The Following Items were the subject of a
Form 12b-25 and are included herein: 6 and 7
FORM 10-KSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1995
Commission file number 0-24256
ENHANCED SERVICES COMPANY, INC.
-------------------------------
(Name of Registrant in its charter)
Colorado 84-1075908
- -------------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
16000 Barkers Point Lane, Houston, TX 77079 (713) 556-5051
- ---------------------------------------- ----------- ---------------------
(Address of principal executive offices) (Zip Code) (Registrant's
telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
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. Yes X No
---------- ---------
The Registrant's revenues for the fiscal year ended November 30, 1995
were $6,210,996
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not 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. [ ]
As of February 12, 1996, the aggregate market value of the Common
Stock of the Registrant held by non-affiliates of the Registrant was $975,579.
As of February 12, 1996, 5,218,928 shares of $.001 par value Common Stock of
the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
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). See Part I,
Item 1, "Description of Business," for more information regarding the
Company's operations.
Consolidated Results of Operations
- ----------------------------------
During 1995, the Company, on a consolidated basis, incurred a net loss
of $460,634 as compared to a net income of $504,756 for 1994, a negative
change in profitability of $965,390. (References to 1994 and 1995 herein
are to the fiscal years ended November 30 of the year.) Overall,
consolidated sales increased from $3,445,526 to $6,210,996, an increase of
$2,765,470, or 80%. Cost of sales, exclusive of depreciation and salaries,
increased from $1,546,085 to $2,790,515, an increase of $1,244,430, or 80%.
Gross profit margins were nearly identical in both years and approximated
55%.
Operating expenses increased from $1,170,221 in 1994 to $3,860,285 in
1995, an increase of $2,690,064, or 230%. Salaries increased from $621,241
in 1994 to $1,706,275, an increase of $1,085,034, or 175%. Bad debts
increased from virtually none in 1994 to $123,327 in 1995. Depreciation
increased from $35,420 in 1994 to $180,405 in 1995, an increase of $144,985, or
409%. Advertising expenses increased from $139,799 in 1994 to $182,412 in
1995, an increase of $42,613, or 30%. Rent increased from $55,170 in 1994
to $117,035 in 1995, an increase of $61,865, or 112%. Amortization of
goodwill during 1995 was $78,926 related to the acquisition of NB
Engineering, Inc. which was effective as of May 31, 1995. Since this
acquisition was consummated in 1995, as discussed below, there was no
amortization of goodwill in 1994. All other operating expenses increased
from $318,591 in 1994 to $1,471,905 in 1995, an increase of $1,153,314, or
362%. As can be seen by the significant changes in operating expenses from
1994 to 1995, operations of the Company were not very comparable in the two
years. Several factors as described below, contributed to the significant
changes from 1994 to 1995.
a. Operations of LSI
The following is a summary of LSI's results of operations for 1995 and
1994:
1995 1994 Change (%)
---- ---- ----------
Sales $4,509,332 $3,445,526 31%
Cost of sales (exclusive of
depreciation and salaries) 2,058,632 1,546,085 33%
---------- ---------
Gross Profit 2,466,374 1,899,441 30%
Operating expenses 2,149,186 1,170,221 84%
----------
Net Income, before income taxes $ 317,188 $ 753,893 (57%)
========== ==========
-2-
<PAGE>
Salaries in 1994 amounted to $621,241 as compared to $982,482 in
fiscal 1995, an increase of $361,241, or %51. Salary increases are partly
due to increased volume of business, but also due to more repair services -
which are more labor intensive than upgrade services - being performed in
fiscal 1995 than in 1994 and to hirings 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, legal and accounting fees, payroll taxes,
insurance costs, travel, telephone and other general and administrative
expenses.
