FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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 AUGUST 31, 1997
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.)
16000 BARKERS POINT LANE, HOUSTON TX 77079
(Address of principal executive offices) (Zip Code)
(713) 566-5051
(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 August 31, 1997, Registrant had 1,123,174 shares of common stock, $.001
Par Value, outstanding.
<PAGE>
INDEX
PAGE
NUMBER
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31,
1996 (Unaudited) and November 30, 1996 2
Consolidated Statements of Operations Three
Months Ended August 31, 1997 and
August 31, 1996 (Unaudited) 3
Consolidated Statements of Operations, Nine
Months Ended August 31, 1997 and
August 31, 1996 (Unaudited) 4
Consolidated Statement of Changes in Stock-
holders' Equity from November 30, 1996
through August 31, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows,
Three Months Ended August 31, 1997 and
August 31, 1996 (Unaudited) 6
Consolidated Statements of Cash Flows,
Nine Months Ended August 31, 1997 and
August 31, 1996 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 9
Part II. Other Information 11
1
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
August 31, November 30,
1997 1996
------------ ------------
Current Assets
Cash in bank ............................. $ 425,662 $ 156,432
Inventory ................................ 703,996 551,603
Accounts receivable, net of allowance
for doubtful accounts .................. 777,302 992,379
Other current assets ..................... 209,542 105,180
------------ ------------
Total Current Assets ................... 2,116,502 1,805,594
Property and equipment, net of accumulated
depreciation ................................. 392,897 1,241,273
Goodwill, net of accumulated amortization ...... 749,766 868,152
Other assets ................................... 67,353 47,544
------------ ------------
Total Assets ................................... $ 3,326,518 $ 3,962,563
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses .... $ 664,565 $ 861,279
Notes payable, current portion ........... 536,134 698,960
Mortgage payable, current portion ........ -- 9,229
Other current liabilities ................ 37,605 46,816
------------ ------------
Total Current Liabilities .............. 1,238,304 1,616,284
Notes payable, net of current portion .......... 3,676 --
Mortgage payable, net of current portion ....... -- 602,878
Other liabilities .............................. -- 20,544
------------ ------------
Total Liabilities ...................... 1,241,980 2,239,706
------------ ------------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized
8,000 issued and outstanding,
8.6% cumulative preferred
(Liquidation preference of $800,000) ... 8 --
Common stock - $.001 par value,
15,000,000 shares authorized;
1,123,174 shares issued and
outstanding ............................ 1,123 1,103
Additional paid-in capital ............... 3,224,581 2,397,063
Retained earnings ........................ (1,141,174) (675,309)
------------ ------------
Total Stockholders' Equity ............. 2,084,538 1,722,857
------------ ------------
Total Liabilities and Stockholders' Equity ..... $ 3,326,518 $ 3,962,563
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
August 31 August 31
1997 1996
------------ ------------
Revenue:
Sales .................................. $ 1,477,284 $ 1,124,503
Cost of sales (exclusive
of depreciation and salaries
shown separately below) .............. 749,687 287,075
------------ ------------
Gross Profit ........................ 727,597 837,428
------------ ------------
Operating Expenses
Salaries ............................... 584,283 523,413
Advertising and promotion .............. 82,701 28,785
Contract services ...................... 107,298 23,055
Rent ................................... 98,997 80,903
Travel and entertainment ............... 44,640 29,485
Depreciation/amortization .............. 55,378 107,589
Other operating expenses ............... 420,063 276,692
------------ ------------
Total Operating Expenses ............. 1,393,360 1,069,922
------------ ------------
Net Operating (Loss) ....................... (665,763) (232,494)
Interest Expense ........................... (28,391) --
Gain from disposition of property .......... 719,562 --
Other Income ............................... 5,971 11,184
------------ ------------
Net income (loss) .......................... $ 31,379 $ (221,310)
============ ============
