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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ____________________
COMMISSION FILE NUMBER 0-21999
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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)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
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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 No X
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
For the fiscal year ended December 31, 1996, the issuer's revenues
totaled $0.8 million, and pro forma revenues giving effect to the merger with
Voice Plus, Inc. totaled $9.6 million.
As of April 10, 1997, the aggregate market value of the voting stock
of NHancement Technologies Inc. held by non-affiliates was approximately
$12,571,484, based upon the closing bid price for such common stock on such
date in The Nasdaq Stock Market SmallCap System, of $3.875 per share.
As of April 10, 1997, there were 4,228,440 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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NHANCEMENT TECHNOLOGIES INC.
TABLE OF CONTENTS
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5. Market for Common Equity and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure . . . . . . . . 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 21
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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PART I
ITEM 1. BUSINESS
The following contains forward-looking statements regarding future
events or the future financial performance of NHancement Technologies Inc.
("NHancement" or 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, including
those set forth in this Item 1 under "Strategy," "Marketing," "Products and
Services -- The FACTOR 1000(R) System -- Future Applications" and
"Competition," as well as in Item 6 hereof and elsewhere in this report. This
report includes certain trademarks of NHancement and other companies.
OVERVIEW
NHancement Technologies Inc. (the "Company") is a leading voice
processing systems integrator that also offers a proprietary computerized
testing system for measuring human sensorimotor skills to determine an
individual's performance readiness and fitness to perform. The Company
combines the businesses of Voice Plus, Inc., a California corporation ("VPI"),
a national provider of voice processing systems that furnishes businesses with
advanced multimedia and voice processing solutions based on integrating voice
processing systems with various PBXs and computers, and BioFactors, Inc., a
Delaware corporation ("BFI"), a development stage company, that offers the
FACTOR 1000 system, a proprietary computerized impairment testing system. VPI
and BFI both provide stand-alone and LAN-based systems utilizing the Intel(TM)
computer platform. VPI derives its revenues from the sale and installation of
various communications systems products such as voice messaging, facsimile
messaging, voice response systems and electronic messaging. VPI also generates
revenues from recurring fees under annual maintenance service contracts. BFI
derives its revenues from recurring annual usage fees for its FACTOR 1000
system and from licensing the system.
The Company was incorporated in October 1996 to pursue an emerging
business opportunity created by the continuing changes in telecommunications
and an increased corporate emphasis on workplace productivity and security.
The Company combines the proven marketing, distribution and service
capabilities of VPI with the experienced product and business development
skills of BFI management.
In February 1997, the Company consummated the initial public offering
of its securities (the "IPO"). Immediately prior to the consummation of the
IPO, two merger transactions were completed whereby BFI and VPI each became
wholly owned subsidiaries of the Company. The Company's letter of intent to
acquire C.C. & Associates ("CCA"), a security systems and services provider,
expired by its terms on March 31, 1997. The letter of intent and the proposed
acquisition of CCA were described in the Company's Prospectus dated January 30,
1997. The Company is evaluating whether to go forward with the CCA acquisition
in light of other business opportunities.
The business of the Company is conducted by its two operating company
subsidiaries, BFI and VPI. The Company's principal corporate office is located
at 1746 Cole Boulevard, Suite 265, Golden, Colorado 80401, and its telephone
number is 303-271-0505.
STRATEGY
The Company intends to leverage its position as a leading provider of
voice processing systems to become a diversified provider of a full range of
productivity and security enhancement products and services. The specific
elements of the Company's strategy to achieve this objective are as follows:
Capitalize and expand on VPI's existing sales and support
infrastructure and systems integration capabilities to market VPI's
existing products and BFI's FACTOR 1000 system
The Company's strategy is to fully utilize the combined management,
product development, systems integration and national marketing and
distribution capabilities of BFI and VPI. Initially, the Company will address
productivity from the standpoint of enhancing communications capability,
increasing workers' productivity and reducing workplace injuries. The Company
will cross-market the FACTOR 1000 system through the VPI sales
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force to expand the installed base of the FACTOR 1000 system. The Company
believes that, by utilizing VPI's sales force and installed base of over 1,000
client organizations, the Company will be positioned better to exploit the full
potential of the FACTOR 1000 product as an impairment testing methodology and a
strategic corporate communications tool for reaching the blue collar workforce.
BFI will utilize VPI's national sales and support infrastructure to market
FACTOR 1000. VPI has national sales and marketing presences in major markets
geared to sell telecommunications products and services across the United
States, including the San Francisco Bay Area, Seattle, Chicago, Boston, New
York, Phoenix and Dallas. VPI intends to expand its sales and support system
into additional major U.S. markets through acquisitions or otherwise. Target
markets include Denver, St. Louis, Salt Lake City and Atlanta. Currently, no
such acquisitions are pending or probable. In October 1996, VPI entered into an
agreement to purchase, and assumed control of, the assets of Phonetics, Inc., a
Texas-based value-added voice-processing dealer and computer-telephony systems
integrator serving the southwestern United States. The acquisition was
consummated in February 1997.
There can be no assurance that the Company's plan to rely upon VPI's
experienced sales force to increase sales of the FACTOR 1000 system will be
successful, as VPI has no experience in selling the FACTOR 1000 system. Also,
while VPI's sales force may be successful in increasing sales of the FACTOR
1000 system, there can be no assurance that such sales will generate profits
for the Company. If the VPI sales force is not successful in increasing sales
of the FACTOR 1000 system, the Company would have to recruit, hire and train a
new sales force. The Company may not have sufficient cash to complete market
development of the system.
Exploit a growing trend towards unified networks by providing various
solution-based stand-alone and LAN systems and applications
The Company believes that, when implementing any new system or
technology, businesses seek to maximize the use of current resources and
facilities. As a result, previously disparate electronic systems are being
integrated to operate on a unified network. For example, networked electronic
security systems that provide access control and monitoring within a premise or
over a wide geographic area were developed following the demand by corporations
that the installation of new security systems utilize existing communications
networks. Further, the continuing trend towards outsourcing of services in an
environment of increased technological complexities requires vendors to be
highly skilled in integrating telephony technology with LAN and WAN systems.
The Company's goal is to provide integrated productivity and security systems
that achieve these goals. Management believes that VPI's voice processing
integration capabilities, BFI's proprietary FACTOR 1000 impairment testing
system and potential worker communications capability, together with the
security products and services the Company anticipates providing, will offer
solutions to meet the productivity and security needs of corporations.
Expand sales of the FACTOR 1000 system by customizing the FACTOR 1000
system to meet the needs of specific industries such as
transportation, manufacturing and the military
The Company intends to customize the testing device and graphical user
interface of the FACTOR 1000 system to incorporate the specific job
characteristics of certain industries (e.g., testing devices configured as a
steering wheel for truck drivers and with various interfaces for manufacturing
operations). In addition to expanding the sales of the FACTOR 1000 system in
the transportation and manufacturing industries, the Company intends to explore
the potential for FACTOR 1000 system applications in the military. The ability
to deploy troops quickly and effectively is a function of effective training,
measured in terms of personnel fitness to perform or undergo training, which
can be monitored through the use of the FACTOR 1000 system.
The Company's business success will depend in part upon its ability to
market, manufacture and license the FACTOR 1000 system. The market for the
system is not yet established, and it is unknown whether demand for the system
will meet the Company's expectations. The FACTOR 1000 impairment testing
system has been subjected to commercial trials for less than three years and is
in use for beta testing at only five commercial locations. Although management
believes that at least $500,000 is needed for product and market development of
the FACTOR 1000 system, there can be no assurance that the Company's cash
outlays and development efforts will result in market acceptance of the system.
Development of the FACTOR 1000 system could require significantly more funds
than the Company anticipates, particularly if a separate sales force is
required. The Company may not have sufficient cash to complete product
development of the system.
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Moreover, while the FACTOR 1000 impairment testing system has not met
with legal challenge to date, there can be no assurance that use of the FACTOR
1000 system will not be legally challenged or that future legal decisions will
not restrict or prohibit an employer's use of the FACTOR 1000 system. If the
use of the FACTOR 1000 system were legally restricted or prohibited, the
Company would be materially adversely affected.
Exploit the need for worldwide WAN capabilities to meet the growing
demands from business globalization
The Company has targeted the need for integrated global security
systems and telecommunications systems integration capabilities. With multiple
synchronized manufacturing sites across continents, operations increasingly are
in real time, and security and communications must be conducted in real time.
The Company intends to provide communications and security products and
services on a global basis by exploiting, among other things, management
contacts in Singapore, Indonesia, Hong Kong, Malaysia and Taiwan.
Acquire complementary businesses and products
The Company seeks to acquire additional businesses that will expand
its geographic coverage or provide complementary products and services in the
areas of productivity and security. In particular, the Company intends to
expand its product portfolio while maximizing its organizational strength and
expertise in marketing and systems integration. The Company believes that
productivity and security must be addressed in tandem, as methods for
increasing productivity that do not address the corresponding potential for
increased liability and asset loss will result in reduced benefits. The
Company intends to enter the security business through future acquisitions.
Acquisitions may involve a number of special risks, including adverse
short-term effects on the Company's operating results, diversion of
management's attention from the operations of the Company, dependence on
retention, hiring and training of key personnel, risks associated with
unanticipated problems or legal liabilities and amortization of acquired
intangible assets, some or all of which could have a material adverse effect on
the Company's operations and financial performance. Successfully integrating
the operations of additional companies into those of the Company will require
the cooperative efforts of the managers and employees of the respective
business entities, including the integration of the owners or managers of
smaller companies into roles that require them to report to supervisors.
Significant costs and management time may be required to integrate management
control systems. Furthermore, to manage its growth effectively, the Company
must continue to improve its operational, financial and management controls and
information systems, to accurately forecast sales demand, to control its
overhead and to manage its marketing programs. There can be no assurance of
accomplishing these results without encountering substantial costs, delays or
other problems. If management fails to establish the needed controls and to
manage the expected growth effectively, the Company's operating results and
financial condition would be adversely affected.
The Company has no plans, agreements, understandings or arrangements
with respect to any future acquisition. The Company does not intend to submit
a proposed acquisition or other business transaction to the review and vote of
its stockholders, except as required by Delaware law. Even if submitted to a
vote of stockholders, the Company's management owns a substantial portion of
the Company's outstanding voting securities and may be able to control the
outcome of any such proposal. The Company's growth strategy is highly
dependent on the Company's ability to make future acquisitions.
License FACTOR 1000 technology for use in other areas
The Company has licensed its proprietary FACTOR 1000 technology for
use by professional sports teams in baseball, basketball and hockey to
SportsTrac, Inc. (formerly, Bogart Associates International, Inc.)
("SportsTrac"), and intends to pursue other licensing arrangements in areas
unrelated to the Company's core business, such as physical therapy. The
Company believes that licensing will increase public awareness of the FACTOR
1000 technology as a non- invasive tool for measuring sensorimotor skills and
detecting fatigue and other impairment in the workplace and in other
environments. To date, BFI has had limited success in licensing the FACTOR
1000 technology. There can be no assurance that future licensing efforts will
be successful.
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THE COMPANY'S BUSINESSES
The Company's current businesses include voice processing and
multimedia messaging and impairment testing.
The Voice Processing and Multimedia Messaging Business
Voice messaging systems, at a minimum, perform the functions of the
telephone operator directing incoming calls and recording messages.
Increasingly, these systems have evolved to provide more complex functions,
such as voice processing or interactive voice response, which enable users to
conduct self-inquiry of electronic databases. These innovations have resulted
from the need to increase productivity. Voice processing enables a corporation
to increase productivity by enhancing corporate communications.
Electronic messaging systems are now commonly accepted and widely used
in offices throughout the U.S. The growth of electronic mail, or "e-mail," has
transcended private corporate networks and crossed public boundaries connecting
users worldwide through a communications medium commonly referred to as the
"World Wide Web." Despite these advances in corporate communications, the
factory worker is still largely excluded. Management believes that the use of
the FACTOR 1000 system for impairment testing provides the basis to extend
e-mail and voice messaging to the blue-collar worker.
The Impairment Testing Business
Management believes that corporations are seeking to increase human
productivity, and that to do so, corporations must provide both physical
integrity in performance capability and physical protection. The Company
provides systems that can be used to enhance productivity by identifying and
preventing impaired individuals from performing quality or safety sensitive
tasks, thereby increasing the quality of work performed, reducing errors,
avoiding accidents and enhancing workplace security. The Company has developed
the FACTOR 1000 system for routinely screening employees for fitness-for-work
prior to the performance of their jobs. The FACTOR 1000 system is a hand-eye
coordination measurement system that runs on an IBM-compatible personal
computer platform. The test is performed by the employee, without supervision,
and is administered in less than one minute.
MARKETING
VPI has an established marketing and distribution infrastructure for
its voice processing and electronic messaging products, which will be extended
to include the FACTOR 1000 system and other new products. VPI has marketing
personnel, a technical assistance center (including customer service
representatives, system engineers and senior level field technicians) and a
nationwide network of service/support dealers to provide its customers with
personalized attention, flexibility, responsiveness and accountability. The
Company recently has introduced the FACTOR 1000 product to the VPI sales
organization.
VPI markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific emerging growth
markets (including the paging and cellular operator markets), participation in
trade shows, acquisition of data bases and inclusion of its products and
services on bidders' lists. VPI maintains a strict sales and marketing
discipline that focuses on pre-sale analysis of its customers' needs and the
rate-of-return potential of specific sales opportunities to determine whether
they justify the investment of time and effort of VPI's sales and marketing
organization. Typically, VPI will only pursue sales opportunities over
$100,000 where the value added by VPI's products and services provides
significant benefits for the customer. VPI also participates in competitive
bidding for government agency work. In evaluating a prospective sales
situation, VPI also considers the lead time to revenue, the complexities of the
customer's requirements and its ability to satisfy the customer and provide it
with the necessary support.
VPI currently sells and supports voice processing systems throughout
the United States and its territories. VPI has sales and/or support offices in
the San Francisco Bay Area, Seattle, Boston, New York, Phoenix and Dallas.
BFI conducts its sales and support services from Denver.
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PRODUCTS AND SERVICES
Voice Processing and Electronic Messaging
VPI is a systems integrator and national distributor of voice
processing equipment from several manufacturers, which equipment enables users
to access and interact with a broad range of information in a variety of
formats (including voice, text, data and facsimile) from a variety of terminals
(including touch-tone telephones and personal computers). Applications such as
voice messaging, fax store-and-forward, and interactive voice response are
integrated on VPI's communications server, which is based on industry-standard
hardware and software.
VPI offers a broad range of products that supports a number of
enterprise applications such as voice messaging, text messaging, LAN messaging
and interactive voice response or self-inquiry systems.
Telephone Answering. This application is an early evolution
of voice messaging systems whereby messages are recorded when a
telephone is either busy or left unanswered.
Voice Messaging. Voice messaging is the first true
communications application that generally is offered by most voice
processing equipment vendors, including Centigram Communications
Corporation ("Centigram"), Octel Communications Corporation, and
Comverse Technology, Inc. Instead of merely recording a message, the
application enables a user to send, receive, store and forward voice
messages, on or off the system, while control is effected via the
keypad of a touchtone telephone. In some cases, such as with
Centigram's One View(TM) product, a user can access and generate voice
messages via a computer. Most vendors also offer the capability of
message notification and other more advanced features such as "message
receipt" whereby a sender of a voice message on the system can obtain
verification that a message was received and the time of such receipt.
Each vendor tends to have different user protocols and keypad
definitions that determine the ease of use of the system.
Automated Attendant. This application is an early adaptation
for messaging systems whereby the system answers an incoming call and
allows callers to direct their calls to various telephone extensions
without human operator intervention.
Paging. Voice processing systems today generally have
incorporated a paging capability. A page is triggered upon receipt
and storage of a voice message. The person paged can complete the
communications process by retrieving the voice message via a touchtone
telephone.
Audiotext. An early application of voice processing systems
is audiotext, which provides callers access to recorded voice
announcements such as weather reports and stock quotes.
Facsimile Messaging. A number of manufacturers have added
facsimile capabilities to their voice processing systems. Some have
added the capability through external peripherals, while others, such
as Centigram, have integrated the feature directly, providing a
multimedia capability that allows mixing of voice and facsimile
messages. The ease of use and functionality of the facsimile
features, such as the ability to broadcast or forward a facsimile,
differ from manufacturer to manufacturer.
Voice Response. Self-inquiry systems became popular with
familiar use of automated teller machines ("ATM"), which allow
customers to make routine inquiry of their account balances and
conduct certain transactions. Voice response systems provide
telephone access to electronic databases to enable users to obtain
information, as well as supply information to the system, via a voice
recording or commands via the telephone keypad.
Electronic Messaging. Electronic messaging has grown from
simple text messaging to include delivery of graphic information.
E-mail now has greater geographic coverage effected through private
networks (both LANs and WANs) and public networks such as the World
Wide Web.
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LAN Integration and Networking. The need for group
interaction has propelled the growth of LAN electronic messaging and
the need for localized group voice messaging through the desktop
computer, whereby voice and text messaging are integrated and
available for access simultaneously. Certain manufacturers, such as
Centigram and CallWare Technologies, Inc., have combined such access
capability through the LAN. Networking capability is an important
manufacturer differentiator in terms of connectivity and voice
quality. Electronic messages, which are stored and transmitted in
digital format, preserve the integrity of the information transmitted
no matter the frequency of storing and forwarding of the message.
Voice messages, like facsimiles, undergo severe information
degradation depending on the mode of transmission and storage. A
facsimile that undergoes multiple scanning deteriorates in legibility
as each scan reduces the quality of image capture. Similarly, voice
messages that undergo multiple analog to digital and then digital to
analog conversions may become unintelligible. Networking that
converts a voice message digitally only one time at the time of
storage, such as the technology Centigram employs, provides high
quality reproduction.
