UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the period ended FEBRUARY 29, 1996
or
[ ] Transition Report Pursuance to Section 13 or 15(d) of the Securities
Exchange act of 1934.
For the transition period from ______________ to _____________
Commission File Number 0-24256
ENHANCED SERVICES COMPANY, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1075908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10700 RICHMOND AVE, SUITE 114, HOUSTON TX 77042
(Address of principal executive offices) (Zip Code)
(713) 789-0878
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 29, 1996, Registrant had 5,215,000 shares of common stock, $.0001
Par Value, outstanding.
INDEX
Page
Number
------
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets as of February
29, 1996 (Unaudited) and November 30, 1995 .... 2
Consolidated Statements of Income, Three
Months Ended February 29, 1996 and
February 28, 1995 (Unaudited) .................. 3
Consolidated Statements of Changes in Stock-
holders' Equity from November 30, 1995
through February 29, 1996 (Unaudited) .......... 4
Consolidated Statements of Cash Flows,
Three Months Ended February 29, 1996 and
February 28, 1995 (Unaudited) .................. 5
Notes to Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations ..................................... 7
Part II. Other Information ....................................... 8
1
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
February 29 November 30
1996 1995
---------- -----------
Current Assets
Cash in bank .............................. $ 136,069 $ 355,138
Inventory ................................. 520,016 622,165
Income tax refund receivable .............. 128,200 128,200
Accounts receivable, net of allowance
for doubtful accounts ................... 816,277 685,824
Other current assets ...................... 31,833 53,491
---------- ----------
Total Current Assets .................... 1,632,395 1,844,818
Property and equipment, net of accumulated
depreciation ................................... 1,393,075 1,430,230
Goodwill, net of accumulated amortization ........ 986,537 1,026,001
Other assets ..................................... 94,809 83,213
---------- ----------
Total Assets ..................................... $4,106,816 $4,384,262
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses ..... $ 870,154 1,088,444
Notes payable, current portion ............ 318,417 47,520
Mortgage payable, current portion ......... 8,600 8,490
Other current liabilities ................. 75,254 21,112
---------- ----------
Total Current Liabilities ............... 1,272,425 1,165,566
Notes payable, net of current portion ............ 30,648 67,488
Mortgage payable, net of current portion ......... 609,779 611,807
Other liabilities ................................ 14,692 14,693
---------- ----------
Total Liabilities ......................... 1,927,544 1,859,554
---------- ----------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized
none issued and outstanding ............. -- --
Common stock - $.001 par value,
15,000,000 shares authorized;
5,068,928 shares issued and
outstanding ............................. 5,069 5,069
Additional paid-in capital ................ 2,124,884 2,124,884
Retained earnings ......................... 49,319 394,755
---------- ----------
Total Stockholders' Equity .............. 2,179,272 2,524,708
---------- ----------
Total Liabilities and Stockholders' Equity ....... $4,106,816 $4,384,262
========== ==========
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Periods Ended
(Unaudited)
February 29, February 28,
1996 1995
----------- ------------
Revenue:
Sales ................................... $ 1,274,048 $1,199,560
Cost of sales (exclusive
of depreciation and salaries
shown separately below) ............... 546,142 505,838
----------- ----------
Gross Profit ......................... 727,906 693,722
----------- ----------
Operating Expenses:
Salaries ................................ 533,815 209,128
Advertising and promotion ............... 68,924 44,738
Contract services ....................... 41,528 13,138
Rent .................................... 80,338 18,410
Travel and entertainment ................ 22,316 11,760
Depreciation ............................ 73,846 5,900
Other operating expenses ................ 293,175 118,539
----------- ----------
Total Operating Expenses .............. 1,113,942 421,613
----------- ----------
Net Operating Income (Loss) .................. (386,036) 272,109
----------- ----------
Other Income:
Loss from office building ............... (18,191) --
Interest and other income ............... 58,791 7,403
----------- ----------
Total Other .................................. 40,600 7,403
----------- ----------
Net Income (Loss), before
Provision for Income Taxes ................. (345,436) 279,512
Provision for Income Taxes ................... -- 94,106
----------- ----------
Net Income (Loss) ............................ $ (345,436) $ 185,406
=========== ==========
Net Income (Loss) Per Share .................. $ (.07) $ .05
=========== ==========
Weighted Average Shares Outstanding .......... 5,068,928 3,936,000
=========== ==========
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1995 through February 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
NO./SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1995 ................ 5,068,928 $5,069 $2,124,884 $ 394,755 $ 2,524,708
Net (loss) for the three month
period ended February 29, 1996 .............. -- -- -- (345,436) (345,436)
--------- ------ ---------- --------- -----------
Balance at February 29, 1996 ................ 5,068,928 $5,069 $2,124,884 $ 49,319 $ 2,179,272