Provision for preferred dividends .......... 17,201 --
------------ ------------
Net Income (Loss) to Common
Shareholders .............................. $ 14,178 $ (221,310)
============ ============
Net Income (Loss) per Common Share ......... $ .01 $ (.21)
============ ============
Weighted Average Shares Outstanding ........ 1,118,174 1,036,674
============ ============
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Nine Months
Ended Ended
August 31 August 31
1997 1996
------------ ------------
Revenue:
Sales .................................. $ 4,533,411 $ 3,674,243
Cost of sales (exclusive
of depreciation and salaries
shown separately below) .............. 1,961,457 1,229,452
------------ ------------
Gross Profit ........................ 2,571,954 2,444,791
------------ ------------
Operating Expenses
Salaries ............................... 1,664,493 1,498,924
Advertising and promotion .............. 207,322 139,595
Contract services ...................... 185,766 111,123
Rent ................................... 266,984 241,218
Travel and entertainment ............... 102,018 66,162
Depreciation/amortization .............. 163,921 326,730
Other operating expenses ............... 1,149,067 794,236
------------ ------------
Total Operating Expenses ............. 3,739,571 3,177,988
------------ ------------
Net Operating (Loss) ....................... (1,167,617) (733,197)
Interest Expense ........................... (66,925) --
Gain from disposition of property .......... 719,562 --
Other Income ............................... 94,982 68,231
------------ ------------
Net (loss) ................................. $ (419,998) $ (664,966)
============ ============
Provision for preferred dividends .......... 45,867 --
------------ ------------
Net (Loss) to Common Shareholders .......... $ (465,865) $ (664,966)
============ ============
Net Income (Loss) per Common Share ......... $ (.42) $ (.64)
============ ============
Weighted Average Shares Outstanding ........ 1,116,507 1,036,480
============ ============
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1996 through Aug 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- ------------------- Paid-in Accumulated
No./shares Amount No./shares Amount Capital (Deficit) Total
---------- ------ ---------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1996 ...... -- $ -- 1,103,174 $1,103 $2,397,063 $ (675,309) $ 1,722,857
Common stock issued ............... -- -- 20,000 20 59,980 -- 60,000
Preferred stock issued, net
of offering costs of $32,454 ...... 8,000 8 -- -- 767,538 -- 767,546
Net (loss) for the nine months
ended Aug 31, 1997 ................ -- 8 -- -- -- (465,865) (465,865)
---------- ------ ---------- ------ ---------- ----------- -----------
Balance at Aug 31, 1997 ........... 8,000 $ 8 1,123,174 $1,123 $3,224,581 $(1,141,174) $ 2,084,538
========== ====== ========== ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
August 31 August 31
1997 1996
------------ ------------
Cash Flows from Operating Activities:
Net income (loss) ...................... $ 14,178 $ (221,310)
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization ....... 94,840 107,588
(Decrease) in accounts payable
and accrued expenses ............... (133,949) (337,587)
(Increase) decrease in
accounts receivable ................ (11,844) 107,921
(Increase) decrease in
inventory .......................... 70,925 (95,410)
Other, net .......................... (124,271) (88,894)
------------ ------------
Net Cash (Used in) Operating
Activities ............................ (90,121) (527,692)
------------ ------------
Cash Flows from Investing Activities:
(Purchases) of property and
equipment ............................. -- (13,288)
Disposition of property ................ 814,603 --
------------ ------------
Net Cash Provided by (Used in)
Investing Activities .................. 814,603 (13,288)
------------ ------------
Cash Flows from Financing Activities:
(Repayment) from notes and
mortgages payable ..................... (606,678) (2,555)
Preferred stock issued ................. --
Proceeds from notes payable ............ -- 250,000
Common stock issued .................... -- 199,900
------------ ------------
Net Cash Provided by (Used in)
Financing Activities .................. (606,678) 447,345
------------ ------------
Increase (Decrease) in cash ................ 117,804 (93,635)
Cash, Beginning of Period .................. 307,858 212,223
------------ ------------
Cash, End of Period ........................ $ 425,662 $ 118,588