In comparing the results of operations for 1995 to 1994, as well as
comparing the results of operations for the various quarters during 1995, it is
important to note the change in sources of LSI's revenue. During 1995, LSI
encountered significantly more competition in providing enhancement and
upgrade services to several computer manufacturers than in 1994, when it was a
more significant supplier of such services to such customers. While the number
of units processed by the Company in its upgrade and enhancement services
remained relatively stable in 1995 compared with 1994, profit decreased as the
average revenue per unit serviced declined. LSI provided more warranty services
for various manufacturers with lower profitability due to the more labor
intensive requirements. In 1995, there were significantly more transactions
requiring significantly more management and administrative staff to support
upgrade, enhancement and warranty services than in 1994. Further, during 1995,
due to lack of controls over the return of certain warranty parts to
manufacturers, LSI incurred a loss of approximately $100,000 when used or
damaged parts were not returned as required. Management is in the process of
implementing new control procedures to eliminate this problem. There can be no
assurance that its efforts will be successful.
While management believes that LSI can continue to remain profitable,
it is likely that to achieve profits similar to prior years 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.
b. Formation and Operations of Laptop Solutions, Inc. of California
During 1995, the Company formed Laptop Solutions, Inc. ("LCA"), 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.
LCA's results of operations for 1995 are summarized as follows:
Sales $ 164,286
Cost of sales (exclusive of
depreciation and salaries) 55,115
-----------
Gross Profit 109,171
Operating expenses 267,548
-----------
Net Loss $ (158,377)
===========
The factors relating to LSI's business in 1995 discussed above
generally also apply to LCA. 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 LCA and believes that new management, better controls and
better marketing efforts should lead to future profitability of LCA,
although there can be no assurance that it will be attained.
-3-
<PAGE>
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. The Company's consolidated results of operations for 1995
include the results of operations of the acquired operations ("NBE") from
May 31, 1995, the date of acquisition, through November 30, 1995. NBE's
results of operations for the six month period then ended are summarized
as follows:
Sales $1,471,298
Cost of sales (exclusive of
depreciation and salaries) 676,768
----------
Gross Profit 794,530
Operating expenses 1,261,303
----------
Net Loss $ (466,773)
==========
Of the $1,085,034 increase in salaries in the consolidated financial
statements described above, $581,553 were attributable to the NBE
acquisition. The consolidated bad debt provision of $123,327 was
principally attributable to NBE. NBE's bad debt provisions relate
principally to two contract engagements that resulted in disagreements with
results of NBE's performance and/or ownership rights of the product being
developed. The net loss of $466,773 of NBE plus the amortization of the
NBE goodwill of $78,926 total $545,699. Inasmuch as the total consolidated
net loss of the Company in 1995 was $460,634, the net income before tax
considerations of LSI and LSICA in 1995 totalled $85,065. See the
discussion of LSI and LCA elsewhere in this Management Discussion.
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.
Management estimates that NBE had continuing losses of approximately
$195,000 during the three month period ended February 29, 1996. It
believes that there is a reasonable possibility that NBE may have break-
even operating results during the quarter ending May 31, 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 increased revenue and operating profits in the future, but
there can be no assurances that new revenues or any profitability will be
achieved.
d. Acquisition of Office Building in Houston, Texas
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
$40,000 and $60,000, 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.
-4-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's working capital decreased from $1,463,095 as of November
30, 1994 to $679,252 as of November 30, 1995, a decrease of $783,843, or
54%. It issued common stock for cash totalling $293,750, which added to
its working capital. Principal causes of the decrease in working capital
included the Company's loss from operations in 1995 of $460,634, which was
primarily related to the operations of NBE, and also included working
capital of approximately $150,000 invested in the office building in
Houston. Management believes that its current working capital, together
with a $500,000 line of credit, secured by the Company's inventory and
accounts receivable, which it obtained subsequent to November 30, 1995
(against which $250,000 has been borrowed), should be sufficient to finance
its operations during its fiscal year ending November 30, 1996. The
Company is required to make monthly payments of interest only, at the
annual rate equal to 2% in excess of the prime rate published by the Wall
Street Journal, until January 19, 1997, at which time the full principal
amount plus any accrued and unpaid interest thereon is due. The loan may
be prepaid in full, without penalty, on or before the maturity date. The
Company is also considering the sale of certain equipment owned by NBE to
generate additional working capital for NBE.
Item 7. Financial Statements
Financial statements and supplementary data required pursuant to
this item are presented on pages F-1 through F-13.