Services. VPI offers comprehensive service and support,
including project coordination, system engineering and integration,
application development, implementation, technical training, and
on-going service and support services. VPI supports its customers
with certified technicians, maintains a large spare parts inventory
and attempts to resolve problems accurately and expeditiously. VPI
offers a variety of maintenance programs that can be customized to
address the diverse needs of its customers, including (i) a
comprehensive maintenance program, offering service 24 hours per day,
seven days a week; (ii) a standard maintenance program offering
service and support during principal periods of maintenance; and (iii)
a parts and telephone maintenance program, providing support for more
technically advanced customers.
The FACTOR 1000 System
Impairment Testing. The Company's FACTOR 1000 impairment testing
system is based upon the Critical Tracking Task/Test ("CTT") technology, a
product of research conducted by Systems Technology, Inc. ("STI") for the U.S.
military in the late 1950's on pilot control of unstable aircraft. The CTT
technology has become the accepted standard for assessing human sensorimotor
performance. Continuing studies performed in the 1970's, 1980's and 1990's
used the CTT technology as the yardstick to assess the effects on performance
caused by drugs, alcohol, fatigue and stress. In 1988, the CTT technology was
licensed exclusively to BFI pursuant to a license agreement from STI, with a
term extendable to November 24, 2008. Under the terms of the license, STI is
allowed to use the CTT technology for research purposes, but routine use of the
technology would require STI to pay license fees to BFI. See "--Intellectual
Property" for the material terms of the CTT license.
BFI has invested several million dollars and many staff-years to
commercialize the CTT technology as the FACTOR 1000 system. In the FACTOR 1000
system, the CTT technology has been enhanced significantly to (i) operate
seamlessly on networked computer systems to afford placement of tracking
stations at key customer defined locations throughout the workplace; (ii)
provide security-controlled, versatile management reports, and (iii) detect
non-compliant employee performance. BFI began beta testing on the FACTOR 1000
system in 1990 and began limited marketing in January 1994 to companies with
employees in safety sensitive jobs, particularly vehicle and machinery
operators in the trucking, manufacturing, paramedic, school bus and ski
industries. The system is in regular use for beta testing at five commercial
locations.
Future Applications. The Company believes that the design and
underlying technology of the FACTOR 1000 system provides a basis for expanding
use of the FACTOR 1000 system for applications beyond impairment testing in the
industrial environment. Management believes that the FACTOR 1000 system
terminals could be utilized as limited communications devices to send
electronic messages to blue collar workers as they log on at the terminal.
However, labor unions generally have resisted any form of employee testing.
BFI has experienced labor union resistance to the FACTOR 1000 system, and, in
several instances, labor unions have prevented implementation of the FACTOR
1000 system. Similar resistance from other employee groups also may arise.
The FACTOR 1000 system also could be integrated into an overall
security system in high security facilities such as nuclear power plants and
military missile bases. The self-referencing design of the FACTOR 1000
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system that compares an individual's performance to his or her own baseline
performance may be usable to identify that individual, providing another level
of security screening. The Company also believes that the FACTOR 1000 system
potentially could be integrated into commercial vehicles as interlock devices,
disallowing operation of the vehicle unless the driver successfully completes
an impairment test.
PRINCIPAL SUPPLIERS
VPI's business is based upon the integration of hardware and software
telecommunications and data processing equipment manufactured by others into
integrated systems designed to meet the needs of its customers. Although VPI
has distributor agreements with a number of equipment manufacturers,
substantially all of its revenue is based upon products manufactured by
Centigram. See "-- Products and Services." Any termination or adverse change
in the Company's distributor relationship with Centigram would have a material
adverse impact upon the Company's voice processing business. In addition, the
Company depends upon Centigram to offer products that are competitive with
products offered by other manufacturers as to technological advancement,
reliability and price. If Centigram's competitors should surpass Centigram in
any of these qualities, the Company may be required to establish alternative
strategic relationships. Any such development would adversely affect the
Company's business for an indeterminate period of time until new supplier
relationships could be established.
Pursuant to the Authorized U.S. Distributor Agreement, dated as of
April 16, 1996 (the "Distributor Agreement"), between Centigram and VPI; VPI is
an independent distributor of Centigram products in the U.S., Puerto Rico and
Canada and may expand this territory into international locations with written
authorization from Centigram. Under the Distributor Agreement, VPI must
purchase a certain number of products each quarter from Centigram. During each
of the nine years that this distributor relationship has existed, VPI has
exceeded its quotas by significant amounts. The Distributor Agreement expires
on December 31, 1997, but is renewable automatically for successive two-year
terms until cancelled by either party upon 90 days' notice. The Distributor
Agreement may be terminated for cause in the event (i) VPI defaults in the
payment of any amount due Centigram, and such default continues unremedied for
a period of 60 days after written notice of default; (ii) VPI breaches certain
provisions of the Distributor Agreement concerning the proprietary rights of
Centigram; (iii) VPI is acquired by a business entity that provides products or
services in direct competition with Centigram's products, and in Centigram's
judgment, such acquisition represents a conflict of interest; (iv) VPI fails to
perform any obligation under the Distributor Agreement and such failure
continues for a period of 20 days after written notice; (v) VPI fails to
purchase any Centigram assigned quota for a period of two consecutive quarters;
or (vi) VPI sells a Centigram product outside VPI's designated territory. In
addition, the Distributor Agreement terminates automatically if VPI becomes
insolvent, makes an assignment for the benefit of its creditors or if
bankruptcy proceedings are commenced by, for or against VPI. Any controversy
or claim related to the Distributor Agreement must be submitted to final and
binding arbitration to be held in San Jose, California, according to the rules
of the American Arbitration Association.
VPI has distributor agreements with a number of equipment
manufacturers in addition to Centigram. In accordance with the terms of
distributor agreements, a manufacturer may discontinue the distributor
relationship because of factors related to a particular distributor or because
of a manufacturer's decision to change its method of distributing its products
to all or parts of its markets. In making such a change, a manufacturer of key
products sold by a distributor may effectively become a direct competitor of
its former distributor. Moreover, a manufacturer may reduce its dealer
discounts, eliminate exclusive distribution rights, reduce the manufacturer's
support of a distributor or otherwise adversely affect the competitive
environment in which the distributor sells the manufacturer's products. Any
material change in VPI's distributor relationships with its key suppliers, or
any interruption of the delivery of equipment to VPI by any of its key
suppliers, would have a material adverse effect upon the Company.
INTELLECTUAL PROPERTY
BFI holds an exclusive worldwide license to market the FACTOR 1000
system until 2008. The patent and copyrights on the CTT technology, a critical
component of the FACTOR 1000 system, are held by STI. Under the CTT license,
the CTT technology is escrowed, and the escrow agent is instructed that, in the
event STI is acquired, merged or its principal assets acquired, the CTT
technology will be delivered to BFI unless the successor-in-interest
-7-
<PAGE> 10
agrees in writing to be bound by all obligations undertaken by STI pursuant to
the CTT license. The CTT license provides that STI may use the FACTOR 1000
technology for research purposes, but any routine use would require payment of
fees to BFI. If either party fails to fulfill its obligations under the CTT
license, the other party may terminate the CTT license by giving 60 days'
written notice of termination, and the CTT license will be terminated unless
such obligations are fulfilled during such 60-day period. In addition, in the
event of any adjudication of bankruptcy, appointment of a receiver, assignment
for the benefit of creditors or levy of execution directly involving BFI, STI
may terminate the CTT license by giving five days' written notice.
The CTT license requires BFI to make quarterly royalty payments to STI
of 8.5% of revenues directly related to CTT-based impairment testing of
employees. In addition to end-user licensing, the CTT license permits BFI to
sublicense the CTT technology; provided that the sublicense agreement requires
an initial payment to BFI of at least $250,000 and an on-going royalty payment
of 8.5% of revenues. BFI must make payments to STI on such sublicensing
arrangements as follows: (i) a royalty payment of 8.5% on $250,000 of the
initial sublicense fee plus 50% of any initial fee in excess of $250,000; and
(ii) a royalty payment of 50% of the sublicense royalties received, which
amount must be at least 4.25% of the gross contract revenue. The agreement
also includes a minimum aggregate payment to STI of $150,000 over each
three-year period (which amount may include fees paid to STI for consulting
services), beginning with the three-year period commencing on January 1, 1997.
The Company has granted an exclusive license of sports-related and
sports entertainment applications of the FACTOR 1000 system (and sublicense of
the CTT technology) to SportsTrac for the term of the CTT license. The
Company collected a $1,000,000 initial fee from SportsTrac and in 1996 paid to
STI a royalty of $42,500 on the $500,000 portion of the initial fee subject to
the STI royalty. To date, SportsTrac has sold only one system. As a result,
the Company has collected only $850 (in the first quarter of 1997) in on-going
royalties from SportsTrac, and the Company has not forecasted significant
revenue from any such on-going royalties in the future.
The Company's right is totally dependent on maintenance of its CTT
license and is dependent on STI for product validation and expert witness
testimony of STI's principals regarding aerospace and vehicle performance
dynamics and stability and human operator dynamic response. Although the
Company is currently in compliance with the payment and other terms of its
license agreement with STI, the Company previously has been delinquent in its
payments and certain reporting obligations. The failure to pay future royalty
payments or otherwise to perform its obligations under the license agreement,
including failure to market the product, could result in loss of the license
from STI, which would have a material adverse effect upon the Company.
The Company's success depends, in part, on its intellectual property
rights. The Company intends to protect vigorously the CTT software, the
FACTOR 1000 technology and the Company's other intellectual property against
infringement or misappropriation by others through a combination of copyright,
trade secret and trademark law, licensing, confidentiality agreements with
certain customers, suppliers and employees, and other security measures. There
can be no assurance, however, that steps taken by the Company will prevent
misappropriation of its intellectual property or that competitors will not
develop products similar to the FACTOR 1000 system. Protection of the CTT
software owned by STI requires the active participation of STI in such efforts.
There can be no assurance that STI will cooperate with the Company regarding
such matters. Further, the enforcement of proprietary rights of the Company
through litigation could result in costs to the Company that could have a
material adverse effect on its financial condition. In addition, although the
Company believes that the CTT software, the FACTOR 1000 technology and the
Company's other intellectual property do not infringe on the proprietary rights
of third parties, there can be no assurance that infringement or invalidity
claims will not be asserted against the Company in the future. An adverse
determination or the costs of defending litigation based on such claims would
have a material adverse effect on the Company's business and financial
condition.
The Company currently has two federally registered trademarks --
FACTOR 1000(R) and PERFORMANCE FACTORS(R) -- and has several federal trademark
applications. No assurance can be given that federal registration will be
awarded based on the applications made.
-8-
<PAGE> 11
GOVERNMENTAL REGULATION
The Telecommunications Act of 1996 eliminated government mandated
barriers between local and long distance calling, cable television,
broadcasting and wireless service. Consequently, local telephone companies,
the traditional long distance carriers and cable television companies may now
enter any of these markets to provide both local telephone and long distance
service, as well as television programming. Such increased competition likely
will change the infrastructure for implementing communications applications,
such as voice and electronic messaging.
INSURANCE
The Company currently maintains director and officer liability
insurance of $3,000,000 per occurrence, $3,000,000 in the aggregate, general
liability insurance of $1,000,000 per occurrence, $2,000,000 in the aggregate,
a general liability umbrella policy with a $5,000,000 limit, and products
liability insurance of $2,000,000 per occurrence, $2,000,000 in the aggregate.
There can be no assurance, however, that the Company will be able to secure
increased coverage if needed or that any insurance policy will provide adequate
protection against successful claims. A successful claim brought against the
Company in excess of the Company's insurance coverage could have a material
adverse effect upon the Company.
The Company has purchased a key man insurance policy in the amount of
$1 million on the life of Esmond T. Goei, the Company's Chairman, President and
Chief Executive Officer, which names the Company as the sole beneficiary. The
Company intends to purchase additional key man insurance policies on other key
employees. There can be no assurance that the Company will be able to obtain
key man insurance policies on such individuals at an acceptable cost. The loss
of the services of any of these persons would have a material adverse effect on
the Company.
EMPLOYEES
As of March 31, 1997, the Company employed a total of 45 employees,
all but two of whom are employed on a full-time basis. The Company has never
had a work stoppage and no employee is covered by a collective bargaining
agreement. The Company believes that its relations with its employees are
good.
COMPETITION
Voice Processing
The voice processing market, one of the fastest growing segments of
the telecommunications industry, is highly competitive. The Company believes
that competition within this industry will intensify with the introduction of
new product enhancements and new competitors. VPI competes with a number of
larger integrated companies that provide competitive voice processing products
and services as subsets of larger product offerings, including all the former
regional Bell companies and major PBX equipment manufacturers, such as Fujitsu
Limited and Lucent Technologies Inc. ("Lucent"), formerly a division of AT&T.
These integrated public company competitors are substantially larger and may
encroach on the company's voice processing equipment and service market.
Additionally, in the customer premise equipment markets, VPI competes with two
types of equipment companies: (i) interconnects (PBX providers), including
Lucent, Northern Telecom Limited, Fujitsu Limited and NEC Corporation, and (ii)
independent voice processing manufacturers, such as Octel Communications
Corporation, Digital Sound Corp., Active Voice Corp., Applied Voice Technology,
Inc., Glenayre Technologies, Inc. and Comverse Technology, Inc. Glenayre
Technologies, Inc. and Comverse Technology, Inc., among others, also compete
with the Company in the service provider market. Many of the Company's
competitors in the voice processing field have better name recognition in the
market, a larger installed base of customers and greater financial, marketing
and technical resources than the Company.
VPI believes that its attention to customer service, as well as to the
customer's technical requirements, has resulted in success in competing and
winning sales bids against its much larger competitors. VPI provides detailed
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<PAGE> 12
information and support to its customers beginning at the point of sale and
continuing through the implementation period and ongoing service. Depending on
the terms of the maintenance contract purchased, the Company provides
assistance for its customers up to 24 hours per day, 365 days a year. The
Company provides extensive training for its employees in products,
installation, system design and support in order to assist customers in
selecting the right equipment and to provide the quality of service that is
demanded. VPI's technical capabilities and expertise are enhanced by its
experienced technical personnel. VPI's junior field technicians generally have
at least two years of field experience with the particular equipment being
installed, and senior technicians have about eight years of field experience.
This level of experience is significantly more than that offered by many of
VPI's larger competitors and is often a deciding factor in a customer's
purchase decision. VPI believes it has a very loyal customer base founded on
satisfaction with its service capabilities and active account management.
Customer Premise Equipment. In the CPE markets, VPI competes with two
types of companies: interconnects (PBX providers), including Lucent, Northern
Telecom Limited, Fujitsu Limited and NEC Corporation, and independent voice
processing manufacturers, such as Octel Communications Corporation, Glenayre
Technologies, Inc., Digital Sound Corp., Active Voice Corp. and Applied Voice
Technology, Inc.
PBX providers sell voice processing equipment as an integrated
solution with their own PBXs. These providers may have a competitive advantage
with customers purchasing a voice processing system at the same time they are
purchasing a new PBX, and, in many situations, the Company is competing with an
organization offering the same product platform. The Company believes its
competitive strengths are its development and delivery of customer
applications, its implementation process and its service and support
performance. The Company also believes its ability to deliver enhanced
applications, such as integration with computer networks, facsimile and voice
response systems applications, differentiates its products and services.
VPI is the only national distributor that focuses solely on voice
processing systems integration and has developed a strong national capability
in meeting and supporting its customers' varying voice processing needs. Other
distributors that focus solely on voice processing do not have a national
organization. VPI's national competitors are generally the manufacturers of
voice processing equipment. Such manufacturers are concerned primarily with
the sale of their own equipment and generally do not promote other
manufacturers' equipment that may better satisfy the needs of their customers.
The Company expects that new or enhanced products will be offered by
its principal existing competitors and new competitors. In addition, the
Company believes that computer software vendors, such as Novell, Inc., Lotus
Development Corp. and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications.
Service Providers. The Company provides products to various service
providers, including cellular communications operators and long-distance
resellers. Competitors include several independent voice processing
manufacturers such as Boston Technology Inc., Octel Communications Corporation,
Centigram, Comverse Technology, Inc., Digital Sound Corp. and Glenayre
Technologies, Inc. The further deregulation of the telecommunications industry
resulting from the Telecommunications Act of 1996 has provided opportunities
for increased competition in the local telephone market. The Company believes
that this market will require extensive integration of equipment supplied by
various vendors and, as such, would benefit from the Company's independence and
integration skills.
Impairment Testing
The FACTOR 1000 system is a non-invasive test for impairment that
operates without supervision, takes less than one minute to administer and
report results, and can be installed in an industrial environment with minimal
disruption. No direct competition for the FACTOR 1000 system exists. The
other current impairment testing technologies--biochemical, neurological and
methods of performance testing other than the FACTOR 1000 system--lack the
extensive, broadscale scientific validation conducted over the last 30 years on
the CTT technology, the critical component of the FACTOR 1000 system.
Biochemical or drug testing is not a true impairment test in that it can only
identify the presence of specific levels of specified substances. Additionally,
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<PAGE> 13
biochemical testing is a relatively time intensive and invasive method to
manage risk. Neurological testing is expensive and time intensive due to the
requirement of skilled technicians to evaluate results and is therefore not an
efficient method to evaluate impairment. Performance testing for impairment
includes sensorimotor testing, such as that used in the FACTOR 1000 system, and
cognitive testing. Cognitive testing in the industrial environment is time
consuming (test administration can take from five to 45 minutes) and lacks the
level of scientific validity obtainable from other impairment testing methods.
In summary, the Company believes that other impairment testing methods are not
as practical for the commercial environment as is the FACTOR 1000 system.