============ ============
Interest Paid .............................. $ 28,391 $ 13,977
============ ============
Income Taxes Paid .......................... $ -- $ --
============ ============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
August 31 August 31
1997 1996
------------ ------------
Cash Flows from Operating Activities:
Net (loss) ............................. $ (465,865) $ (664,966)
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization ....... 282,307 326,730
Increase (decrease) in accounts
payable and accrued expenses ....... (196,714) (556,809)
(Increase) decrease in accounts
receivable ......................... 215,077 (3,978)
(Increase) in inventory ............. (152,393) (69,786)
Decrease in income tax refund
receivable ......................... -- 128,200
Other, net .......................... (153,926) (22,690)
------------ ------------
Net Cash (Used in) Operating
Activities ................................ (471,514) (863,299)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and
equipment and other ................... (130,148) (62,239)
Disposition of property ............... 814,603 --
------------ ------------
Net Cash Provided by (Used in)
Investing Activities .................. 684,455 (62,239)
------------ ------------
Cash Flows from Financing Activities:
(Repayment) of notes payable ........... (771,257) (12,125)
Preferred stock issued ................. 767,546 --
Proceeds from notes and mortgage
payables .............................. -- 500,000
Common stock issued .................... 60,000 201,113
------------ ------------
Net Cash Provided by Financing
Activities ............................ 56,289 688,988
------------ ------------
Increase (decrease) in cash ................ 269,230 (236,550)
Cash, Beginning of Period .................. 156,432 355,138
------------ ------------
Cash, End of Period ........................ $ 425,662 $ 118,588
============ ============
Interest Paid .............................. $ 66,925 $ 29,382
============ ============
Income Taxes Paid .......................... $ -- $ --
============ ============
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1997 and 1996
(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 August 31, 1997, the statements of income and the
statements of cash flows for the three and nine month periods ended August
31, 1997 and August 31, 1996 and the statement of changes in stockholders'
equity for the nine month period ended August 31, 1997 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 August 31, 1997, and for all periods presented, have been made.
(3) REVERSE STOCK SPLIT
During May, 1996 the Company effected a one for five reverse stock split.
All references to common stock in the financial statements have been
retroactively adjusted.
(4) STOCK ISSUE
Effective December 31, 1996 the Company issued 8,000 preferred shares with
gross proceeds to the Company of $800,000. The
8
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1997 and 1996
(4) STOCK ISSUE, CONTINUED
Company incurred offering costs of approximately $32,454 which were netted
against the proceeds of the offering. The preferred stock has preference
in liquidation to the extent of the $800,000 plus cumulative dividends of
8.6% per annum.
Also effective December 31, 1996 the Company issued 20,000 shares of its
common stock for $60,000 pursuant to the exercise of certain stock
purchase rights.
(5) SALE OF PROPERTY
During the three month period ended August 31, 1997 the company sold its
investment in its office building resulting in a gain of $881,311.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
OVERVIEW
Enhanced Services Company, Inc. (the "Company") provides (a) upgrade, repair,
contract maintenance and asset management services, as well as peripheral,
enhancement and accessory products developed by the Company, for portable
computers, and (b) digital video multimedia presentation development (DVD) and
compression processing services for marketing, training, archival storage, video
formatting and other applications. The Company's portable computer services and
products are provided through it's wholly owned Laptop Solutions-Texas and
- -California subsidiaries, and multimedia services are provided through the
Company's wholly owned NB Engineering subsidiary.
The Company's third fiscal quarter and the nine months period ended August 31,
1997 and the comparable periods of 1996 are referred to in the discussions below
as the three and nine months of 1997 and 1996, .
