SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
Commission file number 0-24256
ENHANCED SERVICES COMPANY, INC.
(Name of small business issuer in its charter)
COLORADO 84-1075908
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
16000 BARKERS POINT LANE, HOUSTON, TX 77079 (281) 556-5051
(Address of principal executive offices) (Zip Code) (Issuer'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
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 Issuer's revenues for the fiscal year ended November 30, 1996 were
$5,051,296
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of Issuer'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 20, 1997, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates of the Registrant was $1,792,138 based on
the average high/low bid/ask prices of the Company's Common Stock as reported by
the National Quotations Bureau of $4.42 . As of February 20, 1997, 1,123,174
shares of $.001 par value Common Stock of the Registrant were outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Enhanced Services Company, Inc. (the Company) provides repair and
maintenance upgrade fulfillment and related engineering services for users of
portable computers as well as digital video multimedia presentation and
processing services for marketing, training, archival storage, video formatting
and other applications.
Historically, most of the Company's revenues have been derived from
portable computer support and maintenance services. It offers repair services as
an authorized warranty provider for Toshiba, Compaq, Panasonic, IBM, Texas
Instruments and NEC as well as non-warranty repairs on most other portable
computers. The Company also upgrades laptop computer chips and repairs LCD
(color and monochrome) and plasma display screens for portable computers. The
Company's asset management services include consulting, tagging, tracking and
logistical support of its customers' in-field portable computers, and end of
life retirement and refurbishment. Through its "hot spare" programs, it
replaces, on an expedited basis, its participating customers' damaged units with
working portable computers. By integrating and testing accessories, peripherals
and enhancements from various manufacturers, together with performing custom
software loads, custom data loads and burn-in of hardware, the Company sets up
and delivers portable computers which meet the customer's individual
requirements. Asset management, including "hot spares," and services to
customers engaged in field automation projects, are higher gross margin services
than repair and upgrade services. With the recent formation of the Company's
Solutions Engineering Division, the Company designs, engineers, manufactures and
sells portable computer accessories, peripherals and enhancements for its
customers' specific field automation projects. The Division also offers
engineering services designed to help ensure that the computer, its accessories,
peripherals and enhancements are fully functional with the customer's hardware
and software at optimal cost/performance. In September, 1996, the Company
introduced a removable hard drive pak for the Toshiba Tecra 700 series of
laptops. This product is the first in its intended Compatibility PlusTM product
line. The Company, in the first quarter of its 1997 fiscal year, began offering
the application, under clean-environment conditions, of a licensor's
multi-layered optical film to the surface of its users' color LCD display
screens, greatly improving their readability in sunlight and direct office
lighting conditions. This LCD film product, which the Company is marketing as
ClarityView(TM), is designed to reduce glare while increasing contrast and
luminance on portable computer screens. The Company's portable computer services
and products, which are described above, are provided through its wholly owned
Laptop Solutions-Texas and -California subsidiaries.
Multimedia services include specialized digital video services to the
corporate and entertainment markets. In the corporate markets, services offered
by the Company include CD-ROM title development, data compilation and synthesis
of its customers' CD-ROM titles, with interactive features (such as touch
screen, intelligent data branching, viewer testing and speech input), for use in
training, marketing, archival storage and other purposes. The services are
offered on a custom engineering basis by the Company, whose engineers work with
its customers' video editors, creative artists and producers. After a
presentation has been fully developed, whether with the Company or independently
by the customer, it must be fully digitized and compressed in order to be
distributed on CD-ROM or other PC-based media. Management believes that the
market for compression services is in its infancy, and that there are only three
other independent facilities in the U.S. that provide the breadth of multimedia
compression services offered by the Company. For the entertainment industry, the
Company has the
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ability to "format author" (premaster film, video and interactive multimedia
applications) its customers' films, using the compression standard known as
Digital Versatile Disk ("DVD"). DVD allows a full length motion picture to be
stored on a 5.25" optical disc at broadcast quality video and Dolby AC-3 quality
surround sound stereo. This emerging standard is, management believes, likely to
be a future digital standard for home delivery of full length motion pictures.
