<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------------
NHANCEMENT TECHNOLOGIES INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39420 LIBERTY STREET, SUITE 250
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 744-3333
(Issuer's telephone number)
----------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of May 29, 1998, there were 4,436,500 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair statement of the information shown.
2
<PAGE> 3
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 935,900
Accounts receivable, less allowance for doubtful accounts of $515,000 1,601,500
Notes receivable from stockholders 112,000
Inventory 526,400
Prepaid expenses and other 330,700
Income tax receivable 225,600
------------
TOTAL CURRENT ASSETS 3,732,100
------------
PROPERTY AND EQUIPMENT 1,289,700
Less accumulated depreciation 631,500
------------
PROPERTY AND EQUIPMENT, net 658,200
------------
Excess of cost over net assets acquired of Voice Plus, Inc., net of accumulated 1,425,000
amortization of $75,000
Excess of cost over net assets acquired of Advantis, net of accumulated amortization 962,300
of $29,000
Long-term portion of notes receivable from stockholders 162,600
Deferred acquisition costs 119,400
Other assets 131,200
------------
$ 7,190,800
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit 311,000
Accounts payable 839,800
Accrued liabilities 436,700
Payable to affiliates 440,600
Deferred revenue 1,032,800
Current portion of long-term debt 298,000
------------
TOTAL CURRENT LIABILITIES 3,358,900
LONG-TERM DEBT, net of current portion 162,500
------------
TOTAL LIABILITIES 3,521,400
------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $0.01 par value, 20,000,000 shares authorized,
4,437,000 shares issued and outstanding 44,400
Additional paid-in capital 18,020,600
Accumulated deficit (14,387,500)
Cumulative translation adjustment (8,100)
------------
TOTAL STOCKHOLDERS' EQUITY 3,669,400
------------
$ 7,190,800
============
</TABLE>
3
<PAGE> 4
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET SALES $ 1,431,900 $ 1,216,500
Cost of sales 636,600 850,000
----------- -----------
GROSS PROFIT 795,300 366,500
----------- -----------
OPERATING EXPENSES
Research and development 23,700 --
Selling, marketing and administrative 611,900 1,089,300
Amortization of excess of cost over net assets
acquired 98,900 99,800
----------- -----------
TOTAL OPERATING EXPENSES 734,500 1,189,100
----------- -----------
INCOME (LOSS) FROM OPERATIONS 60,800 (822,600)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 38,400 21,600
Interest expense (46,200) (26,500)
Other -- 41,200
----------- -----------
(7,800) 36,300
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 53,000 (786,300)
----------- -----------
INCOME TAXES 10,400 --
----------- -----------
NET INCOME (LOSS) $ 42,600 $ (786,300)
----------- -----------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ 0.02 $ (.18)
----------- -----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
2,682,000 4,436,500
OPTIONS AND WARRANTS 125,100 --
----------- -----------
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,807,100 4,436,500
=========== ===========
</TABLE>
4
<PAGE> 5
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
PAR VALUE ADDITIONAL ACCUMULATED TRANSLATION
SHARES AMOUNT PAID-IN-CAPITAL DEFICIT GAIN (LOSS) TOTAL
---------- ------- --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 4,436,500 $44,400 $18,020,600 $(13,601,200) $11,300 $4,475,100
Cumulative translation loss -
Advantis (19,400) (19,400)
Net loss -- -- -- (786,300) -- (786,300)
---------- ------- ----------- ------------ ------- ----------
BALANCE, March 31,1998 4,436,500 $44,400 $18,020,600 $(14,387,500) $(8,100) $3,669,400
========== ======= =========== ============ ======= ==========
</TABLE>
5
<PAGE> 6
NHANCEMENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MARCH 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 42,600 $ (786,300)
Adjustments to reconcile net income (loss) to net cash
used in operating
activities:
Depreciation and other amortization 126,200 153,400
Other -- (19,400)
Changes in operating assets and liabilities:
Accounts receivable 420,000 1,403,700
Income tax receivable -- (53,600)
Inventory 17,400 9,800
Prepaid expenses and other (220,300) (223,700)
Other assets 51,700 6,200
Accounts payable and other current liabilities (2,405,000) (1,032,400)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,967,400) (542,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from VPI Acquisition 851,900 --
Purchase of property and equipment (35,200) (9,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 816,700 (9,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under line of credit -- 124,000
Principal payment of long-term debt (1,814,000) --
Proceeds from initial public offering of common stock, net
of offering costs 6,962,200 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,148,200 124,000
----------- -----------
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,997,500 (427,300)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,100 1,363,200
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,057,600 $ 935,900
=========== ===========
</TABLE>
6
<PAGE> 7
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On February 3, 1997, the Company issued 1,312,500 shares of its Common
Stock and $1,500,000 in promissory notes for all the outstanding shares of
Voice Plus, Inc. pursuant to a purchase and plan of merger agreement.