In addition to its extensive scientific validation, the FACTOR 1000
system's testing advantages are its ease and speed of administration in an
industrial environment and the fact that it does not compromise the privacy of
the test subject. The test is self-administered in less than one minute, and
designated supervisors and managers have immediate access to a variety of
reporting options to assist them in identifying and managing potential safety
risks. To ensure success, PERFORMANCE FACTORS services--policy consulting,
procedural guidelines, operations documentation, implementation planning,
on-site training, trend analyses reporting and ongoing support--are provided to
all customers of the FACTOR 1000 system. The FACTOR 1000 system is available
both as a stand-alone system or networked in a LAN.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate offices occupy approximately 3,260 square feet
of office space in Golden, Colorado, currently leased by BFI. This facility is
leased pursuant to a lease agreement expiring December 31, 1998. Rent payments
total $4,071 each month. In the near future, the Company intends to
consolidate its offices and move its principal corporate office to California.
Management is engaged in discussions with its current landlord and expects the
landlord to cancel the lease with little or no cost to the Company. There can
be no assurance, however, that the move and consolidation can be accomplished
as planned, or that the lease can be terminated without penalty.
VPI leases office space at various locations under five short-term
leases ranging from month-to-month to one-year terms and totaling approximately
13,750 square feet. Total monthly office rental expense for all such offices
is approximately $16,460. The Company believes that leased office space at
market rates is readily available at all such locations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management believes that any
resulting liability, individually or in the aggregate, will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the over-the-counter market
and is quoted on The Nasdaq Stock Market SmallCap System under the symbol
"NHAN" since the Company's February 4, 1997 initial public offering. As of
March 31, 1997, there were approximately 106 shareholders of record. The
following table sets
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<PAGE> 14
forth for the periods indicated the high and low closing prices for the
Company's Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
HIGH LOW
---- ---
<S> <C> <C>
First quarter (February 4, 1997 to March 31, 1997) . . . . . . . $4.3125 $3.75
</TABLE>
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock since its
inception, nor did its predecessor, BFI. VPI in the past has made
distributions to its sole stockholder. However, the Company currently intends
to retain earnings for use in the business. Accordingly, the Company does not
anticipate paying any dividends to its stockholders in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On February 1, 1996, BFI closed a bridge financing, pursuant to which
it issued an aggregate of (i) $315,000 principal amount of unsecured promissory
notes (the "February 1996 Notes"), bearing interest from the date of issuance
until due and payable on March 31, 1997 at a rate of 10% per annum, and at 18%
per annum in the event of default, and (ii) shares of BFI Common Stock,
subsequently exchanged for 70,875 restricted shares of Common Stock. Such
shares of Common Stock are entitled to certain demand registration rights
commencing on the first anniversary of the IPO. Upon the February 4, 1997
consummation of the IPO, the outstanding principal amount was repaid, all
accrued interest was converted into 7,255 shares of Common Stock at the IPO
price ($4.00 per share), and the Company issued warrants to purchase an
aggregate of 23,625 shares of Common Stock at an initial exercise price of 120%
of the IPO price ($4.80 per share). The proceeds from the February 1996 Notes
were used for general corporate purposes.
On May 17, 1996, BFI closed a bridge financing, pursuant to which it
issued an aggregate of (i) $300,000 principal amount of unsecured promissory
notes (the "May 1996 Notes"), bearing interest at a rate of 10% per annum, due
and payable on March 31, 1997, and (ii) shares of BFI Common Stock,
subsequently exchanged for 67,500 restricted shares of Common Stock. Such
shares of Common Stock are entitled to certain demand registration rights
commencing on the first anniversary of the IPO. Upon the February 4, 1997
consummation of the IPO, the outstanding principal amount was repaid, all
accrued interest was converted into 5,093 shares of Common Stock at the IPO
price ($4.00 per share), and the Company issued warrants to purchase an
aggregate of 22,500 shares of Common Stock at an initial exercise price of 120%
of the IPO price ($4.80 per share). The proceeds from the sale of the May 1996
Notes were used for general corporate purposes.
On November 5, 1996, BFI closed a bridge financing, pursuant to which
it issued an aggregate of (i) $500,000 principal amount of unsecured promissory
notes (the "November 1996 Notes"), bearing interest at 10% per annum, due and
payable on the earlier of (a) March 31, 1997, or (b) the consummation of the
IPO, and (ii) warrants to purchase 500,000 restricted shares of Common Stock,
exercisable commencing January 30, 1998 at an initial exercise price of 120% of
the IPO price ($4.80 per share) and nontransferable except under certain
limited circumstances. The shares of Common Stock issued upon exercise of the
warrants are entitled to certain demand registration rights commencing on the
first anniversary of the IPO. Upon the February 4, 1997 consummation of the
IPO, the outstanding principal of the notes and accrued interest in the
aggregate amount of $512,868 was paid. The proceeds from the November 1996
Notes were used to purchase director and officer liability insurance and to pay
legal, accounting and other fees in connection with the IPO.
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<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, including those set forth in this Item 6 under "Liquidity and Capital
Resources," as well as in Item 1 hereof and elsewhere in this report.
GENERAL
NHancement was formed in 1996 as a holding company. On February 4,
1997, NHancement 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 NHancement
Technologies Inc. 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 a
separate independent entity. For all periods presented, the Historical
Financial Statement information includes the separate accounts of BFI and VPI
without giving effect to the business combinations or the IPO. The unaudited
pro forma financial information gives effect to the business combinations and
the IPO, and, accordingly, the assets and liabilities of BFI are reflected at
their historical amounts, with VPI presented at estimated current fair values.
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------
1995 1996
---- ----
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of goods sold . . . . . . . . . . . 41.4 % 16.2 %
Gross margin . . . . . . . . . . . . . . 58.6 % 83.8 %
Research, selling and administration
expenses . . . . . . . . . . . . . . . . 196.1 % 240.0 %
Operating loss . . . . . (137.5)% (156.2)%
Other expense . . . . . . . . . . . . . . (115.2)% (73.3)%
Loss before income taxes . . . . . . . . (252.7)% (229.5)%
Income taxes . . . . . . . . . . . . . . 0.0 % 0.0 %
Net loss . . . . . . . . . . . . . . . . (252.7)% (229.5)%
</TABLE>
BFI is a development stage company focused on employee impairment
testing systems. BFI's net sales and gross margins in 1995 were attributed to
early "beta" type customer installations of the FACTOR 1000 system, with
significant negative gross margins and high engineering and customer
installation costs. The increased revenue for 1996 of $796,000 (compared to
$451,000 in 1995) was primarily due to (i) the recording of the receipt in 1996
of $700,000 as final payment from SportsTrac on a $1 million one-time fee in
connection with a licensing agreement signed in 1995 for BFI's technology for
sports-related applications, and (ii) customer renewals of licenses for the
FACTOR 1000 impairment testing system. BFI's gross margin for 1996 increased
to 83.8% as a result of the receipt of such $700,000 payment with minimal
related expense. No significant revenues from the commercial release of the
FACTOR 1000 system are expected until at least the second half of 1997.
Research, selling and administrative ("RS&A") expenses as a percentage
of net sales were high during 1995 and 1996 for the following reasons: (i) for
most of 1995, BFI continued development of the FACTOR 1000 system, working
closely with a few beta customers as the product was made commercially viable,
while several of BFI's early stage customers committed to continue to use the
FACTOR 1000 system in a commercial mode; (ii) as
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<PAGE> 16
development costs significantly decreased during late 1995 and early 1996, most
of the operating costs were incurred in finding complementary businesses to
acquire that would provide a viable marketing channel for the FACTOR 1000
system; and (iii) during 1996 significant expenditures were made in connection
with unconsummated mergers and indirect expenditures were made in connection
with the VPI merger and to prepare for the IPO. Management believes that at
least $500,000 is needed in 1997 for initial market development and product
packaging expenses for the FACTOR 1000 system.
Other expense increased from $519,200 in 1995 to $584,000 in 1996,
primarily due to interest and original issue discounts associated with
additional bridge financings, which financings were repaid or converted upon
consummation of the IPO. After the application of funds from the February 4,
1997 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.
<TABLE>
<CAPTION>
VOICE PLUS, INC.
YEARS ENDED
DECEMBER 31
-----------
1995 1996
---- ----
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of goods sold . . . . . . . . . . . . 57.7 % 58.6 %
Gross margin . . . . . . . . . . . . . . . 42.3 % 41.4 %
Selling and administration expenses . . . . 38.3 % 30.6 %
Operating income . . . . 4.0 % 10.8 %
Other income . . . . . . . . . . . . . . . 0.4 % 0.4 %
Income before income taxes . . . . . . . . 4.4 % 11.2 %
Income taxes . . . . . . . . . . . . . . . 2.0 % 1.2 %
Net income . . . . . . . . . . . . . . . . 2.4 % 10.0 %
</TABLE>
VPI is an integrator and distributor of voice processing and
telecommunications systems for businesses. VPI's net sales increased 20.7%
from $7.3 million in 1995 to $8.8 million in 1996. The increase between 1995
and 1996 was due primarily to the sale of larger voice processing systems and
multiple installations for the same customer.
Gross margin increased 18.2% from $3.1 million in 1995 to $3.6 million
in 1996. Gross margin as a percentage of net sales remained relatively
constant at 42% in 1995 and 41% in 1996. The overall gross margin trend for
VPI's sales, excluding sales of reconditioned equipment, is declining at a slow
rate as a result of industry competition. A major objective of the Company's
business combination strategy is to take advantage of VPI's established
distribution strength by providing VPI with complementary higher gross margin
products, such as the FACTOR 1000 system, that are either internally developed
or acquired in future business combinations.
Selling and administrative ("S&A") expenses remained fairly constant
at $2.8 million in 1995 and $2.7 million in 1996, but decreased 7.7% during
1996 as a percent of revenues. The decrease from 1995 to 1996 was attributable
to the discontinuance of the bonus paid to the sole shareholder of VPI of
$550,000, while normal sales expenses increased in proportion to the increase
in revenues.
A slight increase in other income, from 1995 to 1996, occurred
primarily due to interest on higher cash balances invested in interest bearing
bank accounts during the later period. VPI had no debt during the reporting
periods.
The effective income tax rate of 45.7% in 1995 was slightly different
from the federal statutory income tax rate principally due to state income
taxes. The effective income tax rate for the 1996 of 10.5% reflects VPI's
change to Subchapter S corporation status, effective January I, 1996, the
elimination of a deferred tax asset and the establishment of a provision for
built-in gains on the effective date of the S corporation election. The
Company will
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<PAGE> 17
file consolidated tax returns as a C corporation in the future and will be
subject to the higher C corporation income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complementary businesses and products is
an element of the Company's business strategy, none of the proceeds of the IPO
were reserved specifically for the funding of future acquisitions. If a cash
payment in excess of available working capital is required to make an
acquisition, the Company will need to obtain additional debt or equity
financing. Debt financing may require the Company to pay significant amounts
of interest and principal payments, thus reducing the resources available to
expand its existing businesses. Equity financing may be dilutive to the
Company's existing stockholders' interest in the assets or earnings of the
Company. There can be no assurance that the Company will be able to obtain
either debt or equity financing if and when it is needed for acquisitions or
that, if available, such financing would be available on terms the Company
deems acceptable. The inability of the Company to obtain such financing would
likely have a material adverse effect on the Company's acquisition strategy.
Further, the refusal of potential acquisition candidates to accept Common Stock
as consideration also could require the Company to reduce or curtail its
acquisition strategy.
BIOFACTORS, INC.
During 1996, net cash used in the operating activities of BFI was
$673,100, and net cash provided by investing and financing activities totaled
$562,700, resulting in a net decrease in cash of about $110,000 during 1996.
BFI's working capital deficit at December 31, 1996 was $3.7 million. The
current ratio decreased from 0.38 to 1 at December 31, 1995 to 0.13 to 1 at
December 31, 1996, primarily due to increased bridge debt financing and
one-time costs associated with the VPI merger and the IPO.
As of December 31, 1996, BFI had outstanding debt of approximately
$2.6 million and $471,000 of associated accrued interest. BFI has financed its
working capital requirements during the last two years through various bridge
financings totaling approximately $2.6 million. The Company utilized a portion
of the net proceeds of the IPO to repay approximately $2.0 million of
outstanding nonconvertible 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.
BFI management estimates that it will incur minimal capital
expenditures during the 12 months following the IPO. 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, together with the net
proceeds of the IPO, 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, and it will use various methods
to finance acquisitions, including the payment of cash, for this purpose.
VOICE PLUS, INC.
During 1996, net cash provided by operating activities of VPI was
approximately $1.5 million, and net cash used in financing activities totaled
$918,700, of which $868,700 was used to pay dividends to VPI's sole shareholder
and $50,000 was used to repurchase and retire shares of common stock of VPI.
Cash used in investing activities was $312,500, all of which consisted of
additions to property and equipment. VPI had no debt during these periods.
-15-
<PAGE> 18
VPI's working capital at December 31, 1996 was ($190,600). The
current ratio decreased from 1.2 to 1 at December 31, 1995 to 0.95 to 1 at
December 31, 1996, primarily due to increases in deferred revenues and accounts
payable recorded in 1996, which were partially offset by increases in accounts
receivable and inventory. Deferred revenues and accounts payable increased as
a result of two significant product installations pending at December 31, 1996,
which delayed customers' acceptance and payment for the products installed.
Accounts receivable increased approximately 41% during 1996, while
average days outstanding during 1996 increased to 69 days, as compared to 58
days for 1995, due to two significant system installations pending at December
31, 1996. These significant pending system installations also caused inventory
turnover to average approximately 53 days during 1996, as compared to
approximately 26 days during 1995.
VPI estimates that it will make minimal capital expenditures during
1997 and it is anticipated that most capital expenditures will be financed
through equipment leases and will not require significant direct outlays of
cash.
ACCOUNTING STANDARDS
The Company was not significantly affected by its adoption of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. This statement was effective for
the Company's year ending December 31, 1996.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," established a different method of calculating earnings per share than
is currently used in accordance with Accounting Principal Board No. 15,
"Earnings per Share," and provides for the calculation of basic and diluted
earnings per share. Calculations under the new standard, which is anticipated
to be adopted in the fourth quarter of 1997, are not expected to have a
significant impact on the Company's earnings per share calculation.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant seasonal
variations, although net sales may be affected in the future by overall hiring
trends and the concentration of vacations of key employees of client companies
during the summer months.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1
hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-16-
<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to
each of the directors, executive officers and significant employees of the
Company and its subsidiaries. Richard H. Williams was a director of the
Company until April 9, 1997, when he resigned for personal reasons. The
vacancy created by Mr. Williams' resignation has not been filled.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Esmond T. Goei . . . . . . . . 46 Chairman, Chief Executive Officer, President and
Director
Douglas S. Zorn . . . . . . . 48 Executive Vice President, Chief Operating and Financial Officer,
Treasurer, Secretary and Director; President of BioFactors, Inc.
Linda K. Wackwitz . . . . . . 46 Vice President, General Counsel and Assistant
Secretary
James S. Gillespie . . . . . . 44 Vice President Sales and Director; President of Voice Plus, Inc.
Diane E. Nowak . . . . . . . . 35 Vice President of Sales, Western Region, of Voice
Plus, Inc.
Bradley J. Eickman . . . . . . 31 Director of Operations of Voice Plus, Inc.
William Brehm . . . . . . . . 52 Director
Gary L. Nemetz . . . . . . . . 44 Director
</TABLE>
Esmond T. Goei. Mr. Goei has served as Chairman of the Board,
President and Chief Executive Officer of the Company since its incorporation in
October 1996. Mr. Goei has served as Chairman of the Board, President and
Chief Executive Officer of BFI since December 1993. From October 1992 to March
1997, Mr. Goei was a General Partner of Transition Ventures I, L.P., a venture
capital fund which he co-founded. Mr. Goei also was the co-founder of
Transtech Venture Management Pte. Ltd., an international venture capital
management firm established in 1986, and co-founder of Transpac Capital
Management Pte. Ltd. in 1989, a venture capital management firm established in
1989, of which he was Chief Executive Officer for North American operations
until 1992. Mr. Goei currently serves as a director and Vice Chairman of YES!
Entertainment Corp., an electronics toy company of which he was a co-founding
investor in 1992 and which is listed on The Nasdaq National Market ("Nasdaq
NMS"). From 1988 to 1995, Mr. Goei was a director of CliniCom, Inc., a patient
care information systems company listed on Nasdaq NMS, which was sold in 1995
to HBO & Company. From 1987 to March 1995, Mr. Goei was a director of
Centigram Communications Corporation, a voice messaging equipment company
listed on Nasdaq NMS and VPI's largest supplier of voice processing equipment,
and from 1988 to 1994, was Chairman of the Board. From 1988 to 1994, Mr. Goei
also was a director of TranSwitch Corp., a telecommunications semiconductor
systems company listed on Nasdaq NMS.
Douglas S. Zorn. Mr. Zorn has served as Executive Vice President,
Chief Financial and Operating Officer, Treasurer, Secretary and a director of
the Company since its incorporation in October 1996. Mr. Zorn has served as
Executive Vice President, Secretary and Treasurer and Chief Financial and
Operating Officer of BFI since December 1993. From 1991 until he joined BFI,
Mr. Zorn was Chief Financial Officer of Monterey Telecommunications
Corporation, an OEM wireless switch manufacturer for Motorola, Inc. From 1983
to 1991, he was employed by Centigram where he last served as Vice President of
Finance and Administration. Prior to joining Centigram, Mr. Zorn held various
positions with Gould, Inc., a manufacturer of sophisticated logic test
instruments, including Operation Controller of the Biomation Division. Mr.
Zorn is a licensed certified public accountant.