Multimedia services are provided through the Company's wholly owned NB
Engineering subsidiary.
The Company, a Colorado corporation organized in 1987, acquired Laptop
Solutions Inc., a Texas corporation, from Kenneth M. Duckman on September 30,
1992, and Mr. Duckman became the Company's President and Chief Executive
Officer, a director of the Company and its controlling stockholder. The Company,
in March 1995, formed its wholly owned subsidiary, Laptop Solutions, Inc. a
California Corporation. The Company acquired NB Engineering, Inc., a Delaware
corporation, on May 31, 1995 from a corporation of which Ralph LaBarge was the
largest stockholder, and Mr. LaBarge became President and Chief Executive and
Technical Officer of NB Engineering and a director and, beneficially, a
stockholder of the Company. See Item 11, "Security Ownership of Certain
Beneficial Owners and Management."
PORTABLE COMPUTER SERVICES
The Company's portable computer support and maintenance services include
consulting with customers who need to put hundreds, and in some cases thousands,
of laptop computers in field locations for specialized staff functions, related
engineering and pre-setup and configuration services and asset management and
maintenance support. Most of the Company's customers for repair and maintenance
and field automation related services are medium to large sized companies.
Portable computer services and products are offered by the Company through its
Laptop Solutions-Texas and -California subsidiaries.
SUPPORT AND MAINTENANCE SERVICES. The Company's support and contract
maintenance services include warranty repair services as an authorized warranty
provider for Toshiba, Compaq, Panasonic, IBM, NEC and Texas Instruments, as well
as non-warranty repair services on most other portable computers. The Company
also repairs LCD (color and monochrome) and plasma display screens for portable
computers at a cost typically below replacement cost. The Company's asset
management services include consulting, tagging, tracking and logistical support
of its customers' in field-portable computers, and end of life retirement and
refurbishment. In addition, it offers "hot spare" programs to customers with a
large number of laptops deployed in the field, exchanging damaged units with
working replacements, often within hours of notification by the customer. The
Company also offers a variety of processor upgrade services as well as random
access memory ("RAM") upgrades.
FULFILLMENT SERVICES. Through its pre-delivery setup and configuration
fulfillment services, the Company delivers portable computers set up by the
Company to meet its customers' specific requirements. These services include
initial receipt of the customers' computers, accessories, peripherals and
enhancements from the various manufacturers, integration and testing of each
item, custom software loads, custom data loads, burn-in of hardware, testing of
software, and fulfillment to the end user, with full reports back to the
customer.
CUSTOM ENGINEERING SERVICES. Services offered by the Company's Solutions
Engineering Division include the design, engineering, manufacture and sale of
portable computer accessories, peripherals and enhancements for the customers'
specific field automation projects. The Company also evaluates modems,
networking cards, special boards in docking stations and other items to
determine
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their performance in a wide variety of uses relevant to its customers. The
Company, during the fourth quarter of fiscal 1996 completed an engineering
enhancement project installing touch screen capabilities on a fleet of laptop
computers.
NEW PRODUCT LINE AND SERVICE
Management believes that many of the skills and disciplines required for
its custom engineering services enable the Company to develop, both internally
and with the assistance of outside engineering when necessary, "shrink-wrap"
products for the broader market. It recently formed its Solutions Engineering
Division for that purpose and introduced Compatibility Plus(TM) to the market as
its new brand name for such products. The Compatibility PlusTM brand is intended
to be developed into a varied product line of accessories, peripherals and
enhancements for portable computers.
REMOVABLE HARD DRIVE PAK. In September 1996, the Company introduced as
its first product for its Compatibility Plus(TM) product line, a removable hard
drive pak with a current capacity of up to 3 gigabytes, for the Toshiba
Tecra(TM) 700 series of laptops. The Company intends to introduce additional
products. There can be no assurances, however, that additional products will be
developed or introduced .
