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of BioFactors and VPI for the nine months ended September
30, 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. The following
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.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------
NINE MONTHS ENDED
-------------------------------
SEPT. 30, 1996 SEPT. 30, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 6,950,400 $ 7,572,000
Cost of sales 3,864,700 4,105,700
----------- -----------
Gross profit 3,085,700 3,466,300
Total operating expenses (includes amortization of
excess of cost over net assets acquired) 3,840,000 3,211,800
----------- -----------
Income (loss) from operations (754,300) 254,500
Other income (expense) (25,500) 35,600
----------- -----------
Income (loss) before income taxes (779,800) 290,100
Income taxes -- 91,500
----------- -----------
Net income (loss) (779,800) 198,600
=========== ===========
Net income (loss) per common share $ (0.38) $ 0.05
=========== ===========
Weighted average common and common equivalent shares
outstanding 2,074,615 3,965,153
=========== ===========
</TABLE>
F-11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS SEPTEMBER 30, 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. ("NHAN" or the "Company") was formed in
1996 as a holding company. On February 4, 1997, NHAN 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 NHAN. 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 nine months ended September
30, 1996 include only BFI results of operations. The financial data presented
for the nine months ended September 30, 1997 include nine months' operating
results of BFI and also includes eight months (February through September)
operating results of VPI (VPI was a separate company until February 4, 1997).
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1996 1997
-------- -------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 14.3 % 52.3 %
Gross profit 85.7 % 47.7 %
Research, selling and administrative expenses 186.0 % 37.3 %
Amortization of excess of cost over net assets 0.0 % 6.1 %
acquired
Income (loss) from operations (100.3)% 4.3 %
Other income (expense) (57.5)% 0.5 %
Income (loss) before income taxes (157.8)% 4.8 %
Income taxes 0.0 % 1.4 %
Net income (loss) (157.8)% 3.4 %
</TABLE>
BFI is completing development of its technology relating to employee
impairment testing systems and had almost no revenues during the first nine
months of 1997. VPI is an integrator and distributor of voice processing and
telecommunications systems for businesses and had significant revenues during
the first nine months of 1997. Increased NHAN revenue for the first nine months
of 1997 of $5,941,700 was exclusively due to the acquisition of VPI and the
recording of $6,698,800 of VPI revenues for February through
F-12
<PAGE> 14
September 1997; no such revenues were included in the first nine months of 1996.
NHAN's gross margin for the first nine months of 1997 decreased to 47.7% from
85.7% for the comparable period in 1996 as a result of recording VPI revenues
for February through September of 1997 with an associated gross margin of 48.4%.
VPI's gross margin for February through September is unusually high due to the
recording of $250,000 in extremely high gross margin revenues during the period
as well as sales of refurbished systems with higher than normal gross margins.
Management expects a 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 favorable pricing adjustments from a key supplier. In the
first nine months of 1996, BFI's net sales and gross margins were attributable
to a $700,000 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 nine months 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 nine months of 1997 versus the first
nine months of 1996 (186.0% versus 37.3%) due to the acquisition of VPI, whose
significant revenues materially altered operating percentages. RS&A expenses
increased from $1,408,300, in the first nine months of 1996 to $2,507,100 in the
first nine months of 1997, due to the recording of eight months of VPI operating
expenses offset by a reduction in BFI's RS&A expenses, which decreased from
$1,406,300 in the first nine months of 1996 to $488,300 for the first nine
months of 1997 due to expense reductions and the allocation of certain
administrative expenses to the VPI operation.
Amortization of the excess of cost over net assets acquired related to
the Voice Plus, Inc. acquisition amounted to $409,800 for the eight month period
ended September 30, 1997 or 6.1% of net sales for the period. No such charges
were recorded in 1996, as the VPI acquisition was completed February 3, 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.
Other expense decreased from $(435,100) in the first nine months of
1996 to a net other income of $32,000 in the first nine months of 1997,
primarily due to a decrease in interest expense on bridge financings which were
repaid or converted into shares of NHAN Common Stock upon consummation of the
IPO. After the application of proceeds from the IPO, the Company had only
$437,500 remaining as of September 30, 1997 in promissory notes payable in
connection with the VPI merger, after payment of $1,062,500 of such notes in the
first three-quarters of 1997. The reduction in interest expense amounted to
$363,800, and the increase in interest income totaled $103,300 during the
period.
The effective income tax rate of 28.7% in the first nine months of 1997
was substantially different from the blended federal and state statutory income
tax rate of approximately 40% principally due to the application of BFI's
current losses and the net operating loss carryforward, limited due to change of
ownership, which offset the profits of VPI on a consolidated tax return basis.
The Company has recorded a 100% valuation allowance against the BFI gross
deferred tax assets, which principally relate to net operating loss
carryforwards, as realization is presently evaluated as uncertain. The zero
effective income tax rate for the first nine months 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 during 1996 and
the first month of 1997. NHAN will file consolidated tax returns as a C
corporation in future periods.
F-13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, net cash used in the operating
activities of NHAN was $2,013,400 primarily due to the payment of accounts
payable and other current liabilities. Net cash provided by investing and
financing activities totaled $4,279,600 due primarily to NHAN'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 $6.5 million to the Company of which $1.8 million
was used to repay long-term debt and $1,062,500 was used to pay down the debt
due stockholder which was incurred in connection with the acquisition of VPI. As
a result of the above, there was a net increase in cash of about $2.3 million
during the period. NHAN's working capital at September 30, 1997 was
approximately $2.6 million. The current ratio at September 30, 1997 was 1.9 to
1, primarily due to the completion of the IPO and the acquisition of Voice Plus,
Inc.