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.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ENHANCED SERVICES COMPANY, INC.
(Registrant)
Date: March 13, 1996 By/s/ Kenneth M. Duckman
------------------------------
Kenneth M. Duckman, President
and Chief Executive Officer
Date: March 13, 1996 By/s/ Robert Smith
------------------------------
Robert Smith, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 13, 1996 /s/ Kenneth M. Duckman
--------------------------------
Kenneth M. Duckman, Director
Date: March -, 1996
--------------------------------
Michael Bernard, Director
Date: March -, 1996
--------------------------------
John Meaney, Director
Date: March 13, 1996 /s/ Bertram Pariser
--------------------------------
Dr. Bertram Pariser, Director
Date: March 13, 1996 /s/ Ralph LaBarge
--------------------------------
Ralph LaBarge, Director
-6-
<PAGE>
ENHANCED SERVICES COMPANY, INC.
-------------------------------
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
November 30, 1995 and 1994
F-1
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
November 30, 1995 and 1994
Table of Contents
Page
----
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in Stockholders'
Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors
Enhanced Services Company, Inc.
We have audited the consolidated balance sheet of Enhanced Services
Company, Inc. and Consolidated Subsidiaries as of November 30, 1995 and
related consolidated statements of operations, changes in stockholders'
equity and cash flows for the two years ended November 30, 1995 and 1994.
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 an 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Enhanced Services Company, Inc. and Consolidated Subsidiaries as of
November 30, 1995 and the results of its operations, its changes in
stockholders' equity and its cash flows for the two years ended November
30, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ Schumacher & Associates, Inc.
---------------------------------
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
March 3, 1996
F-3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
BALANCE SHEET
November 30, 1995
Current Assets
Cash in bank $ 355,138
Inventory 622,165
Income tax refund receivable 128,200
Accounts receivable, net of allowance
for doubtful accounts of $156,176 685,824
Other current assets 53,491
-----------
Total Current Assets 1,844,818
Property and equipment, net of accumulated
depreciation of $252,986 (Notes 2 and 7) 1,430,230
Goodwill net of accumulated amortization
of $78,926 (Note 3) 1,026,001
Other assets 83,213
-----------
Total Assets $ 4,384,262
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 1,088,444
Notes payable, current portion (Note 7) 47,520
Mortgage payable, current portion (Note 7) 8,490
Other current liabilities 21,112
-----------
Total Current Liabilities 1,165,566
Notes payable, net of current portion (Note 7) 67,488
Mortgage payable, net of current portion (Note 7) 611,807
Other liabilities 14,693
-----------
Total Liabilities 1,859,554
-----------
Commitments (Notes 3,4,5,6,7 and 9) -
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
Additional paid-in capital 2,124,884
Retained earnings 394,755
-----------
Total Stockholders' Equity 2,524,708
-----------
Total Liabilities and Stockholders' Equity $ 4,384,262
===========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30
1995 1994
---------- -----------
Revenue:
Sales $6,210,996 $ 3,445,526
Cost of sales (exclusive
of depreciation and salaries
shown separately below) 2,790,515 1,546,085
---------- -----------
Gross Profit 3,420,481 1,899,441
---------- -----------
Operating Expenses
Salaries 1,706,275 621,241
Bad debts 123,327 -
Advertising 182,412 139,799
Rent 117,035 55,170
Amortization of goodwill 78,926 -
Depreciation 180,405 35,420
Other operating expenses 1,471,905 318,591
---------- -----------
Total Operating Expenses 3,860,285 1,170,221
---------- -----------
Net Operating Income (Loss) (439,804) 729,220
---------- -----------
Other Income (Expenses)
Investment income 20,888 25,081
Interest expense (41,718) (408)
---------- -----------
Total Other (20,830) 24,673
---------- -----------
Net Income (Loss), Before Provision
for Income Taxes (460,634) 753,893
Provision for Income Taxes - 249,137
---------- -----------
Net Income (Loss) $ (460,634) $ 504,756