REDUCED GLARE AND INCREASED CONTRAST AND LUMINANCE LCD FILM. High
resolution multi-color LCD screens used in most portables today are highly
reflective and difficult to read when in direct sunlight or strong incandescent
lighting conditions. While this is not a problem for the majority of users, it
may be a significant disadvantage for police forces, emergency services,
hospital workers, real estate agents, insurance adjusters, utility inspectors
and military users. The Company holds a non-exclusive (but, management believes,
presently sole) license to apply a film, manufactured by its licensor, designed
to reduce an LCD screen's glare and increase its contrast ratio and luminance.
Application of this LCD film product requires a manufacturing process in a clean
environment. The Company is currently seeking a larger facility in which to
perform the application. The Company began offering the LCD film product,
marketed as ClarityView(TM), applied to users' laptop LCD screens, during the
first quarter of its 1997 fiscal year. Management estimates that a significant
number of portable computers are used in such direct light conditions.
MULTIMEDIA SERVICES
Users of the Company's multimedia services are usually medium to large
companies with requirements for the development of digital multimedia
presentations utilizing computer technology. They typically lack the requisite
in-house technological expertise and equipment, or find it more economical and
timely to retain an outside firm with such capabilities to prepare such
presentations. Multimedia services are offered by the Company through it's NB
Engineering subsidiary.
DIGITAL VIDEO COMPRESSION SERVICES. The Company's digital video
compression service entails a two-step process in which images (movie or still)
and sound are first converted and then compressed into a digital format that can
be stored and accessed using computer technology. Digital video compression
enables the customer to store, access and play back digitized visual images
using its personal computers. To accomplish this, the Company utilizes industry
developed algorithms, each known as a "Codec" (Compression/DECompression),
including MPEG, PLV and DVD. PLV is regarded as becoming obsolete, and has
rapidly decreased in revenue generating opportunities. MPEG-2 provides
broadcast-level video quality, and it is generally used when the customer
requires the highest level of video quality possible to be generated from a
computer platform. Digital Versatile Disk (DVD) is the newest consumer video
format. It has been accepted by most, if not all, of the major producers of
computer hardware and software, and it offers significantly greater storage
capacity then the earlier
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standards for optical disc delivery. DVD enables a full length motion picture to
be delivered to the consumer market on a single optical disc with very high
quality video and audio. Management believes that NB Engineering has developed
the skills necessary to "format author" (premaster film, video and underactive
multimedia applications) titles, and that it is well positioned to service the
preparation of DVD titles. The Company started to provide such service in August
1996.
MULTIMEDIA DEVELOPMENT SERVICES. The Company offers custom engineering
development services to customers who have digital image processing requirements
that cannot be met with commercially available products. These services include
assisting a customer with the design, development, integration, installation and
testing of custom hardware and software items to meet its individual
requirements. Examples of such customized development services are: (1)
MULTIMEDIA CD-ROM TITLE DEVELOPMENT: The Company has developed over a dozen
custom multimedia CD-ROM titles for use by customers for sales force automation,
product brochures and interactive training; and (2) WORLD WIDE WEB HOME PAGE
DEVELOPMENT: The Company offers custom development and hosting services for
customers utilizing the World Wide Web segment of the Internet. It maintains a
dedicated Web server that can be accessed at http://www.nbdig.com.
HARDWARE INTEGRATION SERVICES FOR MULTIMEDIA. The Company, using custom
hardware and software, offered the service of integrating components into
computer platforms that are typically not considered to be "multimedia ready" to
allow the use of multimedia technology by the user. The Company specialized in
providing these services for the users of laptop and notebook computers. NB
Engineering, during fiscal 1996, changed the direction and focus of its business
from hardware integration and engineering services to digital video compression,
including DVD, and multimedia development services. The decline in hardware
integration and engineering business and the consequent change of business focus
were the primary causes for the decline in sales for fiscal 1996.