As of September 30, 1997, NHAN had outstanding debt of $437,500 payable
to its largest stockholder (the former owner of VPI). The Company utilized
proceeds from its IPO to repay about $2.0 million of debt and interest accrued
at rates between 10% and 12% per annum and $1,062,500 of the principal due on
the stockholder notes issued in connection with the VPI Acquisition. 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 the remainder of 1997. However, the Company recently relocated and
consolidated its corporate offices in California and, in connection with that
move and consolidation, incurred certain costs of approximately $75,000
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 acquisition program in the United
States and Southeast Asia, 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 reflect 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.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all
F-14
<PAGE> 16
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier periods
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosure. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
F-15
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On February 4, 1997, the Company and Chatfield Dean & Company, its
underwriter, completed an initial public offering 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 (Commission file number 333-15563). 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
use of proceeds by the Company through September 30, 1997 was as follows
(amounts are actual unless indicated as estimates):
<TABLE>
<S> <C>
Gross Proceeds to the Company $8,180,000
Underwriters Discounts and Commissions 572,600
Underwriters Non-accountable Expenses 245,400
Other Expenses 831,700
----------
Total Expenses 1,649,700
----------
Net Offering Proceeds to the Company $6,530,300
==========
Use of Net Offering Proceeds:
Purchase and installation of equipment $ 199,000
Repayment of Indebtedness 2,485,400
Repayment of Indebtedness to Affiliates 391,100
Bonuses to Officers 250,000
Secured Loans ($60,000 to Officer) 360,000
Working Capital (estimated) 1,490,000
Cash in Banks 1,354,800
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 19, 1997 the Annual Meeting of the Stockholders of NHancement
Technologies Inc. was held in Denver, Colorado. At the meeting, the following
directors were elected to serve as directors until the next Annual Meeting of
Stockholders:
<TABLE>
<CAPTION>
NOMINEES FOR WITHHELD
-------- --- --------
<S> <C> <C>
Esmond T. Goei, Chairman 3,613,494 11,357
James H. Boyle 3,609,994 14,857
Santanu Das 3,610,474 14,377
James S. Gillespie 3,613,494 11,357
Gary L. Nemetz 3,601,059 23,792
Douglas S. Zorn 3,613,494 11,357
</TABLE>
F-16
<PAGE> 18
In addition the stockholders approved the following proposals:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NOT VOTING
--- ------- ------- ----------
<S> <C> <C> <C> <C>
(1) Amendment to the Company's Equity 1,696,204 76,416 28,560 1,823,671
Incentive Plan to increase the
aggregate maximum number of shares
issuable thereunder to 1,476,500, and
to amend certain eligibility, vesting
and other provisions of the Plan.
(2) Ratify the appointment of BDO FOR AGAINST ABSTAIN NOT VOTING
--- ------- ------- ----------
Seidman, LLP, as the Company's 3,611,211 4,640 9,000 0
independent auditors for the fiscal
year ending December 31, 1997.
</TABLE>
The foregoing matters are described in the Company's definitive proxy
statement dated June 20, 1997.
F-17
<PAGE> 19
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 -- Certificate of Incorporation with the Amended
and Restated Certificate of Incorporation(1)
3.2 -- Amended and Restated Bylaws(1)
10.1 -- Formation Agreement, dated as of October 15,
1996, between BFI and VPI(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)
10.28 -- Agreement for the Sale of Shares in Advantis
Network & System Sdn. Bhd. Dated June 20, 1997,
between the Company and the shareholders of
Advantis(2)
10.29 -- Building Lease dated June 9, 1997 by and between
the Company, as Tenant and El Dorado Holding
Company, Inc., as Landlord(2)
11 -- Statement regarding computation of per share
earnings
27 -- Financial Data Schedule
(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.
(2) Incorporated by reference to the Form 10Q SB for the quarter ended
June 30, 1997 (Commission File No. 0-21999).
(b) Reports on Form 8-K
None
[Rest of this page intentionally left blank]
F-18
<PAGE> 20
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: November 14, 1997 ----------------------------------
Esmond T. Goei
Chairman of the Board,
Chief Executive Officer,
And President
By: /s/ Douglas S. Zorn
----------------------------------
Date: November 14, 1997 Douglas S. Zorn
Executive Vice President-Finance,
Secretary, Treasurer and Chief
Financial Officer
F-19
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
<S> <C>
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
F-20
<PAGE> 1
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
September 30 September 30 September 30 September 30
1996 1997 1996 1997
=================================================================================== ============================
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period, exclusive
of cheap stock 93,225 4,228,500 93,225 612,800
Weighted average shares:
Issued pursuant to Staff Accounting Bulletin No. 83 931,390 931,390
Issued in connection with the VPI Acquisition 1,147,222
Issued in the IPO, including the over-allotment 1,770,963
Issued to convert debt to common shares 224,730
Common stock equivalent shares related to stock options 50,759 44,160
--------- --------- --------- ---------
Weighted average shares outstanding at end of period 1,024,615 4,279,259 1,024,615 3,799,875
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,326,300
<SECURITIES> 0
<RECEIVABLES> 1,916,700
<ALLOWANCES> 50,000
<INVENTORY> 438,100
<CURRENT-ASSETS> 5,426,800
<PP&E> 780,100
<DEPRECIATION> 200,900
<TOTAL-ASSETS> 11,737,700
<CURRENT-LIABILITIES> 2,838,500
<BONDS> 0
0
0
<COMMON> 42,300
<OTHER-SE> 17,574,400
<TOTAL-LIABILITY-AND-EQUITY> 11,737,700
<SALES> 6,720,800
<TOTAL-REVENUES> 6,720,800
<CGS> 3,513,400
<TOTAL-COSTS> 3,513,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,300
<INCOME-PRETAX> 322,500
<INCOME-TAX> 92,500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