The Company's consolidated results of operations and position for and as of
the end of its three and nine months ended August 31, 1997 and 1996 are
summarized and discussed below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------------- --------------------------
1997 1996 CHANGE 1997 1996 CHANGE
----------- ----------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales .......................... $ 1,477,284 $ 1,124,503 31.4% $ 4,533,411 $ 3,674,243 23.4%
Cost of Sales
(exclusive of depreciation
and salaries) .................. 749,687 287,075 161.1% 1,961,457 1,229,452 59.5%
----------- ----------- ----------- ----------
Gross Profit ................... 727,597 837,428 (13.1)% 2,571,954 2,444,791 5.5%
Operating &
Other Expenses ............. 1,393,360 1,065,255 30.8% 3,739,571 3,148,607 18.8%
----------- ----------- ----------- ----------
Net Operating Loss ............. (665,763) (227,827) (1,167,617) (703,816) (127.8)%
Other Income (Expense)
Interest Expense ........... (28,391) (4,667) 508.3% (66,925) (29,381) 127.8%
Other Income ............... 5,971 11,184 (46.6)% 94,982 68,231 39.2%
Gain (Loss) from disposition
of property .............. 719,562 -0- -- 719,562 -0- --
----------- ----------- ----------- ----------
Net Income (Loss)
Before income taxes ........ 31,379 (221,310) (114.2)% (419,998) (664,966) (36.8)%
Provision for preferred
Dividends .................. 17,201 -0- -- 45,867 -0- --
----------- ----------- ----------- ----------
Net Income (Loss) to
Shareholders ............... $ 14,178 ($ 221,310) 104.4% $ (465,865) $ (664,966) 29.9%
=========== =========== =========== ==========
</TABLE>
10
<PAGE>
a. Operations of Laptop Solutions-Texas
Laptop Solutions-Texas' results of operations for three and nine months ended
August 31, 1997 and 1996 are summarized and discussed below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------------------- --------------------------------------
1997 1996 CHANGE 1997 1996 CHANGE
---------- ---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales .......................... $ 725,119 $ 834,505 (13.1)% $ 2,713,816 $ 2,638,894 2.8%
Cost of Sales
(exclusive of depreciation
and salaries) .................. 368,298 231,235 59.3% 1,249,199 995,641 25.5%
---------- ---------- ------------ ------------
Gross Profit ................... 356,821 603,270 (40.9)% 1,464,617 1,643,253 (10.9)%
Operating &
Other Expenses ............. 702,949 550,794 27.6% 1,928,245 1,574,360 22.5%
---------- ---------- ------------ ------------
Net Operating Income (Loss) .... (346,128) 52,476 (759.6)% (463,628) 68,893 (773.0)%
Other Income (Expense)
Interest Expense ........... (6,568) (5,595) 17.4% (17,447) (5,722) 204.9%
Other Income ............... 7,259 15,363 (52.8)% 67,260 54,357 23.7
Gain (Loss) from disposition
of property ................ 0 0 0 0
---------- ---------- ------------ ------------
Net Income (Loss)
Before income taxes ........ ($345,437) $ 62,244 (655.0)% ($ 413,815) ($ 117,528) (452.1)%
========== ========== ============ ============
</TABLE>
SALES: Revenue from upgrade and enhancement sales amounted to $347,692 and
$1,252,906 for the three and nine months period of 1997 and $242,846 and
$1,096,736 for the comparable periods in 1996. Sale of units continues to
increase while the per unit revenue and gross margin declined as a result of
competitive pressure. Revenue from Compatibility Plus(TM) sales, the removable
hard disk pak that the Company began shipping in the fourth quarter of 1996,
amounted to $69,254 and $277,570 in the three and nine months period of 1997.
Revenues from non-warranty repair and contract maintenance services in the three
and nine months period of 1997 amounted to $145,063 and $589,197 as compared to
$385,843 and $647,470 for the comparable periods in 1996. Management believes
that the decline of non-warranty revenue was primarily the result of
manufacturers extending the warranty period from one year to three years and
users being more inclined to replace a three year old unit that is
technologically obsolete than to purchase upgrade and enhancement components.
Warranty repair revenue for the three and nine months of 1997 amounted to
$117,108 and $432,370 as compared to $142,586 and $289,513 for the comparable
periods of 1996. Revenues from asset management services for the three and nine
months of 1997 amounted to $46,000 and $115,163 as compared to $34,500 and
$115,163 for the comparable periods of 1996.
COST OF SALES: Cost of sales of upgrade and enhancements services for the three
and nine months of 1997 amounted to $204,662 and $650,117 as compared to $97,762
and $430,182 for the comparable periods of 1996. Cost of sales of Compatibility
Plus(TM) amounted to $49,240 and $159,868 for the three and nine months in 1997.
Cost of sales of non-warranty repair services and contract maintenance services
for the three and nine months of 1997 amounted to $104,603 and $407,068 as
compared to $169,952 and $521,800 for the comparable periods of 1996.