========== ===========
Net Income (Loss) per Share $ (.10) $ .13
========== ===========
Weighted Average Shares Outstanding
4,502,462 3,936,000
========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE><CAPTION>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1993 through November 30, 1995
Additional
Common Stock Paid-in Retained
------------
Shares Amount Capital Earnings Total
---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1993 3,936,000 $ 3,936 $ 655,822 $ 350,633 $ 1,010,391
Net income for the year ended
November 30, 1994 - - - 504,756 504,756
---------- ---------- ----------- --------- -----------
Balance at November 30, 1994 3,936,000 3,936 655,822 855,389 1,515,147
Common stock issued for cash 277,332 277 293,473 - 293,750
Common stock issued for
acquisition of NB
Engineering, Inc. 855,596 856 1,175,589 - 1,176,445
Net (loss) for the year ended
November 30, 1995 - - - (460,634) (460,634)
---------- ---------- ----------- --------- -----------
Balance at November 30, 1995 5,068,928 $ 5,069 $ 2,124,884 $ 394,755 $ 2,524,708
========== ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30
1995 1994
------------ ------------
Cash Flows from Operating Activities:
Net income (loss) $ (460,634) $ 504,756
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization 259,331 35,420
Increase (decrease) in accounts
payable and accrued expenses (309,327) 236,117
(Increase) decrease in accounts
receivable 377,167 (417,162)
(Increase) in inventory (146,215) (215,851)
(Increase) in income tax refund
receivable (128,200) -
Increase (decrease) in
income taxes payable (174,269) 149,722
Other, net (151,999) 65,826
------------ ------------
Net Cash Provided by (used in)
Operating Activities (734,146) 358,828
------------ ------------
Cash Flows from Investing Activities:
Purchase (disposition) of
investments 722,717 (722,717)
Purchases of property and
equipment (288,197) (38,343)
------------ ------------
Net Cash Provided by (Used
in) Investing Activities 434,520 (761,060)
------------ ------------
Cash Flows from Financing Activities:
Principal payments on notes
and mortgages payable (11,695) -
Common stock issued 293,750 -
------------ ------------
Net Cash Provided by Financing
Activities 282,055 -
------------ ------------
(Decrease) in Cash (17,571) (402,232)
Cash, Beginning of Period 372,709 774,941
------------ ------------
Cash, End of Year $ 355,138 $ 372,709
============ ============
Interest Paid $ 41,718 $ 408
============ ============
Income Taxes Paid $ 302,469 $ 99,415
============ ============
Note: In addition the Company issued 855,596 shares of its restricted
common stock for the acquisition described in note 1 plus 150,000 shares
which are to be released from escrow if certain goals are met, and it
assumed liabilities totalling approximately $1,212,000 as part of the
acquisition of NB Engineering, Inc. Based on the results of operations of
NBE, it is apparent that NBE will not reach the required goals and that the
shares held in escrow will likely be cancelled.
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
November 30, 1995 and 1994
(1) General
-------
(A) Nature of Operations
--------------------
Enhanced Services Company, Inc. (ESC) a Colorado Corporation, was
incorporated in 1987.
Laptop Solutions, Inc. (LSI), a wholly-owned subsidiary of ESC
incorporated in Texas, installs internal hard drive, processor and
RAM upgrades for, and repairs and customizes, laptop and notebook
computers.
Laptop Solutions, Inc. (LCA), a wholly-owned subsidiary of ESC
incorporated in California, provides laptop/notebook repair and
maintenance services, including FPD (flat panel display) subsystems
and motherboards.
Effective May 31, 1995, NB Engineering, Inc. (NBE), a wholly-owned
subsidiary of ESC incorporated in Delaware, acquired substantially
all of the assets and ESC assumed certain liabilities of NB
Engineering, Inc., (NB) a privately held Maryland corporation. NBE
provides applications development and digital video compression
services and sells related video and networking products. (See Note
3).
The consolidated financial statements include the accounts of ESC,
LSI, LCA and NBE since May 31, 1995, the date of the acquisition of
NB. All intercompany accounts and transactions have been eliminated.
All references to the Company, refer to consolidated operations of
ESC, LSI, LCA and NB.