CUSTOMERS
The Company has established a broad base of customers, representing a wide
range of industries throughout North America, with a small percentage of sales
generated overseas. Revenues from these customers are generally initiated by
different operational groups within the customer organization. No customer
accounted for more than 10% of the Company's revenue during its fiscal year
ended November 30, 1995 or November 30, 1996. The Company offers 30 day net
terms only to its most credit-worthy customers.
SUPPLIERS
The Company purchases hard disks, expansion boards, RAM chips, custom
cables and other components, and licenses software, from a variety of
manufacturers and distributors, and it is dependent on no one source.
Company-designed sub-components utilized in its upgrade services, such as
mounting brackets, short-run boards and custom cables, are manufactured by
sub-contractors to the Company's design and specifications or assembled by the
Company.
SALES, MARKETING, AND DISTRIBUTION
The Company provides portable computer upgrade and repair and customized
multimedia services. It seeks to become a strategic supplier to its customers
and to differentiate itself from its competitors by offering a higher level of
service. The Company has trained sales personnel, engineers and technicians who
are dedicated to working with customers and to deliver service in a cost
effective and timely fashion. The Company believes that the technical services
provided by its personnel are an
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important factor in its sales of digital video compression and custom
engineering development services.
The Company sells its laptop enhancement and repair services directly
through a combination of customer service representatives and outside sales
staff. The Company also solicits business by advertising regularly in selected
trade publications, visits, the World Wide Web, mail, telephone and it attends
several large trade shows each year. The Company plans to increase its
advertising and promotional efforts, as new services are added and new products
are developed.
COMPETITION
The portable computer enhancement and repair market is highly competitive.
While the Company is unaware of any dominant competitors in the portable
computer upgrade industry, there are few obstacles to market entry and
penetration other than minimal capitalization and the development of the
technological know-how. As a result, it must be anticipated that future
attention will be focused on the market by competitors and potential competitors
with greater resources than those of the Company. While management believes that
its services offer superior price/performance and are well-positioned in terms
of market recognition, it is possible that technological breakthroughs will
enable a competitor or potential competitor to enter the market and be in a
position to challenge the Company in its specialty niche markets.
Competition in the repair and maintenance of laptops and notebooks is
widespread. Many regional and local firms are authorized to provide warranty and
non-warranty service and maintenance for laptops and notebooks. The Company
considers it a competitive advantage that its repairs are typically completed
within a short time of receipt of the damaged unit. The Company believes that
they are well positioned to be competitive because of its technical capabilities
and because it has the infrastructure for rapid turnaround times, a high
priority to the laptop and notebook user.
The digital video compression and custom engineering development services
market are also highly competitive. There are several companies which compete
directly in the digital video compression market and offer compression services
similar to those offered by the Company. Although no one competitor is dominant,
there are four major competitors in the digital video compression market,
including the Company. The Company's three major competitors providing digital
video compression services are Horizons Technology, Inc., CD Archives
Interactive, and Advanced Media Concepts. Horizons Technology's compression
division is part of a larger company, with significantly greater financial,
marketing, and technical resources than the Company. Additional competition
comes from several dozen small digital video compression service centers located
throughout the country. In addition to direct competition, the Company competes
with its customers' ability to perform portions of the required compression
process in house, many of whom have in-house capability to perform digital video
compression services. In some cases, the Company's customers perform the work
in-house, rather than use an off-site digital video compression service
provider.
The custom engineering development service industry is highly fragmented,
with competition from large, medium and small companies. The larger companies,
including IBM, Arthur Andersen and others, generally concentrate on
multi-million dollar programs. The mid-sized companies, including Jostens
Learning, Computer Curriculum, Byron-Price Multimedia and others, are national
companies that generally concentrate on specific segments of the multimedia
market, such as interactive training, entertainment or education. The smaller
companies, such as NB Engineering, develop specific products for customers that
generally represent too small an opportunity for the Company's large
competitors, but are not in the specific niche addressed by its mid-sized
competitors.