On February 4, 1997, the Company issued 258,200 shares of its Common
Stock as repayment of certain notes payable and accrued interest thereon.
7
<PAGE> 8
1. ORGANIZATION
NHancement Technologies Inc., a Delaware corporation ("NHancement" or
the "Company"), was incorporated in October 1996 as a holding company and
successor to the business of BioFactors, Inc. ("BFI" or "BioFactors"), 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, BFI merged with a subsidiary of NHancement whereupon BFI, as the
surviving corporation, became a wholly-owned subsidiary of NHancement (the
"BFI Merger"). Also, on February 3, 1997, the Company acquired Voice Plus,
Inc.(TM) ("VPI" or "Voice Plus"), a California corporation, a systems
integrator and national distributor of voice processing equipment. The
acquisition was accounted for as a purchase, and, accordingly, the results
of VPI's operations were included in the Company's consolidated financial
statements commencing February 3, 1997. For financial accounting purposes,
BFI is deemed to be the acquirer of VPI.
Effective November 12, 1997, BioFactors, Inc. was merged with and into
Voice Plus, Inc. in a statutory merger intended to qualify, for federal
income tax purposes, as a re-organization under Section 368 of the Internal
Revenue Code of 1986, as amended. Voice Plus is the surviving corporation
in the merger transaction with BioFactors, and the separate existence of
BioFactors ceased on the effective date of the merger. The operations of
the combined entity are being conducted under the name of "Voice Plus,"
which is headquartered in Fremont, California. Voice Plus remains a
wholly-owned subsidiary of NHancement.
On December 15, 1997, NHancement purchased one hundred percent (100%)
of the outstanding shares of Advantis Network & System Sdn Bhd
("Advantis"). As a result of the acquisition, Advantis has become a
wholly-owned subsidiary of NHancement. Advantis is a telecommunications
systems integrator. The operations of the entity are being conducted under
the name of "Advantis Network & System Sdn Bhd," which is headquartered in
Kuala Lumpur, Malaysia. The acquisition was accounted for as a purchase,
and, accordingly, the results of Advantis' operations were included in the
Company's consolidated financial statements commencing December 15, 1997.
The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd.
2. FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS
The accompanying consolidated financial statements as of March 31, 1998
and for the three months ended March 31, 1998 and 1997 are unaudited.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been omitted. These consolidated
financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the year ended December 31,
1997 presented in the Company's latest annual report on Form 10-KSB.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
The consolidated financial statements presented herein reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations for the
periods presented.
8
<PAGE> 9
Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders 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. Because of a net loss during the three months ended
March 31, 1998 options and warrants to purchase 1,116,600 shares of common
stock were outstanding but were not included in the computation of diluted
loss per common share because the effect would be antidilutive.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 130 is effective for financial statements for fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier periods to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if any,
the standard may have on future statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if any,
it may have on future financial statement disclosure. Results of operations
and financial position, however, will be unaffected by implementation of
this standard.
In February 1998, the Financial Accounting Standard Board issued SFAS
No. 132, Employers' Disclosures about Pensions and Other Post Retirement
Benefits. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as they were
when previous related accounting standards were issued.