(B) Significant Accounting Policies
-------------------------------
(a) Revenue Recognition
-------------------
The Company recognizes sales revenue when the service is complete and
the customer's equipment is returned. The Company recognizes revenue
from contract services based on the percent of completion method.
The Company has no long-term production or service contracts.
(b) Accounts Receivable
-------------------
Accounts receivable represents amounts due from customers for
services performed and equipment sold. An allowance for
uncollectible accounts has been provided based upon past collection
experience.
F-8
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1995 and 1994
(B) Significant Accounting Policies - Continued
-------------------------------------------
(c) Property and Equipment
----------------------
Property and equipment are carried at cost less accumulated
depreciation. The Company expenses maintenance costs and
capitalizes significant betterments. Depreciation is provided
over the estimated useful lives of the assets ranging from three
to thirty-nine years using principally accelerated methods.
(d) Per Share Information
---------------------
The per share information is presented based upon the weighted
average number of shares outstanding.
(e) Inventory
---------
The Company's inventory consists principally of computer parts
and is carried at the lower of cost or market. Cost is
determined based on the average cost method. No general or
administrative costs are allocated to inventory.
(f) Preferred Stock
---------------
The Articles of Incorporation of the Company authorize issuance
of a maximum of 5,000,000 preferred shares and vests the Board
of Directors with authority to divide the class of preferred
shares into series and fix and determine the relative rights and
preferences of the shares of any such series at a future date.
As of November 30, 1995 no preferred shares have been issued.
(g) Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable and cash in a bank account of $153,155 in excess of
the $100,000 amount insured by the Federal Deposit Insurance
Corporation. The Company grants credit to various business and
entities, principally in the U.S.A.
F-9
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1995 and 1994
(B) Significant Accounting Policies - Continued
-------------------------------------------
(h) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash accounts in banks and
short-term securities held with a brokerage company.
(i) Use of Estimates and Assumptions in the Preparation of Financial
----------------------------------------------------------------
Statements
----------
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates. The
Company, as described in note 3, is amortizing its goodwill
related to the NB acquisition over a seven year period. The
assumption that the Company will recover these goodwill costs
over a seven year period is inherent in the preparation of the
financial statements. The extent to which this goodwill is
recovered in the seven years, or is recovered at all, is a
significant contingency, the ultimate results of which cannot
presently be determined.
(2) Property and Equipment
----------------------
As of November 30, 1995 the Company's property and equipment is
summarized as follows:
Office building and land $ 765,316
Furniture and equipment 917,900
----------
1,683,216
Accumulated depreciation (252,986)
----------
$1,430,230
==========
Depreciation is provided over the estimated useful lives of the assets
ranging from three to seven years on furniture and equipment using
principally accelerated methods and over 39 years on the straight-line
method for the office building.
F-10
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
November 30, 1995 and 1994
(3) Business Combination
--------------------
See Note 1 of the financial statements for additional information
related to the business combination. The transaction was accounted
for as a purchase by the Company. The results of operations of NB are
included in the income statement of the Company commencing May 31,
1995. The cost of this acquisition was approximately $2,440,000,
including assumption of liabilities and issuance of the common stock.
The following table shows the approximate allocation of the purchase
price assets:
Inventory $ 152,000
Accounts receivable 470,000
Property and equipment 655,000
Goodwill 1,105,000
Other assets 58,000
----------
$2,440,000
==========
Liabilities assumed 1,212,000
Common stock issued 1,176,000
Acquisition expenses incurred 52,000
----------
$2,440,000
==========
Assets and liabilities acquired or assumed were recorded at estimated
fair value at May 31, 1995, the date of acquisition.
The amount assigned to the common stock was $1,176,445 ($1.375 per
share) approximately one half the market trading price of the
Company's common stock as of May 31, 1995. This value was used due to
the large number of shares and their restrictive nature.
Management believes that recording the shares issued for the NB
acquisition at 50% of the public trading value is reasonable,
appropriate and normal for this large of a block of restricted
securities. Goodwill is being amortized on a straight-line basis over
a seven year period. The Company believes that a 7 year estimated
life over which goodwill is being amortized is reasonable.