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PROPRIETARY RIGHTS
The Company considers the technology embodied in its hard-disk and
processor upgrade services as valuable intellectual know-how and trade secrets
which it seeks to protect with confidentiality and non-disclosure agreements.
The Company claims unregistered common law copyright protection on all source
code and documentation relating to its upgrade services and all software
developed in the course of custom-sponsored projects (except as licensed to the
customer for its specific application), to the extent that they contain
copyrightable subject matter. There, however, is a dispute with a former
customer regarding the ownership of software developed by NB Engineering for the
customer's production process. It is unlikely that the Company has any patent
protection for any of its services or products. While the Company exercises what
it considers to be reasonable precautions through confidentiality and
non-disclosure agreements to protect its intellectual property, there can be no
assurance that it will not be misappropriated, copied without authorization, or
reverse engineered. In many instances of unauthorized misappropriation, legal
remedies may prove to be inadequate or uneconomical to protect the Company's
intellectual property and competitive advantages.
EMPLOYEES
On February 20, 1997, the Company had 65 employees, of whom 63 were full
time; 48 (47 full time) were employed by Laptop Solutions and 17 (16 full time)
were employed by NB Engineering. The Company has no separate corporate
employees. Employees are not represented by a labor union.
Management believes that employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 41,000 square foot office building in Houston, Texas,
at which its corporate headquarters and principle laptop upgrade and repair
facilities are located and occupy approximately 12,000 square feet. It leases
facilities at the following locations:
LOCATION Approximate PRINCIPAL FACILITY USE LEASE EXPLORATION DATE
-------- SQUARE FEET ---------------------- ----------------------
-----------
Crofton, MD 8,000 Office/Services November, 1997
Irvine, CA 3,411 Office/Services February, 1998
North Bergen NJ 3,000 Office/Services November, 1997
Management is currently seeking a larger facility in which to apply a
film, manufactured by its licensor, designed to reduce an LCD screen's glare and
increase its contrast ratio and luminance. (see item1 - New Product and Service)
Management believes that the Houston, Texas, Crofton, Maryland, and North
Bergen, New Jersey, facilities are suitable for the purposes for which they are
used.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company, and,
except for the threat of proceedings on claims by two former employees of sexual
harassment, to the Company's knowledge, no other proceedings have been
threatened. Based on consultations with special legal counsel, the Company
believes that the harassment claims are without basis, and its intends to
vigorously defend such claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 26, 1995, the shareholders of the Company approved an
amendment to the Company's articles of incorporation by which its outstanding
Company common stock would be subject to a reverse stock split conditioned upon
the Company's board of directors determining the exact number of outstanding
shares to be reverse split into 1 share. Pursuant to a determination of the
board of directors, a 1- for -5 reverse split was effected as of May 20, 1996.
The Company's 1996 annual meeting of shareholders was held on June
17, 1996. At the meeting the shareholders were asked to approve an amendment and
restatement to the Company's 1992 Incentive Stock Option Plan in order to (i)
increase the number of shares reserved for issuance under the Plan to 250,000;
(ii) add provisions whereby upon joining the Board and upon each subsequent
reelection to the Board, non-employee directors would automatically receive
options to purchase up to 2,000 shares of the Company's Common Stock; (iii) add
provisions to permit the granting of Non-Qualified Stock Options to consultants,
advisors, and representatives of the Company; (iv) replace the limitation
whereby the fair market value of Incentive Stock Options granted to an
individual during any calendar year can not exceed $100,000, with a provision
permitting an individual to exercise Incentive Stock Options for shares having a
fair market value of $100,000 during any calendar year; and (v) extend the term
of the Plan from March 2002 to April 2006. The proposal was approved by the vote
of the holders of 3,284,584 (pre-split) shares in favor and 0 (zero) shares
against.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCK MATTERS
MARKET FOR COMMON STOCK
The Company's common stock is traded in the over-the-counter market
under the National Association of Securities Dealers Inc. OTC Bulletin Board
symbol ESVC. From December 1, 1991 to June 16, 1993 there were no reported
trades of the Company's common stock. Set forth below are the high and low bid
and ask prices of the Company's common stock, adjusted for the periods prior to
May 20, 1996 to reflect a 1-for-5 reverse stock split effected as of that date,
as reported on the OTC Bulletin Board for its fiscal years ended November 30,
1995 and 1996.