Linda K. Wackwitz. Ms. Wackwitz has served as Vice President, General
Counsel and Assistant Secretary of the Company since its incorporation in
October 1996 and has held the same positions with BFI since February
-17-
<PAGE> 20
1996. From 1989 until she joined the Company, Ms. Wackwitz was a corporate and
securities attorney with Davis, Graham & Stubbs LLP, a Denver, Colorado law
firm.
James S. Gillespie. Mr. Gillespie has been Vice President of Sales
and a director of the Company since its incorporation in 1996 and continues as
President of VPI. Mr. Gillespie was the founder of VPI and has served as
President and Chief Executive Officer since VPI's incorporation in 1987. Mr.
Gillespie was with Centigram from 1983 to 1986, during which time he held a
number of positions, with his final position being Director of National Sales.
Diane E. Nowak. Ms. Nowak has served as Vice President of Sales,
Western Region, for VPI since July 1993. Ms. Nowak joined VPI in 1989 and has
served as Senior Sales Executive (May 1990 to July 1991) and as Director of
Major Accounts (July 1991 to July 1993). Ms. Nowak served as a director of VPI
from November 1995 to September 1996.
Bradley J Eickman. Mr. Eickman has served as Director of Operations
for VPI since November 1995. Prior to that time, Mr. Eickman served as Sales
Manager (January 1994 to November 1995), Manager of Procurement and Quality
Assurance (May 1992 to January 1994), Service Manager (July 1991 to May 1992)
and Customer Support Manager (April 1990 to July 1991). Mr. Eickman served as
a director of VPI from November 1995 to September 1996.
William Brehm. Mr. Brehm became a director of the Company upon the
consummation of the IPO. Mr. Brehm served from June 1994 to June 1995, and
from October 1995 to February 1997, as a director of BFI. From 1989 to 1995,
Mr. Brehm was the Chief Executive Officer and, from 1988 to 1989, Mr. Brehm was
President of CliniCom, Inc. From 1985 to 1987, he was President of Baxter
Intermediate Systems Division, a healthcare information systems company. From
1984 to 1985, he was Executive Vice President and Chief Operating Officer of
Health Information Systems, Inc., a healthcare information systems company.
Gary L. Nemetz. Mr. Nemetz became a director of the Company upon the
consummation of the IPO. Mr. Nemetz served in March 1995, and from April 1996
to February 1997, as a director of BFI. Mr. Nemetz served as a consultant to
BFI from April 1995 to April 1996. Since 1984, Mr. Nemetz has served as
President of Admiral Capital Corp., a private investment management firm. He
is a general partner of Transition Capital Management Company and Transition
Ventures 1, L.P., a venture capital fund. Since 1984, Mr. Nemetz also has
conducted a management consulting business and law practice through G.L.
Nemetz, a Professional Corporation. Mr. Nemetz is a certified public
accountant (inactive status). Since 1995, Mr. Nemetz has served as a director
of YES! Entertainment Corp., which is listed on Nasdaq NMS.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company had no securities registered pursuant to Section 12 of the
Exchange Act during its most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table, and the accompanying explanatory footnotes,
include annual and long-term compensation information for services rendered in
all capacities during the fiscal years ended December 31, 1994, 1995 and 1996,
by (i) the Company's Chief Executive Officer and (ii) the other most highly
compensated executive officer of the Company at December 31, 1996, and an
additional individual not serving as executive officer of the Company at
December 31, 1996, who received compensation of at least $100,000 during fiscal
year ended December 31, 1996 (collectively, the "Named Executive Officers").
-18-
<PAGE> 21
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- --------------------------
OTHER ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) ($) OPTIONS (#)
----------------- ---- ---------- --------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Esmond T. Goei (1) . . . . . 1996 $135,000 $125,000 $ -- -- --
Chairman of the Board, 1995 108,000 0 -- (2) $58,608 (3) 168,750
President and Chief 1994 108,000 25,000 -- (2) -- --
Executive -- (2)
Officer
Douglas S. Zorn (1) . . . . . 1996 $135,000 $125,000 $ -- -- --
Executive Vice President, 1995 90,000 0 -- (2) $58,608 (3) 140,625
Secretary, Chief Operating 1994 90,000 25,000 -- (2) -- --
and Financial Officer, -- (2)
President of BFI
James S. Gillespie (4) . . . 1996 $300,000 $ 0 $1,003,130 (5) -- --
Vice President of Sales, 1995 300,000 550,000 -- (2) -- --
President of VPI 1994 142,750 550,000 53,684 -- --
</TABLE>
_________________
(1) Data reflect compensation paid by BFI. In 1995, the Company and
Messrs. Goei and Zorn orally agreed that future cash salary payments
would be suspended until BFI had obtained sufficient funding to pursue
a public offering of its securities. During the period of suspension,
from April through December 1995, Messrs. Goei and Zorn continued to
pursue their respective duties in the interest of BFI. BFI
compensated Mr. Goei and Mr. Zorn for their respective past salaries
by issuing to each of them 87,475 shares of restricted stock.
(2) Perquisites do not exceed the lesser of $50,000 or 10% of the Named
Executive Officer's total annual salary and bonus.
(3) Represents 87,475 shares of restricted stock, with a value at December
31, 1996 of $279,920 (based on a value of $3.20 per share). Such
shares are subject to the restrictions on transfer imposed by Rule
144.
(4) Data reflect compensation paid by VPI.
(5) Mr. Gillespie, the sole stockholder of VPI, received a $1.0 million
dividend from VPI in 1996, approximately $450,000 of which was to
reimburse Mr. Gillespie for income taxes paid by him during the year.
OPTION/SAR GRANTS
No stock options or stock appreciation rights were granted to the
Named Executive Officers during the year ended December 31, 1996.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Non-employee directors
receive a fee of $1,000 per board meeting requiring personal attendance and a
fee of $250 per telephonic Board meeting and committee meeting not part of,
immediately preceding or following, a scheduled Board meeting and also are
reimbursed for reasonable travel-related expenses for attendance at meetings.
The non- employee director who chairs the board's compensation committee and
the non-employee director who chairs the board's audit committee are each paid
$12,000 per year in addition to compensation for meetings.
-19-
<PAGE> 22
In connection with his election to the BFI Board in December 1995, Mr.
Williams (who resigned from the board April 9, 1997) received a non-statutory
option ("NSO") to purchase shares of BFI Common Stock, which was exchanged for
an NSO to purchase 16,875 shares of the Company's Common Stock, exercisable at
a price per share of $3.20. The option vested 50% on the first anniversary of
the date of grant and the remaining 50% on the second anniversary.
Additionally, on February 4, 1997, in connection with their respective election
to the Board, the Company granted to each of Messrs. Nemetz and Brehm NSOs to
purchase 16,875 shares of Common Stock at a price per share of $4.00, 50%
percent of which vest on the first anniversary of the date of grant, and the
remaining 50% percent on the second anniversary. Under the Company's Equity
Incentive Plan, each non-employee director who has served as a director for a
full fiscal year will be granted annually an NSO to purchase 2,400 shares of
Common Stock, which will vest one-third on each of the first, second and third
anniversaries of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has three-year employment agreements with each of Esmond
T. Goei, as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, and Douglas S. Zorn, as Executive Vice President, Chief
Operating Officer, Chief Financial Officer, Treasurer and Secretary of the
Company. Each officer's base salary may be adjusted from time to time by
mutual agreement between each such officer and the Board of Directors; in 1997,
the base salary was increased to $150,000. The agreements provide for an
annual bonus to be paid to each officer pursuant to a written bonus plan to be
approved by the Board of Directors. The agreements provide that each officer
is entitled to reasonable expense reimbursements, four weeks paid vacation per
year and participation in any of the Company's benefit and deferred
compensation plans. Each of the officers also receives a $500 monthly car
allowance. On the annual anniversary date of each agreement, the period of
employment is extended automatically for one year unless the officer is
notified in writing. The agreements also provide for payments in the event of
termination prior to the end of the term, as follows: if the officer is
terminated without cause, then base salary will be paid for the greater of two
years or the balance of the term plus a bonus for each such year equal to the
average bonus for the two preceding years; if the officer is terminated upon a
change of control, then compensation equal to two times the sum of the base
salary plus average bonus will be paid for one year. In the event of
termination (except termination without cause), the officer is subject to a
two-year non-competition agreement.
The Company has a three-year employment agreement with James S.
Gillespie, Vice President of Sales of the Company and President of VPI. Mr.
Gillespie's agreement provides for a base salary of $150,000, annual sales
commissions targeted to be approximately $200,000 and an annual bonus pursuant
to a written bonus plan to be approved by the Board of Directors. The
agreement provides that Mr. Gillespie is entitled to reasonable expense
reimbursements, participation in any of the Company's benefit and deferred
compensation plans, use of a company car or a monthly car allowance and annual
paid vacation, consistent with the arrangements provided to the Company's
senior management. Additionally, the agreement contains provisions for
assignment of inventions and confidentiality and, in the event of termination,
covenants not to compete, to solicit customers or to hire employees for two
years. The agreement also provides that in the event of termination without
cause or a material breach by the Company, Mr. Gillespie will receive his base
salary and 50% of sales commissions for the duration of the term of the
agreement and, in the event of a material breach by the Company, the two
promissory notes in the aggregate principal amount of $1.5 million issued by
the Company in consideration for VPI will be accelerated and immediately become
due and payable.
VPI has two-year employment agreements with each of Diane E. Nowak,
Vice President of Sales, Western Region, of VPI, and Bradley J. Eickman,
Director of Operations for VPI. Each of these employment agreements provides
for a base salary of $65,000, sales commissions payable pursuant to an annual
sales manager compensation plan and performance-based bonus payments. Both
agreements also provide for reasonable expense reimbursements, participation in
any of VPI's benefit plans, use of a car leased by VPI and annual paid
vacation. Additionally, the agreements contain provisions for assignment of
inventions and confidentiality and, in the event of termination, covenants not
to compete, to solicit customers or to hire employees for two years. The
Company authorized to Ms. Nowak and Mr. Eickman, upon the consummation of the
VPI merger, (i) a grant of ISOs to purchase 50,000 and 40,000 shares of Common
Stock, respectively, at a price per share equal to the fair market value on the
date of grant, 50% of which will vest 18 months from the date of grant and 50%
of which will vest on
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<PAGE> 23
the second anniversary of the date of grant; and (ii) the payment of signing
bonuses that are not tied to continued employment in the amounts of $100,000
and $50,000, respectively, payable 50% upon the February 3, 1997 consummation
of the VPI merger and 50% six-months thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of Common Stock as of April 10, 1997, by (a) each person
known to the Company to own beneficially more than 5% of the Common Stock, (b)
each of the Company's directors and Named Executive Officers, and (c) all
executive officers and directors as a group. On April 9, 1997, Richard H.
Williams resigned from the Company's board of directors for personal reasons.
<TABLE>
<CAPTION>
Shares Beneficially
Names and Addresses Owned % Ownership
- ----------------------------------------------- ------------------- -----------
<S> <C> <C>
James Gillespie . . . . . . . . . . . . . . . . 712,500 16.9%
198 Country Club Drive
Incline Village, Nevada 89451
Esmond T. Goei . . . . . . . . . . . . . . . . 256,281 (1) 5.9
c/o NHancement Technologies Inc.
1746 Cole Blvd., Suite 265
Golden, Colorado 80401
Douglas S. Zorn . . . . . . . . . . . . . . . . 228,587 (2) 5.3
c/o NHancement Technologies Inc.
1746 Cole Blvd., Suite 265
Golden, Colorado 80401
Gary L. Nemetz . . . . . . . . . . . . . . . . 46,025 (3) 1.1
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025
William H. Brehm . . . . . . . . . . . . . . . 14,562 *
11400 Queensway
Theodore, Alabama 36582
Directors and executive officers
as a group (6 persons) . . . . . . . . 1,278,289 (4) 28.3%
- --------------------------
</TABLE>
* Less than 1%
(1) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 145,313 shares at an exercise
price of $3.20 per share and 5,556 shares at $4.00 per share.
(2) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 121,094 shares at an exercise
price of $3.20 per share and 5,556 shares at $4.00 per share.
(3) Includes 46,025 shares beneficially owned by Admiral Capital
Corporation, as to which Mr. Nemetz has sole voting and investment
power.
(4) Includes options that are presently exercisable or that will become
exercisable within 60 days to purchase 282,813 shares at an exercise
price of $3.20 per share and 12,224 shares at $4.00 per share.
-21-
<PAGE> 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1995, BFI accepted an unsecured loan from Mr. Zorn in the
principal amount of $17,500, at a rate of interest of 12% per annum. BFI paid
Mr. Zorn $15,000 during the second half of 1996; the balance of the loan was
repaid upon the consummation of the IPO.
In October 1995, BFI entered into an agreement with Burton Kanter (a
director of BFI until February 3, 1997), subsequently amended on July 16, 1996.
Mr. Kanter agreed on behalf of Walnut Capital Corp., of which Mr. Kanter is
chairman, (i) to extend the maturity date of certain unsecured notes issued to
Walnut Capital Corp. in the aggregate principal amount of $54,850, represented
by five notes issued between January 29, 1992 and November 1, 1992 (the "1992
Notes"), and payment of accrued interest thereon until the earlier of December
31, 1996 or receipt by the Company of the proceeds of the IPO, (ii) to waive
the default on the 1992 Notes (in return for recomputation of interest on the
1992 Notes on an annually compounded basis from the date each of the 1992 Notes
was issued). In return for such agreements and his past and continuing
participation on BFI's Board of Directors, BFI (i) executed and delivered to
Mr. Kanter a stock option to purchase 75,000 shares of BFI Common Stock, which
subsequently was assigned to Windy City, Inc. and was exchanged for an option
to purchase 42,188 shares of NHancement Common Stock, with an exercise price
per share equal to 80% of the Offering Price ($3.20 per share); (ii)
transferred to Mr. Kanter and a former director all of BFI's rights to invest
in SportsTrac; (iii) transferred to Mr. Kanter and a former director all of
BFI's 71/2% warrants in SportsTrac; and (iv) agreed to pay him a fee of $2,000
per month, plus reasonable expenses, in connection with his duties as a
director. In July 1996, Mr. Kanter agreed to terminate his $2,000 per month
director fees and, from that time forward, to be compensated on the same basis
as other nonemployee directors. The 1992 Notes and all accrued interest
thereon were paid in February 1997.
In May and June 1996, BFI issued 87,475 shares of BFI Common Stock to
each of Messrs. Goei and Zorn in lieu of cash compensation. The aggregate
value of these shares at the time of issuance totaled $117,200, of which
$110,000 was for payment of deferred compensation accrued in 1995. In June
1996, BFI issued 18,750 shares of Common Stock to Mr. Kanter as consideration
for his special services as a director during 1995, paid out of compensation
otherwise owing to Messrs. Goei and Zorn, in accordance with an agreement dated
July 16, 1996 by and among BFI and Messrs. Goei, Zorn, Kanter and a former
director of BFI.
In November 1996, BFI entered into a Unit Subscription Agreement with
each of VPI, Admiral Capital Corporation (of which Mr. Nemetz has sole voting
and investment power) and Messrs. Goei and Zorn for the purchase and sale of
BFI's units consisting of (i) unsecured promissory notes in the principal
amounts of $50,000, $50,000, $35,000 and $100,000, respectively, and (ii)
warrants to purchase 50,000, 50,000, 35,000 and 100,000 shares, respectively,
at an exercise price of 120% of the Offering Price. In January 1997, Mr. Zorn
transferred to Richard H. Williams (a director of BFI until February 3, 1997,
and a director of the Company from February 4, 1997 until April 9, 1997) and
Mr. Goei notes in the principal amounts of $25,000 and $15,000, respectively,
and warrants to purchase 25,000 shares and 15,000 shares, respectively, in
exchange for Mr. Williams payment to BFI of $25,000, Mr. Goei's payment to BFI
of $15,000, and Mr. Zorn's receipt of an unsecured promissory note from BFI in
the principal amount of $40,000. Upon the February 4, 1997 closing of the IPO,
outstanding principal and all accrued interest in the amounts of $51,361.11
(VPI), $51,361.11 (Admiral Capital Corporation), $51,027.78 (Goei), $102,722.22
(Zorn) and $25,270.83 (Williams), respectively, was paid. See Item 5, "Sales
of Unregistered Securities."
Upon consummation of the VPI merger, February 3, 1997, the Company
acquired all of the capital stock of VPI from Mr. Gillespie for total
consideration valued at approximately $6,180,000, consisting of: $1,500,000 in
two long-term notes in the principal amounts of $1,000,000 and $500,000,
respectively, bearing interest at the medium-term United States-Treasury Bill
rate declared at the close of business on the maturity date or earlier payment
date and maturing on the three-year anniversary of the date of issuance but
payable earlier, dependent upon the future earnings of VPI, with fifty percent
(50%) of VPI's pre-tax profits to be applied to pay principal and accrued
interest on the $1,000,000 note quarterly, and $62,500 of principal and accrued
interest to be paid on the $500,000 note in any quarter in which VPI is
profitable, beginning 45 days after the close of the first quarter 1997; and
$2,400,000 in shares of Common Stock sold in the IPO (being 600,000 shares
based on the price to the public in the IPO of $4.00 per share); and $2,280,000
in restricted shares of Common Stock (being 712,500 shares based
-22-
<PAGE> 25
on the estimated fair value of $3.20 per share). In the event of a material
breach by the Company of the employment agreement with Mr. Gillespie, the two
promissory notes will be accelerated and immediately become due and payable.
See Item 10, "Employment Agreements." All such restricted shares are subject
to a lock-up agreement in favor of Chatfield Dean & Co., the representative of
the underwriters of the IPO, for 18 months following the consummation of the
IPO with respect to 50% of the shares, and for 24 months following the
consummation of the IPO with respect to the remaining 50% of the shares.