OPERATING AND OTHER EXPENSES: Salaries and related payroll cost for the three
and nine months of 1997 amounted to $362,060 and $1,066,868 as compared to
$330,652 and $904,266 in the comparable periods of 1996. Personnel and related
cost increases were primarily due to a increase in sales and additional
administrative personnel. Advertising cost during the three and nine months of
1997 amounted to $79,901 and $175,270 as compared to $25,235 and $121,633 in the
comparable periods of 1996. The increase in advertising was a result of
management's decision to place advertising commitments on new and existing
products released in the second and third quarter of 1997. Other taxes,
including property tax and State of Texas franchise tax in the three and nine
months of 1997 amounted to $23,352 and $84,861 as compared to $1,245 and $6,010
in the comparable periods of 1996. The increase was primarily a result of
valuation increases by the local taxing authority. Computer expense in the three
and nine months of 1997 amounted to $41,387 and $78,405 from $17,156 and $38,206
in the comparable periods of 1996, as a result of a continuing program to
enhance the capacity and capabilities of the Company's information services. The
Company sold it's office building August 6, 1997, as reported on it's Form 8-K
filed on August 21, 1997, and it leased it's existing office and warehouse space
from the purchaser. Laptop Solutions-Texas was allocated a rent charge by the
Company in the amounts of $17,332 and $69,328 during the three and nine months
of 1997 as compared to $25,998 and $77,994 for the comparable periods in 1996,
and such amounts are included in Laptop Solutions-Texas Operating and Other
Expenses. The Company settled a E.E.O.C. complaint during the three months ended
August 31, 1997 in the amount of $33,430. Other operating expenses, included
travel, telephone, and other general and administrative expenses amounted to
$132,009 and $404,674 for the three and nine months of 1997 as compared to
$130,700 and $365,644 in the comparable months of 1996.
b. OPERATIONS OF LAPTOP SOLUTIONS-CALIFORNIA
Laptop Solutions-California's results of operations for three and nine
months ended August 31, 1997 and 1996 are summarized and discussed below.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------- -----------------------
1997 1996 CHANGE 1997 1996 CHANGE
---------- --------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales ..................................... $ 524,536 $ 34,479 1421.3 $ 885,164 $ 147,763 499.0%
Cost of Sales
(exclusive of depreciation
and salaries) ............................. 345,828 5,571 6107.6% 584,777 58,292 903.2%
---------- --------- ---------- ----------
Gross Profit .............................. 178,708 28,908 518.2% 300,387 89,471 235.7
Operating &
Other Expenses ......................... 280,565 86,236 225.3% 583,236 287,681 102.7%
---------- --------- ---------- ----------
Net Operating Income ...................... (101,857) (57,328) (77.7)% (282,849) (198,210) (42.7)
Other Income (Expense)
Interest Expense ....................... (7,322) (3,036) 129.9% (13,784) (5,720) 141.0%
Other Income ........................... 19,617 0 -- 29,457 0 --
Gain (Loss) from disposition of property 0 0 -- 0 0 --
---------- --------- ---------- ----------
Net Income (Loss) ......................... ($ 89,562) ($60,364) (48.4) ($267,176) ($203,930) (31.0)%
========== ========= ========== ==========
</TABLE>
The Company in 1996 formed it's Solutions Engineering Division, and it's
management, technical and administrative personnel are included in Laptop
Solutions-California's operating expenses.
SALES: Repair and enhancement sales for the three and nine months of 1997
amounted to $51,324 and $223,127 as compared to $31,030 and $138,727 in the
comparable months of 1996. The increase is primarily attributed to an
enhancement project that was completed in the third quarter of 1997. Laptop
Solutions-California began production and sales of it's
anti-glare/anti-reflective film application to laptop and notebook computers
screens in the second quarter of 1997. Revenues from the film application
amounted to $459,082 and $625,717 in the three and nine months of 1997. Sales of
the film application are primarily to a major computer manufacturer of
ruggedized laptop computers. Warranty repair services for the three and nine
months of 1997 amounted to $14,130 and $18,945 as compared to $795 and $1,575 in
the comparable periods of 1996.