SFAS No. 132 is effective for financial statements for fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated unless the information is not readily
available, in which case the notes to the financial statements should
include all available information and a description of the information not
available. Management believes that the Company's current financial
statement disclosures will not need to be modified based upon current
operations. Results of operations and financial position will be unaffected
by implementation of this standard.
9
<PAGE> 10
3. 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 shares of NHancement common
stock were exchanged for all the issued and outstanding common stock of
BFI, in a ratio of three shares of NHancement Common Stock for every four
shares of BFI Common Stock.
Also, on February 3, 1997, the Company entered into a stock purchase
agreement with Voice Plus, Inc., pursuant to a transaction by which 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, with all principal and accrued
interest paid in full during 1997, (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
subject to accelerated payment based upon quarterly earnings of Voice Plus,
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 (as amended) and pursuant to a lock-up
agreement with the underwriter of the IPO), for all the issued and
outstanding common stock of VPI.
On December 15, 1997, the Company consummated the acquisition of
Advantis Network & System Sdn Bhd, a Malaysian corporation and systems
integrator and distributor of communication equipment, pursuant to a
transaction by which Advantis became a wholly-owned subsidiary of
NHancement.
4. INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed its IPO of 2,300,000 shares
of $0.01 par value Common Stock, of which 1,700,000 shares were sold by the
Company and 600,000 shares, representing a portion of the consideration for
the outstanding shares of VPI, were sold by a stockholder of the Company.
On February 11, 1997, the underwriters exercised an option to purchase from
the Company an additional 345,000 shares of Common Stock to cover
over-allotments. The Company raised approximately $6.5 million of funds,
net of underwriting commissions, printing costs, legal and accounting fees
and other offering expenses, totaling approximately $1,660,200, from the
offering (including the over-allotment shares) and did not receive any of
the proceeds from the sale of shares by the stockholder.
5. STOCK OPTIONS
During the three months ended March 31, 1998, no additional options of
the Company's Common Stock were granted.
10
<PAGE> 11
6. PENDING ACQUISITION AND FINANCING
On January 16, 1998, the Company entered into a definitive agreement to
acquire all of the issued and outstanding shares of capital stock of
Infotel Technologies Pte Ltd ("Infotel"), a Singapore company which
provides radar system integration, turnkey project management services,
test instrumentation, as well as a wide portfolio of communication
equipment. Consummation of the transaction is contingent upon the Company
obtaining third party financing necessary to complete the acquisition, the
closing of which must occur, if at all, by no later than June 24, 1998. The
basic terms of the acquisition agreement require an initial cash payment of
about $2.3 million, notes payable of approximately $2.0 million (with
payment subject to Infotel achieving certain 1998 and 1999 profitability
targets), and the issuance of 431,000 shares of NHancement's Common Stock.
In the event that the transaction fails to close by June 24, 1998, the
Company is obligated to pay a termination fee in the amount of $300,000
plus interest.
On April 13, 1998, the Company signed a $3.0 million Convertible
Preferred Stock financing agreement. Under the terms of the agreement, the
Company had been paid $1,250,000 as of the initial date of filing of the
Company's first quarter report on Form 10-QSB (less commissions and certain
other costs and expenses of approximately $162,500) and, subject to
satisfaction of certain conditions specified in the stock purchase
agreement documentation, will receive $500,000 sixty days after the
effective date of an S-3 registration statement, $500,000 thirty days
thereafter and the final $750,000 thirty days thereafter. The Preferred
Stock bears a 5% cumulative dividend and has a liquidation preference equal
to the original purchase price plus cumulative but unpaid dividends. If the
Company's common stock trades for a thirty day average below $2.00 or the
average daily volume for a thirty day period falls below 20,000 shares, the
investors are not required to fund any remaining portion of the $3.0
million in excess of the first $1,250,000 investment. Further, if the five
day average closing bid price of the Company's Common Stock falls below
$2.00 per share, the Company has the option to redeem the Preferred Stock
at 118% of the original purchase price plus cumulative but unpaid
dividends. Any shares of Preferred Stock tendered for conversion prior to
delivery of the Company's notice of redemption shall not be affected by the
redemption notice and shall be converted into shares of Common Stock. As to
any shares with respect to which such conversion rights have not been
timely exercised, such conversion rights shall terminate upon delivery by
the Company of its notice of redemption. The Preferred Stock is convertible
into Common Stock at the lesser of the five day average closing bid price
at the time of signing or 75% of the five day average closing bid price at
the time of each conversion. The issuance of the $3.0 million of Series A
Convertible Preferred Stock that is convertible into shares of Common Stock
at a 25% discount, which will be reflected as a preferred stock dividend,
will result in a $1.0 million decrease in the income or increase in the
loss applicable to Common Stock in computing the net income/loss per share.