Additionally, the Company has agreed to register 150,000 shares of Common Stock
issued as consideration for VPI one year after the consummation of the IPO
subject to satisfaction by VPI of certain 1997 performance criteria.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Annual Report on Form
10-KSB
1. Financial Statements
See Index to Financial Statements on page F-1 of this Form 10-KSB
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
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)
10.5 -- License Agreement, dated November 24, 1988, by and between BFI and
Systems Technology, Inc., as amended by Addendum to License Agreement,
dated May 19, 1994, as amended by Second Addendum to License Agreement,
dated November 18, 1996 (1)
10.6 -- Sublicense Agreement, dated August 30, 1995, between BFI and
SportsTrac, Inc., as amended by Addendum to Sublicense Agreement, dated
July 31, 1996 (1)
10.8 -- Secured Note and Stock Purchase Agreement, dated December 1, 1995,
between BFI and the purchasers listed therein, as amended by the First
Amendment to Secured Note and Stock Purchase Agreement, dated March 1,
1996, as amended by Second Amendment to Secured Note and Stock Purchase
Agreement, dated July 1, 1996, and as amended by Third Amendment to
Secured Note and Stock Purchase Agreement, dated October 1, 1996,
together with Form of Secured Promissory Note (1)
</TABLE>
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<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
10.9 -- Unsecured Note and Stock Purchase Agreement, dated February 1, 1996,
between BFI and the purchasers listed therein, as amended by the First
Amendment to Unsecured Note and Stock Purchase Agreement, dated March
1, 1996, as amended by Second Amendment to Unsecured Note and Stock
Purchase Agreement, dated July 1, 1996, and as amended by Third
Amendment to Unsecured Note and Stock Purchase Agreement, dated October
1, 1996, together with Form of Unsecured Promissory Note (1)
10.10 -- Unit Subscription Agreement, dated May 17, 1996, between BFI and the
purchasers listed therein, as amended by First Amendment to Unit
Subscription Agreement, dated October 1, 1996, together with Form of
Promissory Note (1)
10.11 -- Unit Subscription Agreement, dated October 1, 1996, between BFI and the
purchasers listed therein, together with Form of Promissory Note and
Form of Warrant (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)
10.16 -- Form of FACTOR 1000 Service Contract (1)
10.17 -- Office Building Lease, dated April 8, 1996, between BFI and Denver West
Office Building No. 21 Venture (1)
10.18 -- Authorized U.S. Distributor Agreement, dated April 16, 1996, between
Centigram Communications Corporation and VPI (1)
10.19 -- Office Lease, dated October 16, 1995, between AJ Partners Limited
Partnership and VPI (1)
10.20 -- Agreement, dated October 16, 1995, between BFI, Burton Kanter and
Elliot Steinberg, as amended by Amendment dated July 16, 1996, between
BFI, Esmond Goei, Douglas Zorn, Burton Kanter and Elliot Steinberg (1)
10.21 -- Stockholder Agreement, dated October 25, 1996, between the Company and
James D. 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)
</TABLE>
-24-
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
10.26 -- Registration Rights Agreement, dated September 1, 1996, between BFI and
(i) a majority of the holders of securities pursuant to the Secured
Note and Warrant Purchase Agreement dated December 1, 1994, as amended;
(ii) a majority of the holders of securities issued pursuant to the
Secured Note and Stock Purchase Agreement, dated December 1, 1995, as
amended; (iii) a majority of the holders of securities issued pursuant
to the Unsecured Note and Stock Purchase Agreement, dated February 1,
1996, as amended; (iv) a majority of the holders of securities issued
pursuant to the Unit Subscription Agreement, dated May 17, 1996, as
amended; (v) the purchasers of securities issued pursuant to the Unit
Subscription Agreement dated October 3, 1996; and (vi) the former
holders of BFI's Series A Preferred Stock (1)
10.27 -- Registration Rights Agreement, dated October 25, 1996, between the
Company and James S. Gillespie (1)
21 -- Subsidiaries (1)
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
-25-
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15(d) Securities Exchange Act of
1934, as amended, 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
----------------------------------------
Esmond T. Goei, Chairman of the Board,
Chief Executive Officer, President
and Director
In accordance with the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ------------------------- --------------
<S> <C> <C>
/s/ Esmond T. Goei Chairman of the Board, Chief April 15, 1997
- ---------------------------------------------- Executive Officer, President and Director
Esmond T. Goei (Principal Executive Officer)
/s/ Douglas S. Zorn Executive Vice President-Finance, April 15, 1997
- ---------------------------------------------- Secretary, Treasurer, Chief Operating
Douglas S. Zorn and Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ James S. Gillespie Director April 15, 1997
- ----------------------------------------------
James S. Gillespie
/s/ Gary L. Nemetz Director April 15, 1997
- ----------------------------------------------
Gary L. Nemetz
Director April __, 1997
- ----------------------------------------------
William H. Brehm
</TABLE>
-26-
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NHANCEMENT TECHNOLOGIES, INC. (FORMERLY BIOFACTORS, INC.):
Report of BDO Seidman, LLP .......................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996, and Unaudited Pro
Forma Balance Sheet as of December 31, 1996 .................................................... F-3
Statements of Operations for the years ended December 31, 1995 and
1996, for the period from inception (January 5, 1988) to December 31, 1996, and
Unaudited Pro Forma Statement of Operations for the year ended December 31, 1996................ F-5
Statements of Stockholders' Deficit for the period from inception to
December 31, 1996............................................................................... F-6
Statements of Cash Flows for the years ended December 31, 1995 and
1996, and for the period from inception to December 31, 1996.................................... F-8
Summary of Accounting Policies....................................................................... F-10
Notes to Financial Statements........................................................................ F-14
VOICE PLUS, INC.:
Report of BDO Seidman, LLP........................................................................... F-33
Balance Sheets as of December 31, 1995 and 1996...................................................... F-34
Statements of Operations for the years ended December 31, 1995 and 1996 ............................. F-36
Statements of Stockholder's Equity for the years ended December 31,
1995 and 1996................................................................................... F-37
Statements of Cash Flows for the years ended December 31, 1995 and 1996 ............................. F-38
Summary of Accounting Policies ...................................................................... F-40
Notes to Financial Statements........................................................................ F-42
</TABLE>
F-1
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and the Stockholders of NHancement Technologies Inc.
We have audited the accompanying balance sheets of NHancement Technologies
Inc., (formerly BioFactors, Inc., a development stage company) as of December
31, 1995 and 1996 and the related statements of operations, stockholders'
deficit, and cash flows for the years ended December 31, 1995 and 1996 and for
the period from inception (January 5, 1988) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NHancement Technologies Inc.
as of December 31, 1995 and 1996 and the results of its operations and its cash
flows for the years ended December 31, 1995 and 1996 and for the period from
inception (January 5, 1988) to December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
February 21, 1997, except for Note 10
which is as of March 31, 1997
F-2
<PAGE> 31
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
===================================================================================
Unaudited
Historical Pro Forma
-------------------------- (Note 12)
December 31, December 31, December 31,
1995 1996 1996
===================================================================================
<S> <C> <C> <C>
ASSETS
CURRENT
Cash (Note 8) $ 170,500 $ 60,100 $ 5,141,200
Accounts receivable, net of allowance
for doubtful accounts of $10,000 in
1995 15,000 -- 1,928,600
Note receivable (Note 2) 700,000 -- --
Inventory 13,900 12,700 1,658,500
Prepaid expenses and other 31,600 1,800 84,600
Prepaid stock offering costs (Note 11) -- 376,200 --
Prepaid acquisition costs (Note 10) -- 100,100 --
- ----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 931,000 550,900 8,812,900
- ----------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 124,200 136,700 614,100
Less accumulated depreciation 65,600 101,800 101,800
- ----------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT, net 58,600 34,900 512,300
- ----------------------------------------------------------------------------------
EXCESS OF COST OVER NET ASSETS ACQUIRED -- -- 5,652,600
Other assets -- -- 24,400
- ----------------------------------------------------------------------------------
$ 989,600 $ 585,800 $15,002,200
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 32
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
===================================================================================
Unaudited
Historical Pro Forma
-------------------------- (Note 12)
December 31, December 31, December 31,
1995 1996 1996
===================================================================================
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT
Accounts payable $ 344,900 $ 545,700 $ 1,599,900
Accrued liabilities 113,700 99,400 630,100
Accrued professional fees 34,000 155,000 155,000
Payroll related liabilities 87,100 140,200 442,700
Deferred compensation to officers and
stockholders (Note 7) 110,000 245,900 245,900
Deferred revenue (Note 2) 724,700 800 1,733,400
Accrued interest 267,000 470,700 --
Current portion of long-term debt
(Notes 3 and 7) 742,400 2,568,100 4,300
- -----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,423,800 4,225,800 4,811,300
LONG-TERM DEBT, net of current portion
(Notes 3 and 7) 774,200 -- 1,500,000
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES 3,198,000 4,225,800 6,311,300
- -----------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' (DEFICIT) EQUITY (Notes 4 and 5)
Preferred stock, $0.01 par value,
10,000,000 shares authorized, no
shares issued and outstanding -- -- --
Common stock, $0.01 par value,
10,000,000 shares authorized, 93,200,
612,800, and 4,223,800 shares issued and
outstanding at December 31, 1995 and
1996, and Pro Forma December 31, 1996,
respectively 1,000 6,100 42,100
Additional paid-in capital 4,972,600 5,363,900 17,658,800
Deficit accumulated during development
stage (7,182,000) (9,010,000) (9,010,000)
- -----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (2,208,400) (3,640,000) 8,690,900
- -----------------------------------------------------------------------------------
$ 989,600 $ 585,800 $ 15,002,200
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 33
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
====================================================================================================
Historical
----------------------------------------- Unaudited
Inception Pro Forma
(January 5, (Note 12)
Years ended December 31, 1988) to Year Ended
----------------------- December 31, December 31,
1995 1996 1996 1996
====================================================================================================
<S> <C> <C> <C> <C>
SALES, including $300,000 and $700,000
from the sale of sublicense in 1995 and
1996 (Notes 2 and 8) $ 450,700 $ 796,400 $ 2,268,000 $ 9,560,500
Cost of sales 186,400 129,200 1,700,400 5,266,600
- ----------------------------------------------------------------------------------------------------
GROSS PROFIT 264,300 667,200 567,600 4,293,900
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research and development 214,500 98,400 2,255,600 98,400
Selling, marketing and administrative
(Notes 3 and 7) 669,500 1,812,800 6,139,300 5,162,300
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 884,000 1,911,200 8,394,900 5,260,700
- ----------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (619,700) (1,244,000) (7,827,300) (966,800)
- ----------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income -- -- 22,800 32,300
Interest expense (519,200) (582,000) (1,286,900) (97,000)
Other -- (2,000) 81,400 (2,000)
- ----------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (519,200) (584,000) (1,182,700) (66,700)
- ----------------------------------------------------------------------------------------------------
NET LOSS $(1,138,900) $(1,828,000) $(9,010,000) $(1,033,500)
====================================================================================================
NET LOSS PER COMMON SHARE $ (0.36)
====================================================================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,833,275
====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE> 34
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
==================================================================================================================================
Convertible Common Stock
Preferred Stock Par Value Additional
------------------ ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, inception (January 5, 1988) -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock for cash
($6.40 and $188.61 per share) in
January and June 1989, respec-
tively -- -- 100 -- 5,000 -- 5,000
Issuance of PFI Series A Preferred
stock for cash ($188.61 per share)
in June 1989 2,500 475,100 -- -- -- -- 475,100
Issuance of PFI Series A Preferred
stock ($188.61 per share) for
cash and conversion of $280,000
of debt in May 1990 2,800 520,900 -- -- -- -- 520,900
Issuance of PFI Series B Preferred
stock for cash ($282.92 per share)
in September 1990 3,900 1,100,000 -- -- -- -- 1,100,000
Issuance of PFI Series C Preferred
stock ($377.19 per share) for
cash and conversion of $339,000
in debt in December 1991 1,600 600,000 -- -- -- -- 600,000
Net loss (inception to December 31,
1991) -- -- -- -- -- (2,923,300) (2,923,300)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1991 10,800 2,696,000 100 -- 5,000 (2,923,300) (222,300)
Net loss -- -- -- -- -- (393,400) (393,400)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1992 10,800 2,696,000 100 -- 5,000 (3,316,700) (615,700)
Issuance of PFI Series D Preferred
stock for cash ($25.92 per share)
in October 1993, net of offering
costs of $25,000 15,400 375,000 -- -- -- -- 375,000
Net loss -- -- -- -- -- (743,700) (743,700)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 26,200 3,071,000 100 -- 5,000 (4,060,400) (984,400)
Issuance of PFI Series D Preferred
stock in conversion of debt
($25.92 per share) in March 1994 27,500 712,800 -- -- -- -- 712,800
Issuance of PFI Series D Preferred
stock for cash ($25.92 per share)
in April 1994 400 12,500 -- -- -- -- 12,500
Issuance of PFI Common stock
upon conversion of debt and
exercise of options -- -- 2,300 -- 58,700 -- 58,700
</TABLE>
F-6
<PAGE> 35
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
<TABLE>
<CAPTION>
=================================================================================================================================
Convertible Common Stock
Preferred Stock Par Value Additional
------------------ ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of BioFactors Series A
Preferred stock upon conversion
of PFI Common stock ($25.92
per share) in May 1994 2,300 $ 58,700 (2,300) $ -- $ (58,700) $ -- $ --
Issuance of BioFactors Series A
Preferred stock for cash ($96.00
per share) in August 1994, net
of offering costs of $97,500 9,800 836,300 -- -- -- -- 836,300
Issuance of warrants with notes
payable in November and
December 1994 -- -- -- -- 158,000 -- 158,000
Compensation related to grant of
stock options in November 1994 -- -- -- -- 7,200 -- 7,200
Net loss -- -- -- -- -- (1,982,700) (1,982,700)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 66,200 4,691,300 100 -- 170,200 (6,043,100) (1,181,600)
Conversion of Series A Preferred
to Common (66,200) (4,691,300) 66,200 700 4,690,600 -- --
Issuance of Common stock in
February 1995 -- -- 300 -- -- -- --
Issuance of Common stock upon
exercise of options in March 1995 -- -- 400 -- 2,600 -- 2,600
Issuance of warrants with notes
payable in January through
June 1995 -- -- -- -- 92,000 -- 92,000
Issuance of Common stock with
notes payable in December 1995 -- -- 26,200 300 17,200 -- 17,500
Net loss -- -- -- -- -- (1,138,900) (1,138,900)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 -- -- 93,200 1,000 4,972,600 (7,182,000) (2,208,400)
Issuance of Common stock with
notes payable in January through
June 1996 -- -- 303,400 3,000 199,300 -- 202,300
Issuance of Common stock in lieu
of salaries and outside service
fees in June 1996 -- -- 216,200 2,100 142,000 -- 144,100
Issuance of warrants with notes
payable in November 1996 -- -- -- -- 50,000 -- 50,000
Net loss -- -- -- -- -- (1,828,000) (1,828,000)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 -- $ -- 612,800 $ 6,100 $ 5,363,900 $(9,010,000) $(3,640,000)
=================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE> 36
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
============================================================================================
Inception
(January 5,
Years ended December 31, 1988) to
------------------------ December 31,
1995 1996 1996
============================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,138,900) $(1,828,000) $(9,010,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 35,200 36,200 135,700
Increase (decrease) in deferred revenue 24,700 (723,900) 800
Amortization of discount and debt issue
costs on notes payable 241,200 252,300 519,800
Compensation related to grant of stock
options and common stock -- 34,100 41,400
Changes in assets and liabilities:
Accounts receivable 35,700 15,000 --
Note receivable -- 700,000 --
Inventory (2,900) 1,200 (12,700)
Prepaid expenses and other (7,600) 29,800 (1,800)
Accounts payable and other current
liabilities 294,100 810,200 1,841,300
- -------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (518,500) (673,100) (6,485,500)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (27,700) (12,500) (177,800)
Proceeds from the sale of furniture and
equipment -- -- 14,200
- -------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,700) (12,500) (163,600)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Prepaid acquisition and stock offering costs -- (476,300) (476,300)
Proceeds from sale of preferred stock -- -- 3,423,300
Preferred and common stock issuance costs -- -- (122,500)
Proceeds from sale of common stock 2,500 -- 7,500
Proceeds from long-term convertible debt -- -- 1,399,300
Proceeds from bank line of credit -- -- 45,000
Principal payments on bank line of credit -- -- (45,000)
Proceeds from long-term debt 623,500 1,170,000 2,785,000
</TABLE>
F-8
<PAGE> 37
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
============================================================================================
Inception
(January 5,
Years ended December 31, 1988) to
------------------------ December 31,
1995 1996 1996
============================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES (continued)
Repayment of long-term debt $ (29,300) $ (118,500) $ (289,400)
Other (4,800) -- (17,700)
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 591,900 575,200 6,709,200
- --------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 45,700 (110,400) 60,100
CASH, beginning of period 124,800 170,500 --
- --------------------------------------------------------------------------------------------
CASH, end of period $ 170,500 $ 60,100 $ 60,100
============================================================================================
SUPPLEMENTAL DATA:
Interest paid $ 2,800 $ 35,400 $ 39,400
============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
In 1995, the Company received $700,000 of notes receivable as partial proceeds
from the sublicense agreement, and the related revenue was deferred as of
December 31, 1995 (see Note 2) and received in 1996; accrued interest of
$21,300 was added to the principal of the note payable to a vendor (see Note
3); and 66,200 shares, adjusted for the 3-for-4 merger exchange and the
1-for-24 reverse stock split, of the Company Series A Preferred Stock were
converted to 66,200 shares of Common Stock (see Note 4).
In 1996, the Company issued 178,700 shares of its Common Stock to three
officers in lieu of cash compensation. The aggregate value of these shares
totaled $119,700, of which $110,000 was for payment of deferred compensation
accrued in 1994 (see Note 7).