COST OF SALES: Cost of sales for repair and enhancement amounted to $27,285 and
$161,960 for the three and nine months of 1997 as compared to $5,153 and $45,947
for the comparable periods in 1996. Cost of sales for the
anti-glare/anti-reflective film application amounted to $258,246 and $346,765
for the three and nine months of 1997. $30,000 was charged to cost of sales in
the three months period for components damaged in the initial production phase
of the application process. Management has taken steps to correct the flawed
process in the quarter. The reserve for inventory obsolescence was increased
during the three months period of 1997 by $35,000.
OPERATING AND OTHER EXPENSES: Salaries and related payroll expenses amounted to
$203,470 and $418,436 for the three and nine months of 1997 as compared to
$56,732 and $187,890 in the comparable periods of 1996. The increase was
primarily related to the addition of production staff of the Solutions
Engineering Division for the anti-glare/anti-reflective film application
process. Computer expenses amounted to $7,399 and $10,301 for the three and nine
months of 1997 as compared to $340 and $1,819 in the comparable periods of 1996.
Rent amounted to $32,221 and $63,778 for the three and nine months of 1997 as
compared to $9,186 and $27,707 for the comparable periods of 1996. The Company
moved to larger facilities in the second quarter of 1997 to accommodate the film
application process. Other overhead expenses associated with the film
application process amounted to $18,584 and $32,915 for the three and nine
months of 1997 as compared to $2,552 and $7,817 in the comparable periods of
1996. All other operating expenses amounted to $18,891 and $57,806 in the three
and nine months of 1997 as compared to $17,426 and $62,448 in the comparable
periods of 1996
c. OPERATIONS OF NB ENGINEERING, INC.
NB Engineering's results of operations for three and nine months ended August
31, 1997 and 1996 are summarized and discussed below.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
----------------------- -------------------------
1997 1996 CHANGE 1997 1996 CHANGE
---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales .................................. $ 227,629 $ 255,519 (10.9)% $ 934,431 $ 887,586 5.28%
Cost of Sales
(exclusive of depreciation and salaries) 35,561 50,269 (29.3)% 127,481 175,519 (27.4)%
---------- ---------- ---------- ----------
Gross Profit ........................... 192,068 205,250 (6.4)% 806,950 712,067 13.3%
Operating & Other Expenses ............. 409,846 416,473 1.6% 1,228,090 1,286,566 4.6%
---------- ---------- ---------- ----------
Net Operating Income ................... (217,778) (211,223) (3.1)% (421,140) (574,499) 26.7%
Other Income (Expense)
Interest Expense .................... (14,501) (7,788) (86.2)% (35,694) (17,939) (98.9)%
Other Income ........................ 330 979 (66.3)% 7,245 60,624 (88.1)%
Gain (Loss) from disposition of
property ........................... (161,749) 0 -- (161,749) 0 --
---------- ---------- ---------- ----------
Net Income (Loss) ...................... ($393,698) ($218,032) (80.1)% ($611,338) ($531,814) (14.9)%
========== ========== ========== ==========
</TABLE>
SALES: Compression and DVD sales amounted to $227,629 and $920,591 for the three
and nine months of 1997 as compared to $204,823 and $450,928 for the comparable
periods in 1996. NB Digital Solutions phased out of the hardware integration
business in the second quarter of 1997.
COST OF SALES: Cost of sales in for the three and nine months period of 1977
amounted to $35,561 and $127,481 as compared to $49,594 and $175,519 in the
comparable periods of 1996. Costs of sales continue to decline as a result of
phasing out of it's hardware integration business.
OPERATING AND OTHER EXPENSES: Salaries and related payroll cost amounted to
$264,248 and $739,710 for the three and nine months of 1997 as compared to
$213,851 and $758,813 for the comparable periods of 1996. Amortization of
goodwill and depreciation amounted $79,589 and $238,362 for the three and nine
months of 1997 as compared to $89,589 and $271,395 for the comparable periods of
1996. A non-recurring credit for property taxes was recorded in the third
quarter of 1997 with a positive effect of $33,366. All other operating expenses
amounted to $66,009 and $250,018 for the three and nine months period of 1997 as
compared to $113,033 and $256,358 for the comparable periods of 1996.