========= ====== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended
(Unaudited)
February 29, February 28,
1996 1995
------------ ------------
Cash Flows from Operating Activities:
Net income .................................. $(345,436) $ 185,406
Adjustments to Reconcile Net
Income to Net Cash Used
in Operating Activities
Depreciation and amortization ............ 113,308 5,900
(Decrease) in accounts payable
and accrued expenses .................... (218,290) (84,172)
(Increase) in accounts receivable ........ (130,453) (64,455)
Decrease in inventory .................... 102,149 9,788
(Decrease) in income taxes payable ....... -- (80,163)
Other, net ............................... 27,365 (38,320)
--------- ---------
Net Cash (Used in) Operating Activities ........ (451,357) (66,016)
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and
equipment .................................. (36,691) (9,408)
Decrease in other investments ............... -- 2,160
--------- ---------
Net Cash (Used in) Investing
Activities ................................. (36,691) (7,248)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from notes payable ................. 285,000 --
(Repayment) of notes and mortgages
payable .................................... (16,021) --
--------- ---------
Net Cash Provided by Financing
Activities ................................. 268,979 --
--------- ---------
(Decrease) in Cash ............................... (219,069) (73,264)
Cash, Beginning of Period ........................ 355,138 372,709
--------- ---------
Cash, End of Period .............................. $ 136,069 $ 299,445
========= =========
Interest Paid .................................... $ 18,853 $ --
========= =========
Income Taxes Paid ................................ $ -- $ 174,269
========= =========
The accompanying notes are an integral part of the financial statements.
5
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 1996 and February 28, 1995
(1) ORGANIZATION
Enhanced Services Company, Inc. (ESC) a Colorado corporation, was
incorporated in 1987.
Laptop Solutions, Inc. (LSI), a Texas corporation was incorporated in
1991. LSI is in the business of internal hard drive, processor and RAM
upgrades for laptop and notebook computers and has selected November 30
as its fiscal year end. LSI is a wholly-owned subsidiary of ESC.
Effective May 31, 1995, NB Engineering, Inc. (NBE), a wholly-owned
subsidiary of ESC, incorporated in Delaware, acquired substantially all
of the assets and assumed certain liabilities of NB Engineering, Inc.
(NB) a privately held Maryland corporation. NBE provides applications
development and digital video compression services and selling related
video and networking products.
The consolidated financial statements include the accounts of ESC and
subsidiaries since acquisition or formation. All intercompany accounts
and transactions have been eliminated.
(2) UNAUDITED STATEMENTS
The balance sheet as of February 29, 1996, the statements of income and
the statements of cash flows for the three month periods ended February
29, 1996 and February 28, 1995 and the statement of changes in
stockholders' equity for the three month period ended February 29, 1996
have been prepared by the Registrant without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows at February 29, 1996, and for all periods
presented, have been made.
6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Enhanced Services Company, Inc. (the "Company" or "ESC") provides upgrade,
repair and maintenance and asset management services for portable computers
(hardware services) as well as multimedia presentation development, processing
and deployment for sales, marketing, training, industrial and promotional
applications (customized software). The following significant events occurred in
the Company's fiscal year ended November 30, 1995, and affected the
comparability of the first fiscal quarter of 1996 with the prior year's quarter:
a. LSICA - Laptop Solutions, Inc. of California was formed during the
second quarter of 1995
b. Office building in Houston, Texas was acquired on May 25, 1995
c. NBE - NB Engineering, Inc. was acquired on May 31, 1995
CONSOLIDATED RESULTS OF OPERATIONS
The following is a summary of the consolidated results of operations for
the first fiscal quarters of 1996 and 1995:
1996 1995 CHANGE (%)
----------- ---------- ----------
Sales ............................ $ 1,274,048 $1,199,560 6.2%
Cost of sales (exclusive
of depreciation and salaries) .. 546,142 505,838 8%
----------- ----------
Gross Profit ..................... 727,906 693,722 5%
Operating expenses ............... 1,113,942 421,613 164%
Other Income ..................... 40,600 7,403 448%
----------- ----------
Net Income, before income taxes .. (345,436) $ 279,512 (447)%
Income taxes ..................... -0- 94,106 (100)%
----------- ----------
Net Income ....................... $ (345,436) $ 185,406 (286)%
=========== ==========
During The three months ended February 29, 1996, the Company, on a
consolidated basis, incurred a net loss of $345,436 as compared to a net income
of $185,406 for three months ended February 28, 1995, a negative change in
profitability of $530,842. (References to 1995 and 1996 herein are to the three
months ended February 28, 1995 and three months ended February 29, 1996)
Overall, consolidated sales increased from $1,199,560 to $1,274,048, an increase
of $74,488, or 6.2%. Cost of sales, exclusive of depreciation and salaries,
increased from $505,838 to $546,142, an increase of $40,304, or 8%. Gross profit
margins were nearly identical in both years and approximated 57%.