The Company intends to utilize the proceeds of this financing to pay a
portion of the initial cash payment on the pending Infotel acquisition and
for working capital.
7. SUBSEQUENT EVENTS
Although the Common Stock was approved for quotation on the Nasdaq
SmallCap Market System in connection with the Company's IPO, there can be
no assurance that it will remain eligible to be included on the Nasdaq
SmallCap Market System. In this regard, on or about April 16, 1998, Nasdaq
informed the Company that it no longer met the requirements for continued
listing on the Nasdaq SmallCap Market System. Specifically, the Company
failed to meet the requirements of Nasdaq Marketplace Rule 4310(c)(2) in
the most recently completed fiscal year or in two of the last three most
recently completed fiscal years. This deficiency was remedied by the
Company in April 1998 as a result of the initial closing of the Convertible
Preferred Stock financing (see Note 6), as reflected in the Company's
unaudited financial statements as of April 30, 1998, as filed with the
Securities and Exchange Commission under a Form 8-K on May 21, 1998. While
the Company presently meets and believes that in the future it will be in a
position to continue to meet these listing requirements, such belief is
dependent in part upon the Company completing the Infotel acquisition, the
financing for which had not been completed as of the date of this Form
10-QSB/A. There can be no assurance that the Company will in fact meet
these requirements in any future period. (See "Liquidity and Capital
Resources".)
11
<PAGE> 12
8. UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations combine the results of
operations of BioFactors, VPI and Advantis, for the three months ended
March 31, 1998 and 1997, as if the VPI and Advantis acquisitions had
occurred at the beginning of the respective periods, after giving effect to
certain adjustments, including the amortization of excess of costs over
assets acquired, interest expense on notes payable to stockholder,
additional salaries, and recalculation of estimated income taxes. The
following unaudited pro forma summary does not necessarily reflect the
results of operations as they would have been had the VPI and Advantis
acquisitions occurred at the beginning of the periods presented and is not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
------------------------------
MARCH. 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net sales $ 4,981,400 $ 1,216,500
Cost of sales 3,350,100 850,000
Gross profit 1,431,300 366,500
Total operating expenses (includes amortization of
excess of cost over net assets acquired) 1,242,600 1,189,100
Income (loss) from operations 188,700 (822,600)
Other income (expense) (4,100) 41,200
Income (loss) before income taxes 184,600 (786,300)
Income taxes 9,500 --
Net income (loss) $ 175,100 $ (786,300)
Net income (loss) per common share $ 0.05 $ (.18)
Weighted average common and common equivalent shares
outstanding 3,563,200 4,436,500
=========== ===========
</TABLE>
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997
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 herein.
GENERAL
NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"). On February 3,
1997, prior to the February 4, 1997 consummation of the initial public offering
("IPO") of the Company's Common Stock, BFI merged with a subsidiary of
NHancement whereupon BFI, as the surviving corporation, became a wholly-owned
subsidiary of NHancement. The BFI merger was accounted for in a manner similar
to a pooling-of-interests. Also, on February 3, 1997, the Company acquired Voice
Plus, Inc. ("VPI" or "Voice Plus"), a California corporation, and 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.
The VPI acquisition was accounted for as a purchase, and, accordingly, the
results of VPI's operations were included in the Company's financial statements
commencing February 3, 1997.
For financial accounting purposes, BFI was deemed to be the acquiror of VPI.