<PAGE>
d. ENHANCED SERVICES COMPANY, INC., OPERATION AND SALE OF OFFICE BUILDING
IN HOUSTON, TEXAS
The Company, on May 31, 1995, acquired an office building in Houston, Texas
and sold the building on August 6, 1997 as reported on Form 8-K filed on August
21, 1997. Results of operations related to the office building for the two and
eight months ended August 31, 1997 and the three and nine months of 1996 are
summarized and discussed below. Rental income includes an allocated rent charge
to Laptop Solutions-Texas in the amounts of $17,332 and $69,328 for the three
and nine months of 1997 as compared to $25,998 and $77,994 for the comparable
periods in 1996.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------- -----------------------
1997 1996 CHANGE 1997 1996 CHANGE
--------- --------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Rental Income ........................ $ 44,971 $ 54,570 (17.6)% $ 196,058 $ 159,879 22.6%
Cost of Operations ................... 66,206 59,728 10.8% 205,038 206,629 (.8)%
--------- --------- --------- ----------
Net Income (Loss) from Office building (21,235) (5,158) (311.7)% (8,980) (46,750) 80.8%
Gain on Sale of Building ............. 881,311 0 -- 881,311 0 --
Provision for Preferred Dividends .... (17,201) 0 -- (45,867) 0 --
--------- --------- --------- ----------
Net Income (Loss ..................... $ 842,875 ($ 5,158) -- $ 826,464 ($ 46,750) --
========= ========= ========= ==========
</TABLE>
The Company sold the building for $1,750,000 and as a result realized as gain
of $881,311. Laptop Solutions-Texas, executed a three lease with the building's
purchaser at the prevailing market rate for the space it is occupying.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1997, the Company had stockholders' equity totaling
$2,084,538 as compared to $1,722,857 at November 30, 1996, an increase of
$361,681. The increase resulted from the closing a private placement of it's
cumulative preferred stock with net proceeds of $767,546 on December 31, 1996,
the exercise of 20,000 (post-split) warrants for a cash consideration of $60,000
and the net loss for the nine months period of $465,865. The Company's working
capital was $878,198 at August 31, 1997 as compared to $189,310 at November 30,
1996, a increase of $688,888. The increase was primarily the result of a private
placement of it's cumulative preferred stock with net proceeds of $767,546, the
exercise of 20,000 (post-split) warrants for a cash consideration of $60,000 and
the loss for the nine months period of $180,558 after excluding amortization and
depreciation of $285,307.
Management plans that income generated from operations, along with working
capital, will be sufficient to fund the Company's operations. NB Engineering,
and Laptop Solutions-Texas and Laptop Solutions-California plan to obtain
purchase commitments that will provide funds to finance their operations and
repayment of the working capital loan of $500,000 due June 1, 1998. However,
should the purchase commitments or new business not materialize, which can not
be assured, additional funds will be required for operations and repayment of
the working capital loan. Such funds will need to be provided through additional
debt financing and/or equity capital, and there can be no assurance that such
funds will be available, or, if available, on favorable terms.
<PAGE>
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
a. None.
b. Form 8-K filed on August 21, 1997 reporting the sale of the
Company's office buklding and included Pro Forma Financial
information.
11
<PAGE>
SIGNATURE
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 hereunto duly authorized.
ENHANCED SERVICES COMPANY, INC.
By /s/ R.C. SMITH Date: 10/20/97
R.C. Smith, Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 425,662
<SECURITIES> 0
<RECEIVABLES> 777,302
<ALLOWANCES> 0
<INVENTORY> 700,546
<CURRENT-ASSETS> 2,329,040
<PP&E> 1,768,935
<DEPRECIATION> 563,645
<TOTAL-ASSETS> 4,409,451
<CURRENT-LIABILITIES> 1,321,284
<BONDS> 0
0
8
<COMMON> 1,123
<OTHER-SE> 3,224,581
<TOTAL-LIABILITY-AND-EQUITY> 4,409,451
<SALES> 4,533,411
<TOTAL-REVENUES> 6,378,393
<CGS> 1,961,457
<TOTAL-COSTS> 4,836,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 58,455
<INTEREST-EXPENSE> 66,925
<INCOME-PRETAX> (419,998)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,139,560)
<DISCONTINUED> (161,749)
<EXTRAORDINARY> 881,311
<CHANGES> 0
<NET-INCOME> (465,865)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