F-9
<PAGE> 38
NHANCEMENT TECHNOLOGIES, INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION
NHancement Technologies Inc., a Delaware corporation (NHancement), 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 (IPO) of the
Company's common stock (see Note 11), BFI merged with a subsidiary of
NHancement whereupon BFI, as the surviving corporation, became a wholly-owned
subsidiary of NHancement (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 NHancement, whereupon VPI,
as the surviving corporation, became a wholly-owned subsidiary of NHancement
(VPI Acquisition). The business of NHancement will be conducted by its
operating company subsidiaries, BFI and VPI (see Note 10).
For financial accounting purposes, BFI is deemed to be the acquirer of VPI.
Accordingly, for the purpose of this historical BFI financial statement
presentation, NHancement is considered to be the successor of BFI and
references herein to the Company signify BFI and its successor NHancement.
BFI was incorporated in April 1994 and is a successor corporation to
Performance Factors, Inc. (PFI), a California corporation, incorporated in
January 1988. In May 1994, pursuant to an Agreement and Plan of Merger (PFI
Merger Agreement), PFI was merged with and into BFI, and BFI was the surviving
corporation and continued the business of PFI. Accordingly, the accompanying
financial statements include the accounts of PFI and BFI since the inception of
the California corporation. Further, all per share amounts have been reflected
as if converted to BFI Common Stock, based on the conversion formulas outlined
in the PFI Merger Agreement and giving effect to a 1-for-24 reverse stock split
effected in November 1995.
F-10
<PAGE> 39
NHANCEMENT TECHNOLOGIES, INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
In addition, all share amounts have been retroactively restated to give effect
to a 3-for-4 exchange ratio in connection with the BFI Merger, except the stock
option plan data which has not been restated (see Note 5).
BUSINESS
The Company is a provider of productivity and security enhancement products and
systems. To date, the Company has principally focused on the development for
commercial implementation of a proprietary computerized testing system, FACTOR
1000(R), which measures human sensorimotor skills to determine an individual's
performance readiness and fitness to perform, the development of supporting
programs, raising capital, personnel recruitment and market analysis.
The Company's FACTOR 1000(R) system is based upon the Critical Tracking Task
(CTT) software, which is exclusively licensed from Systems Technology Inc.
(STI) in Hawthorne, California. CTT is a critical component of the FACTOR
1000(R) system and is protected under a patent and copyrights held by STI. The
Company is totally dependent on maintenance of its CTT license to market the
FACTOR 1000(R) system, and is dependent on STI for product validation and
expert witness testimony of STI's principals regarding aerospace and vehicle
performance dynamics and stability, and human operator dynamic response. The
license agreement with STI is effective through November 2008 and grants the
Company the right to issue sublicenses during the term of the agreement (see
Note 2).
BASIS OF PRESENTATION
The financial statements have been prepared in accordance with the provisions
of Statement of Financial Accounting Standards No. 7, "Accounting and Reporting
by Development Stage Enterprises," which requires development stage enterprises
to employ the same accounting principles as operating companies.
REVENUE RECOGNITION
Revenue is currently derived from two principal sources, direct sales and third
party sales into the commercial marketplace. The Company's only current product
is the FACTOR 1000(R) system used in commercial applications to test "fitness
for work" in safety sensitive jobs. The Company recognizes revenue on the sale
of a
F-11
<PAGE> 40
NHANCEMENT TECHNOLOGIES, INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
FACTOR 1000(R) system when the system has been installed and the Company's
related contractual training and support obligations are substantially
complete.
The Company recognizes other revenue based on the sublicense of the FACTOR
1000(R) system for the measurement and enhancement of on-field athletic
performance (see Note 2). The Company bills customers in accordance with the
terms of the individual contracts. Billings in advance of the recognition of
revenue are recorded as deferred revenue in the accompanying financial
statements.
INVENTORY
Inventory consists primarily of component parts, raw materials and finished
goods and is valued at the lower of cost (first-in, first-out basis) or market.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or their
estimated useful life. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income tax assets and liabilities are recognized
based on the temporary differences between the financial statement and income
tax bases of assets, liabilities and carryforwards using enacted tax rates.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
USE OF ESTIMATES
The preparation of 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, disclosure of
contingent assets and liabilities at the
F-12
<PAGE> 41
NHANCEMENT TECHNOLOGIES, INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Under this standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted to
continue to account for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose pro forma net income and earnings per
share as if the fair value method had been adopted. The Company has elected to
continue to account for stock-based compensation under APB No. 25 (see Note 5).
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 have a significant impact on the Company's
earnings per share calculation.
F-13
<PAGE> 42
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE RISKS
The Company is in the development stage and has not generated significant
revenue or income from operations. The Company is completing development
of its technology and is currently engaged in establishing its market.
Commercial acceptance of the Company's product will have to occur in the
marketplace before the Company can attain successful operations.
As shown in the accompanying financial statements, the Company, as of
December 31, 1996, has incurred recurring losses totaling $9,010,000 since
inception, has a working capital deficit of $3,674,900 and a stockholders'
deficit of $3,640,000. Further, the Company has a significant amount of
notes and loans outstanding as of December 31, 1996.
On February 4, 1997, the Company raised approximately $6.6 million of
funds, net of underwriting commissions, printing costs, legal and
accounting fees and other offering expenses, through an IPO (see Note 11),
from which the Company repaid notes and loans outstanding at December 31,
1996 (see Note 3) and acquired VPI (see Note 10). Thus, with the increase
in available funds, management expects to be able to complete its business
plan, which consists of product and market development, additional
complementary business acquisitions and the expansion of sales and
licensing of the FACTOR 1000(R) product.
Although in 1995 there was substantial doubt about the Company's ability
to continue as a going concern, the above mitigating factors have
increased the Company's ability to complete transactions in the normal
course of business and continue as a going concern.
2. NOTE RECEIVABLE
In August 1995, the Company entered into a sublicense agreement (the
Agreement) with SportsTrac, Inc., a company whose chief executive officer
is a minority stockholder and former executive officer of the Company. The
Agreement provides for the exclusive, world-wide sublicense of sports and
on-field-athletic-performance related uses of the FACTOR 1000(R) system,
through November 2008. As consideration for the sublicense, the Company
received $300,000 in cash and a $700,000 non-interest bearing note payable
which was
F-14
<PAGE> 43
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
paid in two equal installments in March 1996 and August 1996. The Company
recognized $700,000 in revenue during 1996 and $300,000 during 1995. In
addition, the Company is entitled to royalties at 8.5% of cash receipts
from the sale of products or services containing the licensed technology.
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
==============================================================================
<S> <C> <C>
Notes payable related to bridge financing
secured by all assets of BFI, no monthly
installments, stated interest at 12%,
effective interest at 21%, maturity date at
closing of IPO. (1) $750,000 $750,000
Notes payable related to bridge financing,
unsecured, no monthly installments, stated
interest at 10%, effective interest at 21%,
maturity date at closing of IPO. (2)(8) 300,000 350,000
Notes payable related to bridge financing,
unsecured, no monthly installments, stated
interest at 10%, effective interest at 25%,
maturity date at closing of
IPO. (3)(8) -- 315,000
Notes payable related to bridge financing,
unsecured, no monthly installments, stated
interest at 10%, effective interest at 30%,
maturity date at closing of
IPO. (4)(8) -- 300,000
</TABLE>
F-15
<PAGE> 44
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
============================================================================
<S> <C> <C>
Notes payable, related to bridge financing,
unsecured, no monthly installments, stated
interest at 10%, effective interest at 50%,
maturity date at closing of
IPO. (5) $ -- $ 500,000
Notes payable to stockholders, unsecured, no
monthly installments, interest ranging from 10%
to prime plus 2% (10.5% and 10.25% at December
31, 1995 and 1996), maturity date at
closing of IPO. (6) 321,500 326,500
Note payable to a vendor for unpaid royalties
under licensing agreement, unsecured, monthly
installments of $7,500 through August 1996,
interest at prime plus 3% (11.5% at December
31, 1995) 62,700 --
Other, including $38,000 to former
BFI officer in 1995. (7) 82,400 26,600
--------------------------------------------------------------------------
1,516,600 2,568,100
Less current portion 742,400 2,568,100
--------------------------------------------------------------------------
$ 774,200 $ --
==========================================================================
</TABLE>
F-16
<PAGE> 45
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
All notes have current maturities and, except $12,500 due to an officer
and $4,100 for a capital lease, were paid off in February 1997 utilizing
proceeds from the IPO (see Note 11).
(1) In December 1994, BFI entered into a Secured Note and Warrant
Purchase Agreement (the Agreement) with the Purchasers named therein.
BFI authorized the issuance of secured promissory notes in the
aggregate principal amount of $750,000. Accrued interest totaled
$90,600 and $179,000 as of December 31, 1995 and 1996, respectively.
In March 1996, BFI and a majority of the Purchasers entered into an
amendment to the Agreement. The amendment provided that, upon closing
of the IPO, note holders would receive, at no additional cost, two
shares of BFI Common Stock (the "Additional Shares") for each $10 of
the original principal balance of the notes. In May 1996, BFI
accelerated the issuance of the Additional Shares and issued 112,500
shares to the Purchasers in respect of the Agreement. BFI recorded
$75,000 of debt issue costs in 1996, based on the estimated fair
value of $0.67 per share. In October 1996, BFI and a majority of the
purchasers entered into another amendment to the Agreement. Pursuant
to the amendment, upon consummation of the IPO (see Note 11), the
outstanding principal and all accrued interest on the notes was
converted into the Company's Common Stock at a conversion price equal
to the price per share to the public of the Common Stock sold in the
IPO (IPO price). In addition, upon closing of the IPO, note holders
received, at no additional cost, a warrant to purchase 50 shares of
BFI Common Stock for each $1,000 of the outstanding principal balance
of the note held by such holder at an exercise price equal to 120% of
the IPO price.
(2) In December 1995, BFI entered into a Secured Note and Stock Purchase
Agreement (the "December 1995 Agreement") with the Purchasers named
therein. BFI authorized the issuance of secured promissory notes (the
"Notes") in the aggregate principal amount of $350,000 of which
$300,000 was received as of December 31, 1995. In connection with the
issuance of the
F-17
<PAGE> 46
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Notes, BFI issued an aggregate of 26,200 shares of BFI Common Stock
and recorded $17,500 of debt issue costs in 1995, based on the
estimated fair value of $0.67 per share. Accrued interest totaled
$1,600 and $36,400 as of December 31, 1995 and December 31, 1996,
respectively. The notes were secured by BFI's note receivable from
SportsTrac, Inc.
In March 1996, BFI and a majority of the Purchasers entered into an
amendment (the "Amendment") to the December 1995 Agreement. Pursuant
to the Amendment, upon closing of the proposed bridge loan, note
holders would receive, at no additional cost, two shares of BFI
Common Stock (the "Additional Shares") for each $10 of the original
principal balance of the Notes. In May 1996, BFI accelerated the
issuance of the Additional Shares and issued 52,500 shares to the
Purchasers pursuant to the Amendment. BFI recorded $35,000 of debt
issue costs in 1996, based on the estimated fair value of $0.67 per
share. In October 1996, BFI and a majority of the Purchasers entered
into an amendment to the December 1995 Agreement which, among other
things, terminated the noteholders' security interest (see Note 2).
(3) In February 1996, BFI authorized the issuance of unsecured promissory
notes in the aggregate principal amount of $315,000 pursuant to an
Unsecured Note and Stock Purchase Agreement (the "February 1996
Agreement"). In connection therewith, BFI issued an aggregate of
70,900 shares of BFI Common Stock and recorded $47,300 of debt issue
costs in 1996, based on the estimated fair value of $0.67 per share.
Accrued interest on these notes totaled $26,000 as of December 31,
1996.
(4) In May 1996, BFI authorized the issuance of unsecured promissory
notes in the aggregate principal amount of $300,000 pursuant to Unit
Subscription Agreements (the "May 1996 Agreements"). In connection
therewith, BFI issued an aggregate of 67,500 shares of BFI Common
Stock and recorded $45,000 of debt issue costs in 1996, based on the
estimated fair value of $0.67 per share. Accrued interest on these
notes totaled $17,400 as of December 31, 1996.
F-18
<PAGE> 47
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(5) In November 1996, BFI authorized the issuance of unsecured promissory
notes in the aggregate principal amount of $500,000 pursuant to Unit
Subscription Agreements (the "November 1996 Agreements"). In
connection therewith, BFI issued warrants to purchase an aggregate of
500,000 shares of BFI Common Stock at an exercise price equal to 120%
of the IPO price and recorded $50,000 of debt issue costs in 1996,
based upon the estimated fair value of the warrants. Accrued interest
on these notes totaled $7,700 as of December 31, 1996.
(6) Accrued interest on these notes totaled $147,100 and $196,800 as of
December 31, 1995 and December 31, 1996, respectively.
(7) In March 1996, BFI and a former BFI officer and current minority
stockholder entered into a Settlement Agreement under which BFI
agreed to pay the former BFI officer $75,000 in complete settlement
of all claims, including $38,000 in principal amount of unsecured
notes and related accrued interest of approximately $13,000. The
amount of settlement in excess of the principal and accrued interest
was charged to administrative expense for the year ended December 31,
1995.
(8) In October 1996, BFI and the note holders entered into an amendment
to each of the December 1995, February 1996 and May 1996 Agreements,
pursuant to which, upon consummation of the IPO (see Note 11), the
principal of each such note was paid in full utilizing the proceeds
of the IPO and all accrued interest through the IPO closing date was
converted into the Company's Common Stock at the IPO price. Also per
these amendments, upon the closing of the IPO, the Company issued to
each note holder, at no additional cost, a warrant to purchase 75
shares of the Company's Common Stock for each $1,000 of the original
principal balance of the notes at an exercise price equal to 120% of
the IPO price.
F-19
<PAGE> 48
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
4. STOCKHOLDERS' EQUITY
In May 1994, pursuant to the PFI Merger Agreement, each share of Series A,
B, and C Preferred Stock and each share of Series D Preferred Stock of PFI
was converted into .05 and .41 shares, respectively, of Series A Preferred
Stock of BFI. In addition, each share of PFI Common Stock was converted
into .05 shares of BFI Common Stock.
At December 31, 1994, BFI had 66,200 shares (giving effect to the reverse
stock split and the 3-for-4 BFI Merger exchange as mentioned below) of its
Series A Preferred Stock issued and outstanding. All outstanding shares of
BFI Series A Preferred Stock at December 31, 1994 were fully paid and
non-assessable. Holders of BFI Series A Preferred Stock had the right to
convert, at any time, some or all of their shares into fully paid and
non-assessable shares of BFI's Common Stock. In July 1995, holders of the
BFI Series A Preferred Stock consented to such conversion, and
accordingly, all shares of BFI Series A Preferred Stock were converted
into the same amount of fully paid non-assessable shares of BFI Common
Stock.
Pursuant to an amendment to the Certificate of Incorporation approved by
BFI's Board of Directors and stockholders effective November 1995 (the
Charter Amendment), BFI was authorized to issue 10,000,000 shares of
Common Stock, $0.01 par value per share, and 10,000,000 shares of
Preferred Stock, $0.01 par value per share. As provided in the Charter
Amendment, each 24 shares of BFI's Common Stock issued and outstanding
were reclassified into one share of BFI Common Stock. Accordingly, all
references in the financial statements to share amounts, per share amounts
and stock option plan data have been restated to reflect this 1-for-24
reverse stock split.
The Charter Amendment also provided that the BFI board of directors could
authorize the issuance of Preferred Stock as a class or in one or more
series and could designate, for a class or each series of Preferred Stock,
the number of shares, dividend rate, terms of redemption, conversion
privilege and voting rights. As of December 31, 1996, no BFI Preferred
Stock was issued and outstanding, and no series of BFI Preferred Stock had
been designated.
F-20
<PAGE> 49
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
In February 1997, pursuant to the BFI Merger agreement, all outstanding
shares of BFI Common Stock were exchanged for the Company's Common Stock.
The financial statements have been retroactively restated to give effect
to the 3-for-4 exchange ratio in connection with the BFI Merger (see Note
10). Accordingly, all references in the financial statements to share
amounts and per share amounts have been adjusted to reflect the BFI Merger
exchange, except the BFI stock option plan data which has not been
restated (see Note 5).
In connection with the issuance of $750,000 of notes in December 1994,
$350,000 of notes in December 1995, $315,000 of notes in February 1996 and
$300,000 of notes in May 1996 (see Note 3), BFI issued to the note holders
an aggregate of 329,600 shares of BFI Common Stock at $0.01 per share.
During 1995 and 1996, the Company recorded $17,500 and $202,300,
respectively, in debt issue costs based on the estimated fair value of
$0.67 per share.
5. STOCK OPTIONS AND WARRANTS
Stock Options
-------------
BFI's Stock Option Plan adopted in February 1994 (the BFI Plan), which is
administered by the Board of Directors, provides for the granting of
1,302,000 stock options. Upon consummation of the BFI Merger (see Note
10), the stock options outstanding under BFI's Plan were regranted by the
Company, and will be subject to the terms of the Equity Incentive Plan
adopted by the Company and approved by its stockholders on January 23,
1997. Options granted may be either incentive stock options, as defined in
the Internal Revenue Code, or non-qualified options. The stock options are
exercisable over a period determined by the Board of Directors of BFI, but
no longer than ten years after the date of grant. The vesting schedule for
incentive stock options usually covers a three-year period ranging from
one-third immediately and the remainder equally over the next two years to
100% at the end of the third year. Vesting for non-qualified stock options
is determined on a grant-by-grant basis. Incentive stock options must have
an exercise price of not less than fair market value
F-21
<PAGE> 50
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
of the Common Stock on the date of grant (or, for incentive stock options
granted to a person holding more than 10% of the voting power of BFI,
options must have an exercise price equal to 110% of the fair market
value, and be exercisable for a period of five years). The aggregate fair
value of the Common Stock subject to options granted to an optionee that
are exercisable for the first time by an optionee during any calendar year
may not exceed $100,000. Options generally expire three months following
termination of employment. BFI recorded no compensation expense related to
grants and exercise of stock options in 1996 and $2,600 in 1995.