Operating expenses increased from $421,613 in first quarter 1995 to $1,113,942
in first quarter 1996, an increase of $692,329, or 164%. Salaries increased from
$209,128 in first quarter 1995 to $533,815, an increase of $324,687, or 155%.
Depreciation increased from $5,900 in 1995 to $73,846, an increase of $67,946,
or 1,152%. Advertising expenses increased from $44,738 in 1995 to $68,924 in
1996, an increase of $24,186, or 54%. Rent increased from $18,410 in 1995 to
$80,338 in 1995, an increase of $61,928, or 336%. Amortization of goodwill
during 1996 was $39,462 related to the acquisition of NB Engineering, Inc.
7
which was effective as of May 31, 1995. Since this acquisition was consummated
in the second quarter of 1995, as discussed below, there was no amortization of
goodwill in the first quarter of 1995. All other operating expenses increased
from $118,539 in 1995 to $253,713 (excluding amortization of goodwill) in 1996,
an increase of $135,174, or 114%. Several factors as described below,
contributed to the significant changes from the first quarter of 1995 to 1996.
a. OPERATIONS OF LSI
The following is a summary of LSI's results of operations for the first fiscal
quarters of 1996 and 1995:
1996 1995 CHANGE (%)
----------- ---------- ----------
Sales ............................ $ 941,338 $1,199,560 (21.5)%
Cost of Sales (exclusive
of depreciation and salaries) .. 441,485 505,838 (12.7)%
--------- ----------
Gross Profit ..................... 499,853 693,722 (27.9)%
Operating expenses ............... 549,699 421,613 30.4%
Other income ..................... 20,775 7,403 180.6%
--------- ----------
Net Income (Loss)
before income taxes ............ $ (29,071) $ 279,512 (110.4)%
--------- ----------
In comparing the results of operations for first quarter 1996 to 1995, it is
important to note the change in sources of LSI's revenue. During 1996, LSI
encountered significantly more competition in providing enhancement and upgrade
services to several computer manufacturers units than in 1995, when it was a
more significant supplier of such services to such customers. During the first
quarter of 1996, while margins remained relatively stable in LSI's enhancement
and upgrade services, the average revenue and related cost of sales decreased
substantially due to a rapid drop in industry pricing of the primary component.
Additionally, increased competition for enhancement and upgrade services
contributed to decrease revenues from such services in first quarter 1996
compared with 1995, while revenues from repair and warranty services increased.
In first quarter 1996, there were significantly more transactions requiring more
management and administrative staff to support the increased warranty and repair
services than in 1995.
Cost of goods sold decreased in 1996 to $441,485 from $505,838 primarily as a
result of the lower number of enhancement and upgrade units serviced. Salaries
in 1996 amounted to $248,957 as compared to $209,128 in first quarter 1995, an
increase of 39,829, or 19%. Personnel and related cost increases were partly due
to more repair services which are more labor intensive than upgrade services
being performed in first quarter 1996 than in 1995 and to hiring in anticipation
of increased volume which developed more slowly and less than anticipated. Other
expenses contributing to increased operating costs included increases in
information management service costs, rent, legal and accounting fees, payroll
taxes, insurance costs, travel, telephone and other general and administrative
expenses.
Management believes that to achieve profits similar to prior periods will
require greater volume than was required in the past, and there can be no
assurance that LSI will be able to achieve such volume. LSI has recently
received a contract from an international computer manufacturer to provide
integration services, storage, receiving, shipment and asset management for
certain portable computers, as directed by the manufacturer, for a fixed monthly
fee.
8
b. FORMATION AND OPERATIONS OF LAPTOP SOLUTIONS, INC. OF CALIFORNIA
During the second fiscal quarter of 1995, the Company formed Laptop Solutions,
Inc. ("LSICA"), a wholly-owned subsidiary, to perform upgrade and repair
services for portable computers on the west coast. This entity was formed to
provide similar services as LSI, also a wholly-owned subsidiary. LSI's
headquarters are in Houston, and it also has a branch located in New Jersey.
LSICA's results of operations for first quarter 1996 are summarized as
follows:
Sales .............................................. $ 68,939
Cost of sales (exclusive of
depreciation and salaries) ....................... 25,912
--------
Gross Profit ....................................... 43,027
Operating expenses ................................. 95,050
--------
Net Loss ........................................... $(52,023)
========
The factors relating to LSI's business in 1995 discussed above generally also
apply to LSICA. Management continues to believe that a presence in the west
coast market is a prudent investment in the future of the Company. The Company
is currently in the process of replacing management at LSICA and believes that
new management, better controls and better marketing efforts should lead to
future profitability of LSICA, although there can be no assurance that it will
be attained.
c. ACQUISITION AND OPERATIONS OF NB ENGINEERING, INC.