It is the Company's policy that management on a periodic basis, at
least quarterly, will evaluate the carrying value of goodwill and
other intangibles to determine if there is an impairment of value or
the remaining estimated life is less that the remaining unamortized
period. If the evaluation indicates write-downs or adjustments to the
amortization are necessary, such write-downs or adjustments will be
made immediately.
F-11
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
-----------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1995 and 1994
(4) Options and Warrants Outstanding
--------------------------------
The Company has granted certain stock options to employees,
consultants and directors of the Company. As of November 30, 1995,
options to acquire an aggregate of 494,000 shares of common stock were
outstanding, of which options to acquire 313,167 shares were currently
exercisable. The exercise prices for these options ranges from $.50
to $2.53. Certain options are subject to vesting provisions. During
the year ended November 30, 1995, 146,500 options were granted at an
exercise price of $1.83 per share and 40,000 options were granted at
an exercise price of $2.53 per share.. The options have not been
taken into consideration when determining earnings per share, since
exercise of these options would be anti-dilutive. Approximately
34,130 options were exercised during the year ended November 30, 1995
at an exercise price of approximately $.50 per share. Outstanding
options expire at various dates through the year 2000.
(5) Operating Leases
----------------
The Company leases or rents various facilities. Future commitments
under these operating leases, with leases terms exceeding twelve
months total approximately:
Year ending November 30:
1996 $ 36,250
1997 39,000
1998 35,750
(6) Consulting Agreement
--------------------
Effective March 13, 1995, the Company entered into a consulting and
warrant compensation agreement with Creative Business Strategies, Inc.
(CBS) a Colorado corporation. CBS agreed to perform certain
consulting services for the Company for a one year period. As
consideration for these services, the Company issued 343,000 common
stock purchase warrants to CBS. These warrants are exercisable for a
one year period which commenced March 13, 1995 as follows:
100,000 exercisable at $1.00 per share
143,000 exercisable at $1.25 per share
100,000 exercisable at $1.50 per share
The warrants were registered pursuant to an S-8 filing with the
Securities and Exchange Commission during March, 1995. No
compensation expense was recorded in the financial statements related
to these warrants since the exercise prices were equal to or greater
than market value at the time of grant and the exercise period was for
only one year. During the year ended November 30, 1995, 100,000
warrants were exercised at $1.00 per share, 143,000 were exercised at
$1.25 per share, and
F-12
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
-----------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1995 and 1994
100,000 warrants at $1.50 per share were unexercised. The president of CBS
is a cousin of the president of the Company.
(7) Notes and Mortgages Payable
---------------------------
As of November 30, 1995 the Company has a mortgage note payable
totalling $620,297, collateralized by the office building and land.
Monthly payments including principal and interest at 12% per annum
amount to $6,849. The Company also has notes payable to a bank
totalling $115,008. The Notes payable are collateralized by certain
equipment. Principal payments due on the mortgages and notes payable
are summarized as follows:
Year ending November 30,
1996 $ 56,010
1997 77,237
1998 10,503
1999 11,836
2000 579,719
---------
Total $ 735,305
=========
(8) Income Taxes
------------
The Company has net operating loss carryovers of approximately
$400,000 expiring in the year 2011. As of November 30, 1995 the
Company has total deferred tax assets of approximately $80,000 due to
the operating loss carryovers. However, because of the uncertainty of
potential realization of these tax assets, the Company has provided a
valuation allowance for the entire $80,000 therefore, no tax assets
have been recorded in the financial statements as of November 30,
1995. The income tax refund receivable of $128,200 as of November 30,
1995 represents amounts refundable related to estimated income taxes
paid for the year ended November 30, 1995.
(9) Litigation
----------
On December 20, 1995, NBE filed a complaint, together with a motion
for summary judgment, against a customer for failure to pay NBE for
$100,739 for services under a development contract. On February 21,
1996, the customer filed a counterclaim against NBE claiming that NBE
failed to perform, and seeking judgment of approximately $793,000.
Management believes that the counterclaim is without merit and it
intends to vigorously defend against it, while actively prosecuting
its complaint. The amount, if any, of potential loss related to this
matter cannot presently be determined.
F-13