The following table summarizes transactions pursuant to the BFI Plan
without giving effect to the BFI Merger:
<TABLE>
<CAPTION>
Weighted
Average Option
Remaining Exercise
Number Contractual Price
of Shares Life Per Share
=======================================================================
<S> <C> <C> <C>
Options outstanding at
December 31, 1994 31,968 $4.80-$141.36
Granted 875,000 $ 0.50
Canceled (31,438) $4.80-$141.36
Exercised (530) $ 4.80
-----------------------------------------------------------------------
Options outstanding at
December 31, 1995 875,000 9.8 years $ 0.50
Granted 75,000 $ 0.50
-----------------------------------------------------------------------
Options outstanding at
December 31, 1996 950,000 8.8 years $ 0.50
=======================================================================
Options available for grant
at December 31, 1996 352,000 --
Options exercisable at
December 31, 1996 633,611 8.8 years $ 0.50
=======================================================================
</TABLE>
F-22
<PAGE> 51
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The total number of options granted in 1995 consisted of non-statutory
options to purchase 280,000 shares and incentive stock options to purchase
595,000 shares. Incentive stock options to purchase 75,000 shares were
granted in 1996.
Pursuant to the BFI Merger agreement, the Company granted options to
purchase 5.625 shares of the Company's Common Stock at an exercise price
equal to 80% of the IPO price for each 10 shares of BFI Common Stock the
optionee was entitled to purchase under the Plan (see Note 10). At
December 31, 1996, after giving effect to the BFI Merger agreement, the
total number of shares to be purchased for options outstanding is 534,375,
and the number of shares for options available for grant is 442,125.
On February 3, 1997, the Company granted to three VPI employees, upon
closing of the IPO, options to purchase an aggregate of 100,000 shares
(after giving effect to the BFI Merger agreement) of common stock at the
IPO price, 50% of which will vest 18 months from the date of grant and 50%
of which will vest on the second anniversary of the date of grant.
Also on February 4, 1997, the Company granted stock options to two
directors to purchase an aggregate of 33,750 shares (after giving effect
to the BFI Merger agreement) of common stock at the IPO price, 50% of
which will vest one year from the date of grant and 50% of which will vest
on the second anniversary of the date of grant.
BFI applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for the plan. Under APB Opinion
No. 25, because the exercise price of BFI's stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net loss as if
compensation cost for the Company's stock option plans had been determined
in accordance
F-23
<PAGE> 52
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
with the fair value based method prescribed in FASB Statement No. 123. BFI
estimates the fair value of each stock option at the grant date by using
the minimum value approach with the following weighted-average assumptions
used for grants in 1995 and 1996, respectively: no dividend yield for any
year; near-zero volatility for both years; risk-free interest rates of
6.65% and 6.6%; and expected lives of approximately three years and four
years.
Under the accounting provisions of FASB Statement No. 123, BFI's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31, 1995 1996
---------------------------------------------------------------------
<S> <C> <C>
Net loss
As reported $(1,138,900) $(1,828,000)
Pro forma $(1,217,700) $(1,837,000)
=====================================================================
</TABLE>
Warrants
--------
In connection with previous financings, BFI issued warrants to acquire
7,184 shares of Common Stock at $25.92 per share, which have been assumed
by NHancement in connection with the BFI Merger. Therefore, 7,184 shares
of Common Stock are reserved for issuance upon conversion of outstanding
Common Stock warrants.
In December 1994, BFI entered into Secured Note and Warrant Purchase
Agreements with various individuals for notes with an aggregate principal
amount of $750,000 (see Note 3). Under this Agreement, BFI issued warrants
to purchase up to an aggregate of 7,800 shares of its Common Stock at a
purchase price of $96.00 per share (250,000 shares at $3.00 per share
prior to the 1-for-24 reverse stock split and the 3-for-4 BFI Merger
exchange discussed elsewhere herein). At the issuance, the warrants were
valued by the Company at an estimated fair value of $250,000. This amount
was recorded in additional paid-in capital ($158,000 in 1994 and $92,000
in 1995). These warrants were subsequently canceled pursuant to the
amendment to the Agreement entered into in March 1996.
F-24
<PAGE> 53
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
In October 1996, BFI and a majority of the holders of the December 1994,
December 1995, February 1996 and May 1996 notes entered into amendments to
the respective note agreements, pursuant to which, upon the closing of the
IPO, the Company issued to each note holder a warrant to purchase Common
Stock at an exercise price equal to 120% of the IPO price. The aggregate
number of shares of Common Stock to be issued upon exercise of these
warrants is approximately 109,900 (See Note 3).
In November 1996, BFI entered into Unit Subscription Agreements with
various individuals for notes with an aggregate principal amount of
$500,000 (see Note 3). Under these agreements, BFI issued warrants to
purchase up to an aggregate of 500,000 shares of its Common Stock at a
purchase price of 120% of the IPO price, with a provision to prevent
dilution in connection with the BFI Merger. The estimated fair value of
the warrants was $50,000. This amount was recorded in additional paid-in
capital in 1996.
6. COMMITMENTS AND CONTINGENCIES
The Company's impairment testing business exposes it to potential
litigation (i) by employees of companies using the FACTOR 1000(R) system
if the employee's employment relationship is affected thereby and (ii) by
third parties who may be indirectly affected by the Company's services or
products. Product and service liability insurance is expensive, to the
extent it is available at all. As of December 31, 1996, the Company
maintained general liability insurance in the amount of $1.0 million per
occurrence and $2.0 million in the aggregate, and an umbrella policy with a
$5.0 million limit which was obtained in connection with the VPI
Acquisition. The Company maintains products liability insurance of $2.0
million per occurrence and $2.0 million in the aggregate.
The Company leases its office space under a non-cancelable lease agreement
which expires in December 1998. The Company also leases certain office
equipment under an operating lease agreement which terminates in July
2001. Future minimum commitments under these leases are as follows:
F-25
<PAGE> 54
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year ending
December 31, Amount
=========================================================================
<S> <C>
1997 $ 57,000
1998 57,000
1999 8,000
2000 8,000
2001 5,000
-------------------------------------------------------------------------
$ 135,000
=========================================================================
</TABLE>
Rent expense for the office lease for the years ended December 31, 1995
and 1996 was $29,600 and $44,500, respectively.
The Company's product is based on licensed technology. Accordingly, the
Company is required to pay a royalty of up to 8.5% of sales of the related
product. Beginning January 1997 the license agreement also provides for a
minimum aggregate payment over each three-year period of $150,000. In
addition, the Company's license permits the sublicense of the CTT
technology and requires that the Company make payments to its licensor on
such sublicensing arrangements as follows: (i) a royalty payment of 8.5%
on up to $250,000 of the initial sublicense fee and 50% of any sublicense
fee in excess of $250,000; and (ii) a royalty payment equal to 50% of the
sublicense fee, which amount must be at least 4.25% of the sublicensee's
gross contract revenue. The Company's ability to sell its product is
dependent on the continuation of this license.
The Company has entered into employment agreements with two officers that
provide for specified severance payments should the Company terminate the
executive's employment with the Company, other than for cause. The amount
to be paid is two years' base salaries and bonuses.
F-26
<PAGE> 55
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
During the years 1991 through 1994, BFI borrowed approximately $415,800 in
aggregate from four stockholders. As of December 31, 1995 and 1996, the
principal balance was $321,500 and $326,000, respectively, and accrued
interest was $147,100 and $196,800, respectively (see Note 3).
During 1992 and 1993, BFI borrowed approximately $38,000 from a former BFI
officer. In March 1996, BFI and the former officer entered into a
Settlement Agreement under which BFI agreed to pay the former officer
$75,000 in complete settlement of all claims, including $38,000 in
principal amount of unsecured notes and the related accrued interest of
approximately $13,000 (see Note 3).
Pursuant to Secured Note and Warrant Purchase Agreements dated December
1994 (as subsequently amended), BFI borrowed approximately $47,900 from
two BFI officers, $55,000 from two BFI directors, $35,000 from a former
BFI director, $25,000 from a corporation of which a BFI director is
chairman, and $100,000 from a corporation controlled by a director of BFI.
As of December 31, 1995 and December 31, 1996, the principal balance was
$262,900 at each date and accrued interest was $25,900 and $57,800,
respectively. These borrowings are included in the $750,000 December 1994
bridge financing (see Note 3).
In June 1996, BFI issued an aggregate of 178,700 shares of its Common
Stock to three of its officers in lieu of cash compensation; and, in June
1996, BFI issued an aggregate of 37,500 shares to two of its directors for
services rendered. These shares were valued at $0.67 per share. In
connection therewith, $110,000 was accrued as deferred compensation to
officers as of December 31, 1995, and the Company recorded an additional
$9,700 of compensation expense and $25,000 of outside service fees in
1996.
On November 5, 1996, two of BFI's officers, VPI and a company controlled
by a director of BFI purchased $135,000, $50,000 and $50,000,
respectively, of unsecured promissory notes pursuant to Unit Subscription
Agreements. At December 31, 1996, the aggregate principal and accrued
interest outstanding relating to these notes
F-27
<PAGE> 56
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
payable to related parties was $235,000 and $3,600, respectively. These
borrowings are included in the $500,000 November 1996 bridge financing
(see Note 3).
8. CONCENTRATION RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash with high quality financial institutions. Periodically
throughout 1996 and 1995, the Company maintained a balance in one bank
account in excess of the federally insured limit of $100,000. The
Company's accounts receivable are unsecured and are due from customers
located across the United States. The Company performs on-going credit
evaluations of its customers' financial conditions and establishes an
allowance for doubtful accounts based upon credit risk of specific
customers, historical trends and other information.
One customer accounted for 68% and 88% of total net sales for the years
ended December 31, 1995 and 1996.
9. INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. As of December 31, 1996, the Company's net
operating losses for federal income tax purposes were approximately $7
million, and expire between the years 2003 and 2011. For state income tax
purposes, as of December 31, 1996, the Company had net operating loss
carryforwards of approximately $1.3 million for the State of California
and $4.0 million for the State of Colorado, which expire in 1997 and in
years between 2008 and 2011, respectively. The Company files its income
tax returns on the modified cash method of accounting; this creates the
primary differences between the Company's net operating losses for
financial reporting and tax purposes. As of December 31, 1996, the
combined Federal and state tax benefit of the net operating loss
carryforwards was approximately $2.5 million, and the deferred tax asset
related to the modified cash method of accounting was approximately $0.6
million. This deferred tax asset totaling $3.1 million has been completely
offset by a valuation allowance since management cannot determine that it
is more likely than not that the deferred tax asset can be realized. The
use of such net operating loss carryforwards will be
F-28
<PAGE> 57
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
subject to annual limits if the Company has incurred an "ownership
change." In general, an ownership change occurs if, during any three-year
test period, the aggregate of all increases in percentage ownership by
stockholders is more than 50%. Management has not made a determination if
such change has occurred in connection with the Company's completion of
its IPO (see Note 11).
10. ACQUISITION AND MERGER TRANSACTIONS
On February 3, 1997, NHancement merged a wholly-owned subsidiary with and
into BFI, whereupon BFI, as the surviving corporation, became a
wholly-owned subsidiary of NHancement, and the shares of NHancement 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. Pursuant to the BFI Merger agreement, NHancement assumed
(i) the obligations of BFI's outstanding stock options, by which
assumption the optionee will have the right to purchase 5.625 shares of
NHancement 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, and NHancement undertook to issue to certain holders of BFI
notes, warrants to purchase an aggregate of 109,900 shares of NHancement's
Common Stock, exercisable one year from the close of the IPO at an
exercise price of 120% of the IPO Price.
On February 3, 1997, the Company merged a wholly-owned subsidiary with and
into VPI whereupon VPI, as the surviving corporation, became a
wholly-owned subsidiary of the Company. This merger 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 merger, (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 merger, and (iii) shares of
NHancement Common Stock with an estimated fair value of $4,680,000 (of
F-29
<PAGE> 58
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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
Security Act of 1933 and pursuant to a lock-up agreement with the
underwriter of 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 will 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 has 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.
The letter of intent which provided for the merger of Cossey-Capozzi, Inc.
(CCA) and the Company expired without liability to the Company on March
31, 1997. The Company has not entered into any new agreements with CCA to
extend the expiration date of the letter of intent or proceed with a
merger.
11. 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, from the offering (including
the over-allotment shares) and did not receive any of the proceeds from
the
F-30
<PAGE> 59
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
sale of shares by the stockholder. The Company's common stock has been
approved for quotation on The NASDAQ Stock Market Small Cap System. In
connection with the closing of the IPO, the Company converted certain
notes and related interest to common stock and issued warrants for various
amounts of common stock for every $1,000 of notes (see Note 3).
12. PRO FORMA
The Company's unaudited pro forma financial statements give effect to the
VPI Acquisition and the IPO. The acquisition of VPI is accounted for as a
purchase with the assets acquired and the liabilities assumed recorded at
estimated fair values.
The pro forma financial statements as of December 31, 1996, and for the
year then ended illustrate the effect on the Company's financial position
and results of operations of the VPI Acquisition and the receipt and
application of the net proceeds of the IPO. The unaudited pro forma
balance sheet gives effect to the VPI Acquisition and the IPO, as if both
transactions occurred as of December 31, 1996, and is based on the
historical balance sheets of BFI and VPI as of that date. The pro forma
statement of operations for the year ended December 31, 1996 are based on
the historical statements of operations for those periods of BFI and VPI
and assumes the VPI Acquisition and the IPO took place on January 1, 1996.
The unaudited pro forma financial statements are not intended to be
indicative of what the financial position or results of operations would
have been had such transactions occurred at January 1, 1996 or to project
the Company's results of operations or financial position for any future
period. The pro forma financial statements are based on management's
current estimate of the allocation of the purchase price for VPI. Actual
allocations may differ.
The unaudited proforma financial statements include the following
adjustments related to the VPI acquisition:
(a) To reflect the purchase price paid for VPI as follows:
<TABLE>
<S> <C>
CONSIDERATION
Common Stock - 600,000 selling shares $2,400,000
Long-term notes 1,500,000
Common Stock - 712,500 shares subject to
lockup agreements 2,280,000
----------
Total consideration $6,180,000
----------
CALCULATION OF GOODWILL:
Net assets acquired(1) $1,012,200
Cost of Merger (270,100)
----------
742,100
----------
Excess of cost over net assets acquired $5,437,900
==========
</TABLE>
(1) net assets of $390,600 and an increase of estimated fair value of
(i) inventories of $436,300 and (ii) equipment of $135,500. The
increase in valuation of inventories is based on estimated selling
prices less a reasonable profit allowance for installation and
selling effort. The increase in valuation of fixed assets is based
on physical counts valued at current replacement cost.
F-31
<PAGE> 60
NHANCEMENT TECHNOLOGIES INC.
(FORMERLY BIOFACTORS, INC.
A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(b) To reflect the recording of estimated goodwill amortization of
$543,800 for 1996, based on a 10-year amortization period.
(c) To reflect the $50,000 increase in the corporate overhead resulting
from the renegotiation of the employment agreement of the key
management employees of VPI.
(d) To reflect the increase in depreciation expense of $27,000 for 1996
resulting from the recording of certain equipment of VPI at estimated
fair values.
The receipt and application of IPO proceeds considered in the unaudited
pro forma financial statements is summarized as follows:
<TABLE>
<S> <C>
Gross IPO proceeds $8,180,000
Underwriting fees and costs 818,000
Printing costs 350,000
Other offering costs 375,200
----------
Net IPO proceeds 6,636,800
----------
Use of proceeds:
Repayment of current debt 1,823,500
Repayment of accrued interest 197,000
----------
Net increase in cash and cash equivalents $4,616,300
==========
</TABLE>
In addition, the pro forma financial statements reflect the conversion of
$1,014,000 of current debt and accrued interest to common equity and a net
$485,000 reduction in interest expense attributable to the aggregate
decrease in current debt as a result of this conversion and the
application of IPO proceeds. The reduction in interest expense is net of
$90,000 of additional interest on the $1.5 million long-term notes.
The weighted average shares outstanding is based on the estimated number
of shares of common stock equivalents of BFI outstanding during the
period, calculated as follows:
<TABLE>
<S> <C> <C>
Shares outstanding as of December 31, 1995 93,225
Cheap stock:
Shares issued to note holders and management in 1996 519,575
Shares of common stock equivalents related to
stock options 534,375
Less shares assumed to be repurchased pursuant to
the Treasury Stock method (385,060) 668,890
--------
Shares issued to VPI, including 600,000 selling shares 1,312,500
Shares issued in the IPO to effect conversion and
repayment of indebtedness 758,660
---------
Total for combined companies, as adjusted for debt
conversion and repayment from the proceeds of the IPO 2,833,275
=========
</TABLE>
F-32
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and the Stockholders of
Voice Plus, Inc.