The Company entered into the custom digital video compression and engineering
services businesses through the acquisition of NB Engineering, Inc. ("NBE") on
May 31, 1995. The Company's consolidated results of operations for the first
quarter 1996 include the results of operations of NBE:
Sales .......................................... $ 258,863
Cost of sales (exclusive of
depreciation and salaries) ................... 73,295
---------
Gross Profit ................................... 185,568
Operating expenses ............................. 363,496
Amortization of Goodwill ....................... 39,462
---------
Net Loss ....................................... $(217,390)
=========
Of the $324,687 increase in salaries in the consolidated financial statements
described above, $217,390 were attributable to the NBE acquisition.
While management believes that certain steps now being taken with the
operations and direction of NBE should result in a turn around in NBE's
profitability, there can be no assurance that results will improve. It believes
that NBE may approach monthly break-even operating results during the quarter
ending May 31,
9
1996 due to existing sales orders and commitments and potential additional sales
which are now pending or in a proposal stage. However, there can be no assurance
that NBE will become profitable. Management believes that, if NBE's performance
becomes profitable soon enough, the digital video compression business and other
business services provided by NBE are the basis for potential significant
revenue and operating profits in the future, but there can be no assurances that
new revenues or any profitability will be achieved.
d. ENHANCED SERVICES COMPANY, INC., ACQUISITION OF OFFICE BUILDING IN HOUSTON,
TEXAS
Rental Income .................................. $ 55,542
Cost of Building Operations .................... 79,733
--------
Net Loss ....................................... $(26,191)
Other Expenses ................................. 22,789
--------
Net Loss ....................................... $(48,980)
========
During 1995, the Company acquired an office building in Houston, Texas. ESC
and LSI use a portion of the building for their offices and as warehouse
facilities. Certain additional office space is leased to other tenants. There is
currently an approximately 35% vacancy rate in the building. Management believes
that the Company was able to acquire this property and its improvements at less
than its market value, and it believes that it will prove to be a good long-term
investment. The approximate annual cost to own and operate the building, after
rental income received at current occupancy rates, is estimated to be between
$50,000 and $70,000, including depreciation of approximately $15,000 per year.
Had the Company not acquired this building and continued renting facilities in
Texas, it is estimated that the rental costs would not be materially different
than the net operating costs of the building, and that if the occupancy can be
increased it will result in a savings to the Company as well as the opportunity
for possible appreciation in the value of the property. While management
believes that this is likely over a period of time, there can be no assurance
that it will.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1996, the Company had stockholders' equity totaling $2,179,275
as compared to $2,524,708 at November 30, 1995, a decrease of $345,436. This
decrease resulted from a net loss of $345,436 during the three month period
ended February 29, 1996. The Company's working capital was $359,970 at February
28, 1996 as compared to $679,252 at November 30, 1995, a decrease of $319,282.
This decrease was primarily the result of the net loss for the period.
The Company executed a working capital loan in the amount of $500,000 on January
19, 1996. The loan is due in one year with interest paid monthly at 2% above the
prime rate quoted by the Wall Street and is secured by certain accounts
receivable and inventory. The Company had borrowed $250,000 as of February 29,
1996. While management plans that income generated from the Company's LSI
operations, together with a refund of $128,000 tax deposit, should be sufficient
to finance its existing LSI operations. NBE's operations may require that
additional funds be drawn on the working capital loan. However, there can be no
assurances that LSI's operations will become profitable, or that the
availability under the Company's working capital loan will be sufficient, or
that other sources to finance operations will be available, or, if available, on
attractive terms.
10
11
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT A - Working Capital Loan Agreement (to be filed by amendment)
Item 7. FINANCIAL STATEMENTS
Financial statements and supplementary data required pursuant to this
item are presented on pages 2 through 9.
All schedules are omitted since the required information is not present or is
not in amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements and notes thereto.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENHANCED SERVICES COMPANY, INC.
By /s/ R. C. SMITH
Date: 4/23/96
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 1ST QUARTER - 3 MONTHS ENDED FEBRUARY 29, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAR-29-1996
<CASH> 136,069
<SECURITIES> 0
<RECEIVABLES> 944,477
<ALLOWANCES> 0
<INVENTORY> 551,849
<CURRENT-ASSETS> 1,632,395
<PP&E> 2,474,421
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,106,816
<CURRENT-LIABILITIES> 1,272,425
<BONDS> 0
0
0
<COMMON> 2,179,272
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,106,816
<SALES> 1,274,048
<TOTAL-REVENUES> 1,274,048
<CGS> 546,142
<TOTAL-COSTS> 1,113,942
<OTHER-EXPENSES> (40,600)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (345,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,436)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.07)
</TABLE>