However, NHancement is considered to be the successor in interest of BFI and
references herein to the Company signify BFI and its successor NHancement.
Effective as of November 12, 1997, BioFactors, Inc., was merged with and
into Voice Plus, Inc., in a statutory merger intended to qualify, for federal
income tax purposes, as a reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended. Voice Plus was the surviving corporation in
the merger transaction with BioFactors, and the separate existence of BioFactors
ceased on the effective date of the merger. The operations of the combined
entity are being conducted under the name of Voice Plus,(R)which is
headquartered in Fremont, California. Voice Plus remains a wholly-owned
subsidiary of NHancement.
On December 15, 1997, NHancement purchased one hundred percent (100%) of the
shares of Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"). As a result of the acquisition, Advantis became a wholly-owned
subsidiary of NHancement. Advantis is a telecommunications systems integrator
located in Malaysia. The operations of the entity are being conducted under the
name of "Advantis Network & System Sdn Bhd," which is headquartered in Kuala
Lumpur, Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997.
The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. The
financial data presented for the three months ended March 31, 1997 includes
results of operations for only three months of BFI, two months of VPI and none
of Advantis. The financial data presented for the three months ended March 31,
1998 includes three months' operating results of BFI, VPI and Advantis.
-13-
<PAGE> 14
NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31
-----------------------------
1997 1998
---------- ----------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 44.5 % 69.9 %
Gross profit 55.5 % 30.1 %
Research, selling and administrative expenses 44.4 % 89.5 %
Amortization of excess of cost over net assets 6.9 % 8.2 %
acquired
Income (loss) from operations 4.2 % (67.2)%
Other income (expense) (0.5)% 2.6 %
Income (loss) before income taxes 3.7 % (64.6)%
Income taxes .7 % --
Net income (loss) 3.0 % (64.6)%
---------- ----------
</TABLE>
The Company's primary focus in the first quarter of 1998 was as an
integrator and distributor of voice processing and telecommunications systems
for businesses, which operations were conducted through the Company's VPI and
Advantis subsidiaries. Only two months of VPI's revenues were recorded in the
Company's financial statements during 1997. VPI's net revenues as a stand-alone
business decreased 67% from $2.3 million for the three months ended March 31,
1997 to $1.0 million for the three months ended March 31, 1998. The decrease in
revenue was anticipated as the backlog had eroded during 1997 and at year-end
was well below $1 million. The Company's revenues historically are almost
exclusively derived from the sale of Centigram products and in the fourth
quarter of 1997 persistent rumors of Centigram's intention to sell its Customer
Premise Equipment ("CPE") business were wide-spread in the marketplace. In early
March 1998 Centigram made a public announcement that it had signed a letter of
intent with Mitel for the sale of its CPE business (the closing of which
occurred in early May). As a result of the uncertainty in the marketplace
concerning the Centigram product, customers for large Centigram systems delayed
making buying decisions. This accounted for most of the shortfall in the first
quarter revenue, as the Company did not record any revenues from large system
orders in the period. Management believes that much of the uncertainty
surrounding the Centigram product has been resolved with our major customers and
that this issue will not have a significant adverse impact on VPI's business
after the second quarter of 1998. Revenues from maintenance, parts and small
systems during the first quarter were at or above historical levels and are
expected to remain strong.
In addition, during April the Company announced that James B. Linkous
accepted the position of General Manager of VPI and that James Gillespie, who
was previously in that position, became a part-time consultant to the Company.
Mr. Linkous has been tasked with strengthening the sales infrastructure and
expanding VPI's product offering. He is also expected to be a key player in
integrating Voice Plus with NHancement's growing operations in the U.S. and
overseas.
The Company's Advantis subsidiary, a telecommunications system integrator
located in Malaysia was acquired on December 15, 1997. Net sales include three
months of Advantis' results in 1998 but are not included in 1997 first quarter
data. On a stand-alone basis, net sales decreased from $2.7 million to $0.3
million for the first quarter 1998 versus the first quarter 1997. Over 50% of
Advantis' net sales in 1997 were earned during the first quarter of 1997, which
was due to the completion of several one-time large projects. Due to the current
instability of the Malaysian currency, any new implementation projects were
delayed.