We have audited the accompanying balance sheets of Voice Plus, Inc. as of
December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Voice Plus, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
February 4, 1997, except for Note 1
which is as of February 27, 1997
F-33
<PAGE> 62
VOICE PLUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
===============================================================================
December 31, 1995 1996
===============================================================================
<S> <C> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents (Note 8) $ 457,400 $ 697,200
Accounts receivable, less allowance for doubtful
accounts of $25,000 and $35,000 in 1995 and
1996 (Note 8) 1,363,300 1,928,600
Inventories (Note 8) 324,600 1,159,500
Prepaid expenses and other (Note 7) 38,800 81,800
Deferred income taxes (Note 4) 68,300 --
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,252,400 3,867,100
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 2) 168,500 342,100
- -------------------------------------------------------------------------------
Excess of cost over net assets acquired of Phonetics,
net of accumulated amortization of $4,600 (Note 1) -- 214,700
OTHER ASSETS 17,400 24,400
- -------------------------------------------------------------------------------
$2,438,300 $4,448,300
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-34
<PAGE> 63
VOICE PLUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
===============================================================================
December 31, 1995 1996
===============================================================================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Line of credit (Note 3) $ -- $ --
Deferred revenues 816,100 1,732,600
Accounts payable (Note 8) 665,300 1,465,500
Accrued expenses 174,800 425,800
Commissions payable 119,600 109,000
Accrued compensation and benefits (Note 6) 99,500 193,500
Dividends payable -- 131,300
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,875,300 4,057,700
================================================================================
COMMITMENTS AND CONTINGENCIES (Notes 1, 3,
5, 6, 8 and 10)
STOCKHOLDERS' EQUITY
Common stock, no par - 100,000 shares
authorized, 96,000 and 91,000 shares issued
and outstanding in 1995 and 1996 (Note 7) 72,000 22,000
Retained earnings 491,000 368,600
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 563,000 390,600
- -------------------------------------------------------------------------------
$2,438,300 $4,448,300
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-35
<PAGE> 64
VOICE PLUS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
===============================================================================
Years ended December 31, 1995 1996
===============================================================================
<S> <C> <C>
NET REVENUES $7,258,900 $8,764,100
Cost of revenues (Note 6) 4,190,100 5,137,400
- -------------------------------------------------------------------------------
GROSS PROFIT 3,068,800 3,626,700
- -------------------------------------------------------------------------------
Marketing and selling (Note 6) 1,242,800 1,598,000
General and administrative, including $550,000 of
officer bonuses in 1995 1,540,300 1,080,700
- -------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,783,100 2,678,700
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS 285,700 948,000
Interest and other, net 30,600 32,300
- -------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 316,300 980,300
INCOME TAXES (Note 4) 144,500 102,700
- -------------------------------------------------------------------------------
NET INCOME $ 171,800 $ 877,600
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PRO FORMA (Note 11)
Historical income before income taxes $ 980,300
Pro forma income taxes 392,100
- --------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 588,200
================================================================================
F-36
<PAGE> 65
VOICE PLUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
==============================================================================================
Common Stock Total
--------------------- Retained Stockholders'
Shares Amount Earnings Equity
==============================================================================================
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 96,000 $ 72,000 $ 419,200 $ 491,200
Dividends (100,000) (100,000)
Net income 171,800 171,800
- ----------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 96,000 72,000 491,000 563,000
Dividends (1,000,000) (1,000,000)
Repurchase and retirement of common
stock (Note 7) (5,000) (50,000) (50,000)
Net income 877,600 877,600
- ----------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 91,000 $ 22,000 $ 368,600 $ 390,600
==============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-37
<PAGE> 66
VOICE PLUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===================================================================================
Years ended December 31, 1995 1996
===================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 171,800 $ 877,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts on accounts
receivable 13,000 10,000
Loss on disposition of assets 3,500 35,200
Depreciation and amortization 46,900 86,200
Deferred income taxes (59,400) 68,300
Changes in assets and liabilities, net of assets
acquired and liabilities assumed:
Accounts receivable (436,700) (575,300)
Inventories (40,800) (769,500)
Prepaid expenses and other (20,400) (47,200)
Deferred revenues (146,200) 855,700
Accounts payable and accrued expenses 598,900 930,000
- -----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 130,600 1,471,000
- -----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of Phonetics -- (95,800)
Capital expenditures (123,700) (216,700)
- -----------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (123,700) (312,500)
- -----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase and retirement of common stock -- (50,000)
Dividends paid (100,000) (868,700)
- -----------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (100,000) (918,700)
- -----------------------------------------------------------------------------------
</TABLE>
F-38
<PAGE> 67
VOICE PLUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===================================================================================
Years ended December 31, 1995 1996
===================================================================================
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (93,100) $ 239,800
CASH AND CASH EQUIVALENTS, beginning of year 550,500 457,400
- -----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 457,400 $ 697,200
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-39
<PAGE> 68
VOICE PLUS, INC.
SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Voice Plus, Inc. (the Company) is a retailer of voice processing equipment, and
was incorporated in the State of California in April 1987. The Company also
provides various services including equipment installation, technical support
and ongoing maintenance. Revenues generated from providing these services were
approximately 19% and 17% of total 1995 and 1996 revenues, respectively. The
Company maintains offices in the states of California, New York, Washington,
Arizona, and Texas.
CASH EQUIVALENTS
The Company considers all short-term investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist primarily of systems and system components and are valued
at the lower of cost (first-in, first-out method) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets
which approximate five years. Maintenance and repairs are expensed as incurred
and improvements are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired, which relates to the Company's
acquisition of Phonetics, Inc., is being amortized over a ten-year period using
the straight-line method. The carrying value is periodically evaluated by the
Company based on the expected future undiscounted operating cash flows of the
related business.
REVENUE RECOGNITION
The Company recognizes revenue under several methods as dictated by the nature
of the service or product provided and the terms of the sales agreement. System
sales are recognized when all significant uncertainties about customer
acceptance of the system have been resolved. Once system installation is
complete, seller obligations, including estimated future technical support
costs, are immaterial. Revenue from maintenance contracts is prorated over the
life of the contract, normally one year, although the entire amount of the
contract is collected at the beginning of the term. Services, labor and the
sale of parts, upgrades, moves, adds and changes are recorded in the period
shipped or provided.
F-40
<PAGE> 69
VOICE PLUS, INC.
SUMMARY OF ACCOUNTING POLICIES
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income tax assets and liabilities are
recognized based on the temporary differences between the financial statement
and income tax bases of assets, liabilities and carryforwards using enacted tax
rates. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
USE OF ESTIMATES
The preparation of 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-41
<PAGE> 70
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ACQUISITION
On October 16, 1996, the Company entered into an Asset Purchase Agreement
with Phonetics, Inc. (Phonetics) to purchase certain assets, including all
inventory, fixed assets, customer lists, trademarks and logos, and assume
certain liabilities, including all liabilities associated with equipment
and office leases and all liabilities incurred in connection with the
maintenance of service contracts with customers for consideration of
approximately $247,900. Phonetics, located in Dallas, Texas, distributes
voice processing equipment and provides various services including
equipment installation, technical support and ongoing maintenance,
primarily within the state of Texas. The acquisition was accounted for as
a purchase, and, accordingly, the results of Phonetics' operations were
included in the Company's financial statements commencing October 16,
1996.
The purchase price and fair value of net assets acquired are summarized as
follows:
<TABLE>
==================================================================
<S> <C>
Components of purchase price:
Cash to seller $ 147,900(1)
Amount due seller in 24 equal semi-monthly
installments 100,000(2)
------------------------------------------------------------------
247,900
------------------------------------------------------------------
Fair value of net assets acquired:
Inventories 65,400
Property and equipment 73,700
Other assets 2,800
Liabilities assumed (113,300)
------------------------------------------------------------------
28,600
------------------------------------------------------------------
Excess of cost over fair value of net assets
acquired $ 219,300
==================================================================
</TABLE>
F-42
<PAGE> 71
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Of this amount, $75,000 was paid prior to December 31, 1996, and the
remaining $72,900, which is included in accrued expenses at December
31, 1996, was paid on February 27, 1997.
(2) Of this amount, $79,200 remains unpaid as of December 31, 1996 and is
included in accrued expenses.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company and Phonetics as if the acquisition
had occurred at the beginning of 1995, after giving effect to certain
adjustments, including the amortization of excess of cost over net assets
acquired, and the decrease in corporate overhead resulting from the
renegotiation of employment agreements, the elimination of interest and
management fees. This pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and Phonetics
had constituted a single entity during such periods and is not necessarily
indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
Years ended December 31, 1995 1996
----------------------------------------------------------------------
<S> <C> <C>
Net sales $8,186,000 $9,390,800
======================================================================
Income before income taxes $ 419,200 $1,049,900
======================================================================
Net income $ 228,400 $ 947,200
======================================================================
</TABLE>
In connection with the acquisition of Phonetics, the Company entered into
a one-year employment agreement with a former stockholder of Phonetics
which provides for a base salary of $60,000, sales commissions payable
pursuant to an annual sales compensation plan and a $60,000 bonus.
F-43
<PAGE> 72
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1996
======================================================================
<S> <C> <C>
Automobiles $171,300 $182,000
Office equipment 56,700 173,400
Furniture and fixtures 61,700 70,200
Computers 105,900 193,800
----------------------------------------------------------------------
395,600 619,400
Accumulated depreciation 227,100 277,300
----------------------------------------------------------------------
$168,500 $342,100
======================================================================
</TABLE>
3. LINE OF CREDIT AGREEMENT
At December 31, 1996, the Company had a $400,000 revolving line of credit
collateralized by substantially all of the assets of the Company and
guaranteed by the president who is also the sole stockholder of the
Company. Interest is payable on outstanding borrowings at the bank's prime
rate (8.25% at December 31, 1996) plus 1.5%. At December 31, 1995 and
1996, the Company had no outstanding borrowings under the line of credit.
The credit agreement contains various restrictions which require, among
other things, maintenance of certain financial ratios. At December 31,
1996, the Company was not in compliance with several of these covenants.
As such, the Company may not be able to borrow under the line of credit
until a waiver of these covenant violations has been obtained from the
bank.
F-44
<PAGE> 73
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Years ended December 31, 1995 1996
======================================================================
<S> <C> <C>
Current
Federal $ 154,600 $ 11,500
State 49,300 22,900
----------------------------------------------------------------------
203,900 34,400
Deferred
Federal (59,400) 68,300
----------------------------------------------------------------------
Provision for income
taxes $ 144,500 $ 102,700
======================================================================
</TABLE>
Effective January 1, 1996, the Company elected to be taxed under the
Subchapter S rules of the Internal Revenue Code. As a result of this
change, the stockholders will report corporate taxable income in their
individual tax returns and be taxed depending on their personal tax
strategies. The effect of this change during the year ended December 31,
1996 was an elimination of the net deferred tax asset totaling $68,300 and
the establishment of an $11,500 current tax liability for potential
built-in gains on the effective date of election. Except for the state of
New York, for which an S Corporation election was not filed, the states in
which the Company operates recognize Federal S Corporation provisions but
impose a tax at a reduced rate of approximately 1.5%. In connection with
the purchase of the Company by NHancement Technologies, Inc. (NHancement),
the Company terminated its status as a Subchapter S Corporation effective
February 3, 1997 (see Notes 10 and 11).
The following summarizes the difference between the income tax expense and
the amount computed by applying the Federal income tax rate of 34% in 1995
to income before income taxes:
F-45
<PAGE> 74
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year ended December 31, 1995
======================================================================
<S> <C>
Federal income tax at statutory rate $107,500
State income taxes, net of Federal tax benefit 33,000
Other, net 4,000
----------------------------------------------------------------------
$144,500
======================================================================
</TABLE>
The effective tax rate for the year ended December 31, 1996 differs from
the Federal statutory tax rate due to the change to Subchapter S
corporation status effective January 1, 1996.
Deferred tax assets comprise the following:
<TABLE>
<CAPTION>
December 31, 1995 1996
======================================================================
<S> <C> <C>
Deferred revenue on system sales $33,300 $ --
State income taxes 15,100 --
Reserves and accrued liabilities 17,200 --
Accumulated depreciation 2,700 --
----------------------------------------------------------------------
Net deferred tax asset $68,300 $ --
======================================================================
</TABLE>
5. COMMITMENTS
The Company leases certain property consisting of corporate and sales
office facilities and equipment under operating leases that expire at
varying dates through May 2000. Certain facility leases require the
Company to pay real estate taxes, maintenance and utilities.
F-46
<PAGE> 75
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
The Company's future minimum lease commitments for operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
======================================================================
<S> <C>
1997 $142,700
1998 46,400
1999 47,900
2000 20,000
----------------------------------------------------------------------
$257,000
======================================================================
</TABLE>
Rent expense under operating leases was $183,800 and $205,900 for the
years ended December 31, 1995 and 1996, respectively.
The Company has entered into two-year employment agreements with two
employees which expire in January 1999 and provide for an annual base
salary of $65,000, sales commissions payable pursuant to an annual sales
compensation plan and performance-based bonus payments.
6. ACCRUED COMPENSATION AND BENEFITS
The Company has a 401(k) profit sharing plan in which all qualifying
employees with a minimum of 1,000 hours of service at year end are
eligible to participate. Matching contributions are made at the discretion
of the Company's Board of Directors. The Company pays all fees to
administer the plan. As of December 31, 1995 and 1996, the Company accrued
matching contributions of up to 6.5% of employee base compensation, plus
an additional $50,000 for the plan year ended December 31, 1995. Total
expense under this plan was $99,500 and $48,100 for the years ended
December 31, 1995 and 1996.
During the year ended December 31, 1996, the Company declared a $250,000
discretionary bonus to key employees, of which $125,000 is included in
cost of revenues and $125,000 is included in marketing and selling. At
December 31, 1996, $110,000 of this bonus remains unpaid and is included
in accrued compensation and benefits.
F-47
<PAGE> 76
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
A customer controlled by a minority stockholder of the Company purchased
$99,700 of equipment from the Company during the year ended December 31,
1995. Included in accounts receivable at December 31, 1995 is $19,000 due
from this related customer. In February 1996, the Company purchased this
minority stockholder's 5% interest in the Company for $50,000 and retired
the related shares of common stock.
On November 5, 1996, the Company entered into a Unit Subscription
Agreement with BioFactors, Inc. (BFI) which provides for the Company's
purchase of one BFI unit, each unit consisting of (i) an unsecured
promissory note of BFI in the principal amount of $50,000, with stated
interest at 10%, no monthly installments and a maturity date of March 31,
1997, and (ii) a warrant to purchase 50,000 shares of BFI Common Stock at
an exercise price of 120% of the Initial Public Offering (IPO) price of
NHancement Technologies, Inc., the successor to BFI ("NHancement") (see
Note 10), with a provision to prevent dilution in connection with the
Merger of a wholly owned subsidiary of NHancement into BFI. At December
31, 1996, this $50,000 note receivable is included in prepaid expenses and
other.
8. CONCENTRATION RISK
Revenues from one customer accounted for approximately 10% of total net
revenues during the year ended December 31, 1995. Included in accounts
receivable at December 31, 1995 is $431,900 due from this customer.
Revenues from two customers accounted for approximately 29% and 16% of
total net revenues during the year ended December 31, 1996. Included in
accounts receivable at December 31, 1996 is $1,147,500 and $5,800 due from
these two customers.
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States. The Company performs
ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based upon the credit risk
of specific customers, historical trends and other information. The
Company does not require collateral from its customers.
F-48
<PAGE> 77
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
Substantially all of the Company's inventory purchases in 1995 and 1996
were made from one vendor, Centigram Communications Corporation
(Centigram). Any termination or adverse change in the Company's
distributor relationship with Centigram would have a material adverse
impact upon the Company's voice processing business. In addition, the
Company depends upon Centigram to offer products which are competitive
with products offered by other manufacturers as to technological
advancement, reliability and price. If Centigram's competitors should
surpass Centigram in any of these qualities, the Company may be required
to establish alternative strategic relationships. Any such development
would have an adverse effect on the Company's business for an indefinite
period until new supplier relationships could be established. Included in
accounts payable at December 31, 1995 and 1996 are $634,800 and
$1,395,200, respectively, due to Centigram.
Cash and cash equivalents are held principally at two high quality
financial institutions. At times, such balances may be in excess of the
FDIC insurance limit.
9. STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information:
Cash paid for:
<TABLE>
<CAPTION>
Years ended December 31, 1995 1996
======================================================================
<S> <C> <C>
Interest $ 1,100 $ 4,100
======================================================================
Income taxes $226,000 $ 45,300
======================================================================
</TABLE>
F-49
<PAGE> 78
VOICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT
On February 3, 1997, the Company merged with NHancement whereby NHancement
acquired, prior to the consummation of NHancement's IPO on February 4,
1997, all outstanding shares of the Company. The consideration for the
outstanding shares consists of (i) an 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 Merger, (ii)
an 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 Merger, and (iii) shares of NHancement Common
Stock with an estimated fair 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 and pursuant to a lock-up agreement with the underwriter of the IPO).
In connection with the Merger, NHancement entered into a three-year
employment agreement with the president and sole stockholder of the
Company, pursuant to which NHancement will 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
NHancement materially breaches the agreement or terminates the employee
without "cause," NHancement 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, the two promissory notes will be accelerated and
immediately become due and payable.
11. PRO FORMA
In connection with the purchase of the Company by NHancement, the Company
terminated its status as a Subchapter S Corporation effective February 3,
1997. The pro forma adjustment reflects a provision for income taxes at an
effective rate of 40% for the year ended December 31, 1996. Prior to
January 1, 1996, the Company was a C Corporation.
F-50
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 60 71
<SECURITIES> 0 0
<RECEIVABLES> 0 725
<ALLOWANCES> 0 10
<INVENTORY> 13 14
<CURRENT-ASSETS> 551 931
<PP&E> 137 124
<DEPRECIATION> 102 66
<TOTAL-ASSETS> 586 990
<CURRENT-LIABILITIES> 4,226 2,424
<BONDS> 0 774
6 1
0 0
<COMMON> 0 0
<OTHER-SE> 5,364 4,973
<TOTAL-LIABILITY-AND-EQUITY> 586 990
<SALES> 796 451
<TOTAL-REVENUES> 796 451
<CGS> 129 186
<TOTAL-COSTS> 129 186
<OTHER-EXPENSES> 2 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 582 519
<INCOME-PRETAX> (1,828) (1,139)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,828) (1,139)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,828) (1,139)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