BID ASK
1995 HIGH LOW HIGH LOW
---- ---- --- ---- ---
Dec. 1 5 3-1/8 6-7/8 5-5/8
through
Feb. 28
March 1 14-3/8 4-1/16 17-1/2 5-15/16
through
May 30
June 1 13-3/4 8-3/4 19-3/8 12-1/2
through
August 30
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Sept. 1 11-1/4 3-3/4 15 7-1/2
through
Nov. 30
1996
Dec. 1 6-7/8 1-7/8 8-3/4 3-1/8
through
Feb. 28
March 1 5 1-1/4 6-9/16 2-1/2
through
May 30
June 1 6-1/4 3-3/4 6-1/2 4-1/2
through
August 30
Sept. 1 7-1/4 5-1/2 7-1/2 6-1/4
through
Nov. 30
Dec. 2 5-1/2 2-1/2 6 3-11/16
Through
Feb. 20, 1997
The prices presented are bid and ask prices which represent prices between
broker-dealers and do not include retail mark-ups and mark-downs or any
commissions to the broker-dealer. The prices do not reflect prices in actual
transactions.
HOLDERS
As of January 14, 1997, there were 224 holders of record of the Company's
common stock.
DIVIDENDS
The Company has not paid any dividends on its common stock and does not
expect to do so in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 and
processing services for marketing, training, archival storage, video formatting
and other applications. The Company's portable computer services and products
are provided through its 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 consolidated results of operations and position for and as of
the end of its twelve months ended November 30, 1996 are not comparable to the
prior year's twelve month period because: (1) NB Engineering was acquired at the
end of the prior year's second quarter, on May 31, 1995, and it is accordingly
included in the prior year's results of operations only for the six months ended
November 30, 1995, (2) Laptop Solutions-California was formed during the second
quarter of 1995 and it is accordingly included in the prior year's results of
operations only for the nine months ended November 30, 1995, and (3) the Company
acquired its office building in Houston, Texas, at the end of its second
quarter, on May 25, 1995, and it is accordingly included in the results of
operations only for the six months ended November 30, 1995.
A. OPERATIONS OF LAPTOP SOLUTIONS-TEXAS
Laptop Solutions-Texas' results of operations for twelve months ended November
30, 1996 and 1995 are summarized below:
1996 1995 CHANGE (%)
---------- ---------- ----------
Sales .......................... $3,576,722 $4,509,332 (20.7)%
Cost of sales
exclusive of depreciation
and salaries) .................. 1,419,446 2,028,312 (30.0)%
---------- ----------
Gross Profit ................... 2,157,276 2,481,020 (13.1)%
Operating &
Other Expenses ........... 2,155,458 2,179,082 (1.1)%
Net Income,
before income taxes ............ $ 1,818 $ 301,938 (99.4)%
========== ==========
SALES: Laptop Solutions-Texas continues to encounter significantly more
competition in providing enhancement and upgrade services than in 1995.