The Company has decided to pursue a buyer for its FACTOR 1000(R) technology
and products, as no
-14-
<PAGE> 15
significant FACTOR 1000 revenue was generated in 1997 or 1998.
Gross margins in 1998 decreased to 30.1% from 55.5% in 1997, about 10% of
the decrease was attributable to Advantis, the remainder to VPI. VPI's gross
margin on a stand-alone basis decreased from 57.0% to 39.8% as the fixed cost
component of cost of sales was spread over a smaller revenue base for the
quarter. VPI's variable cost of goods sold as a percentage of sales is
comparable in 1998 to 1997 cost of goods sold. Based on anticipated VPI's
revenue increases over the next several quarters, the gross margin is expected
to improve.
Company-wide research, selling, and administrative ("RS&A") expenses as a
percentage of net sales were up to 89.5% for 1998 versus 44.4% for 1997, however
on a standalone basis, the 1998 and 1997 RS&A expense was approximately $1.2
million in both periods. The increase in RS&A expense as a percentage of net
sales is due to the same level of RS&A expenses for 1998 as compared to 1997
being spread over a smaller revenue base.
LIQUIDITY AND CAPITAL RESOURCES
Although the acquisition of complimentary 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 dilute 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 general working capital purposes or that,
if available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing will likely
have a material adverse effect on the Company's growth and acquisition strategy.
The Company recently negotiated an equity financing for $3.0 million, of which
$1,250,000 (less $162,500 of cost and expenses) had been received as of the
initial date of filing of the Company's first quarter report on Form 10-QSB,
with the remainder to be received subject to the terms of the Preferred Stock
financing. However, the issuance of the $3.0 million of Series A Convertible
Preferred Stock that is convertible into shares of Common Stock at a 25%
discount, which will be reflected as a preferred stock dividend, will result in
a $1.0 million decrease in the income or increase in the loss applicable to
Common Stock in computing the net income/loss per share.
Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on or about April 16, 1998, Nasdaq informed the Company
that it no longer met the requirements for continued listing on the Nasdaq
SmallCap Market System. Specifically, the Company failed to meet the
requirements of Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer
maintain (i) net tangible assets of Two Million Dollars ($2,000,000); (ii)
market capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net
income of Five Hundred Thousand Dollars ($500,000) in the most recently
completed fiscal year or in two of the last three most recently completed fiscal
years. This deficiency was remedied by the Company in April 1998 as a result of
the initial closing of the Convertible Preferred Stock financing, as reflected
in the Company's unaudited financial statements as of April 30, 1998, as filed
with the Securities and Exchange Commission under a Form 8-K on May 21, 1998.
While the Company presently meets and believes that in the future it will be in
a position to continue to meet these listing requirements, such belief is
dependent in part upon the Company completing the Infotel acquisition, the
financing for which had not been completed as of the date of this 10-QSB/A.
There can be no assurance that the Company will in fact meet these requirements
in any future period.
If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny stock" rules, and as a result, an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock. Although the Company currently meets
NASDAQ's listing requirements, should the Company fail to continue to meet these
listing requirements and become delisted, there would be a serious impact on the
Company's ability to raise funds in the future.
During the first quarter of 1998, net cash used in operating activities was
$0.5 million, consisting primarily of the net loss for the period and cash used
to pay accounts payable and accrued liabilities, which was partially offset by
accounts receivable collections. Net cash provided by investing and financing
activities totaled $0.1 million consisting principally of additional borrowings
made under Advantis' line of credit. At March 31, 1998, the Company's working
capital was $0.4 million, and cash and cash equivalents totaled $0.9 million.
The current ratio decreased from 1.3 to 1 at December 31, 1997 to 1.1 to 1 at
March 31, 1998, primarily due to reduced revenues for VPI.