Increased competition for enhancement and upgrade services and a decline in per
unit revenue arising from a drop in industry pricing for the services' primary
component contributed to a decrease in revenues from such service, of $1,614,229
in 1996 to $1,470,127 from $3,084,986 in 1995, a decrease of 52%. Revenue from
Compatibility Plus(TM) sales, the removable hard disk pak that began shipping in
the fourth quarter of 1996, amounted to $87,071. Revenues from
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repair and warranty services increases from $1,404,532 in 1995 to $1,816,190 in
1996, an increase of 29.8%. Management believes the increase is a result of
greater visibility of Laptop Solutions as a service provider and the increased
population of portable computers users seeking a service provider. Revenues from
asset management services, a service first offered in 1996, amounted to
$149,663. All other services increased $33,226 from $20,445 in 1995 to $53,671
in 1996, an increase of 163%, primarily as a result of customer outsourcing such
services as backup and restore, reloading database and database software, virus
removal and other software related services.
COST OF SALES: Cost of sales of enhancements and upgrade services decreased as a
result of the drop in industry pricing for the services' primary component in
1996 to $672,701 from $1,453,580 in 1995, a decrease of 54%. Cost of sales of
repair services increased $177,349 in 1996 to $651,469 from $474,120, an
increase of 37% as a result of more contract maintenance units being presented
for repair than in 1995. Cost of Compatibility Plus(TM) amounted to $45,583. All
other direct cost of sales, primarily freight expense, decreased $50,919 to
$49,693 in 1996 from $100,612 in 1995, a decrease of 51%, as a result of a new
freight contract and changes in the recovery of freight cost from customers.
OPERATING AND OTHER EXPENSES: Salaries in 1996 amounted to $1,148,181 as
compared to $1,052,045 in 1995, an increase of 9.1%. Personnel and related cost
increases were primarily due to a 29% increase in warranty and repair services
and additional administrative personnel. Rental increased from $117,035 in 1995
to $181,714 in 1996, an increase of 55%, as a result of increased office and
warehouse space and additional rented office equipment. Laptop Solutions-Texas
was charged a market rate for its office and warehouse space by the Company in
the amounts of $104,000 for fiscal 1996 and $26,000 during fiscal 1995, and such
amounts are included in Operating and Other Expenses. Other operating expenses,
included payroll taxes, professional and consulting fees, travel, telephone and
other general and administrative expenses, decreased from $1,010,002 in 1995 to
$875,563 in 1996, a decrease of 15%, primarily as a result of decreased sales.
Management believes that for Laptop Solutions-Texas to achieve profits similar
to prior periods will require greater volume than was required in the past, and
there can be no assurance that Laptop Solutions-Texas will be able to achieve
such volume.
B. FORMATION AND OPERATIONS OF LAPTOP SOLUTIONS-CALIFORNIA
During the second fiscal quarter of 1995, the Company formed Laptop
Solutions-California to perform upgrade and repair services for portable
computers on the west coast.
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Laptop Solutions-California's results of operations for twelve months ended
November 30,, 1996 and nine months ended November 30, 1995 are summarized below.
For pro forma presentation purposes, the Annualized Percentage Changes shown in
the table below calculates the percentages for fiscal 1995 by annualizing the
1995 nine months' actual amounts.
Annualized
Twelve Nine ------------------
Months Months Change Change
1996 1995 (%) (%)
---------- ---------- ------- ------
Sales ......................... $ 431,788 $ 164,286 162.8 % 97%
Cost of sales
(exclusive of depreciation
and salaries) ................. 219,823 55,115 298.8 % 199%
---------- ----------
Gross Profit .................. 211,965 109,171 94.2 % 46%
Operating &
Other Expenses .............. 440,275 272,123 61.8 % 21%
---------- ----------
Net Income before
income taxes ................ $(228,310) $(162,952) (40.1)% (5)%
========== ==========
The factors relating to Laptop Solutions-Texas, discussed above, generally
also apply to Laptop Solutions-California. 1995 was a startup year for Laptop
Solutions-California's warranty and repair services. The Company in 1996 formed
Solutions Engineering Division, and its management, technical and administrative
personnel are included in Laptop Solutions-California's operating expenses for
1996.