As of March 31, 1998, the Company had outstanding debt of approximately $0.8
million inclusive of associated accrued interest. The Company had been offered a
$2.0 million credit line with a U.S. major bank with an advance rate of 80% of
eligible accounts receivable, but has chosen not to finalize the agreement at
this time.
The Company's management estimates that it will incur about $500,000 in
capital expenditures during the next 12 months, about $300,000 of which
represents company-wide business systems software. It is anticipated that all
major capital expenditures will be financed through equipment leases and will
not require significant direct outlays of cash.
-15-
<PAGE> 16
Based upon its present plans, management believes that operating cash flow,
available cash and available credit, are adequate 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 successfully implement its acquisition program, and it will
use various methods to finance acquisitions, including the payment of cash, for
this purpose. The completion of the pending Infotel transaction requires a
substantial payment.
As of March 31, 1998, the Company had a gross deferred tax asset of
approximately $3,072,000. Since the Company could not determine that it was more
likely than not that the gross deferred tax asset would be realized, a 100%
valuation allowance was provided.
ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board released its SFAS
No.130, Reporting Comprehensive Income. SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of comprehensive income and its components in the entity's
financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS No. 130 does not address issues of
recognition or measurement for comprehensive income and its components, and
therefore, it will not have an impact on the financial condition or results of
operations of the Company upon adoption.
The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
Statement, which is also effective for fiscal years beginning after December 15,
1997, requires reporting of financial and descriptive information about
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Because of the recent issuance
of this standard, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosure. Results of operations
and financial position, however, will be unaffected by implementations of this
standard.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 Employer's Disclosures about Pensions and Other Post Retirement Benefits.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
post retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when previous related accounting standards
were issued. SFAS No. 132 is effective for financial statements for fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated unless the information is not readily available, in
which case the notes to the financial statements should include all available
information and a description of the information not available. Management
believes that the Company's current financial statement disclosures will not
need to be modified based upon current operations. Results of operations and
financial position will be unaffected by implementation of this standard.
-16-
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On February 4, 1997, the Company and Chatfield Dean & Company, its
underwriter, completed an initial public offering of 2,300,000 shares of
$0.01 par value Common Stock, of which 1,700,000 shares were sold by the
Company and 600,000 shares, representing a portion of the consideration
for the outstanding shares of VPI, were sold by a stockholder of the
Company (Commission file number 333-15563). On February 11, 1997, the
underwriters exercised an option to purchase from the Company an
additional 345,000 shares of Common Stock to cover over-allotments. The
use of proceeds by the Company through March 31, 1998 was as follows
(amounts are actual unless indicated as estimates):
<TABLE>
<S> <C>
Gross Proceeds to the Company $8,180,000
Underwriters Discounts and Commissions 572,600
Underwriters Non-accountable Expenses 245,400
Other Expenses 831,700
----------
Total Expenses 1,649,700
----------
Net Offering Proceeds to the Company $6,530,300
==========
Use of Net Offering Proceeds:
Purchase and installation of equipment $ 220,000
Repayment of Indebtedness 2,485,400
Repayment of Indebtedness to Affiliates 391,100
Bonuses to Officers 250,000
Secured Loans ($60,000 to Officer) 360,000
Working Capital (estimated) 1,887,900
Cash in Banks 935,900
</TABLE>
-17-
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following Exhibits are filed as part of the Quarterly Report on
Form 10-QSB
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- ----------------------
27 -- Financial Data Schedule*
* Previously filed on May 15, 1998 as exhibit to Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1998.
(b) Reports on Form 8-K
A Report on Form 8-K/A was filed with the Commission on
February 11, 1998.
A Report on Form 8-K was filed with the Commission on
May 21, 1998.
[Rest of this page intentionally left blank]
-18-
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NHANCEMENT TECHNOLOGIES INC.
By: /s/ Esmond T. Goei
-----------------------------------------------
Date: May 29, 1998 Esmond T. Goei
Chairman of the Board, Chief Executive Officer
and President
By: /s/ Douglas S. Zorn
-----------------------------------------------
Date: May 29, 1998 Douglas S. Zorn
Executive Vice President,
Treasurer and Chief
Financial Officer
-19-