The following discussion of the comparison of the results of operations have
been adjusted to annualize the results of operations for 1995, while 1996 is
actual. Repair sales decreased 20% in 1996 to $175,600 from annualized sales of
$219,048 in 1995. Solutions Engineering Division completed a project in the
fourth quarter of 1996 with revenue of $256,188, or 59% of Laptop
Solutions-California's total revenue for 1996. Cost of sales increased $164,708
in 1996 primarily as a result of sales by Solutions Engineering Division.
Operating and other expenses increased 21% primarily as a result of increased
salaries and related payroll expenses of the Solutions Engineering Division.
-12-
<PAGE>
C. ACQUISITION AND OPERATIONS OF NB ENGINEERING, INC.
The Company entered into the custom digital video compression and multimedia
development services businesses through the acquisition of NB Engineering, Inc.
on May 31, 1995.
NB Engineering's results of operations for twelve months ended November 30,
1996 and six months ended November 30, 1995 are summarized below. For pro forma
presentation purposes, the Annualized Percentage Changes shown in the table
below calculates the percentages for fiscal 1995 by annualizing the 1995 six
months' actual amounts.
Twelve Six Annualized
months months Change Change
1996 1995 (%) (%)
----------- ----------- ---- ---
Sales ........................ $ 1,129,128 $ 1,471,298 (23.3)% (62)%
Cost of sales
(exclusive of depreciation
and salaries) ................ 234,967 676,768 (65.3)% (83)%
----------- -----------
Gross Profit ................. 894,161 794,530 12.5 % (44)%
Operating &
Other Expenses ............. 1,688,544 1,266,895 33.3 % (33)%
Net Income Before
income taxes ............... $ (794,383) $ (472,365) (68.2)% (16)%
=========== ===========
SALES: Hardware integration sales in fiscal 1996 were $218,715, a decline of 85%
from NB Engineering's 1995 annualized sales, as rapid changes in technology
reduced demand for the product. Engineering sales in 1996 were $353,415, a
decline of 56% from the 1995 annualized 1995 sales. The decline in hardware
integration sales were primarily responsible for the decline in engineering
sales. Compression sales in 1996 were $556,998, a decline of 23% from annualized
1995 sales primarily because the unit volume of compression sales measured in
minutes of data compression decreased 3% in 1996 from annualized 1995 sales
while competitive pricing resulted in a decrease of price per minute of data
compression in 1996. NB Engineering, during fiscal 1996, changed the direction
and focus of its business from hardware integration and engineering services to
digital video compression, including DVD, and multimedia development services.
(see Item 1. Description of Business - Multimedia Services.) The decline in
hardware integration and engineering business and the consequent change of
business focus are the primary causes for the decline in sales for fiscal 1996.
COST OF SALES: Cost of sales in 1996 decreased 83% from the annualized 1995 cost
of sales as a result of the decline of hardware integration and engineering
sales, as well as the overall decline in revenues.
OPERATING AND OTHER EXPENSES: Operating and other expenses of $1,688,544
declined 33% from the annualized 1995 expenses. The decline was primarily a
result of the decline in sales and a related reduction in variable expenses,
including salaries, commissions, payroll taxes, health insurance telephone, bad
debts and telephone expense that amounted to $898,820 in 1996, or a 48% decline
from annualized fiscal 1995. All other operating expenses decreased 12% in
fiscal 1996 from annualized 1995 amounts.
-13-
<PAGE>
D. ENHANCED SERVICES COMPANY, INC., ACQUISITION OF OFFICE BUILDING IN HOUSTON,
TEXAS
The Company, on May 31, 1995, acquired an office building in Houston, Texas.
Results of operations related to the office building for twelve months ended
November 30, 1996 and six months ended November 30, 1995 are summarized below.
For pro forma presentation purposes, the Annualized Percentage Changes shown in
the table below calculates the annualized percentage for fiscal 1995 by
annualizing the 1995 six months' actual amounts.
Twelve Six Annualized
months months Change Change
1996 1995 (%) (%)
--------- --------- ------- ---
Rental Income ........... $ 219,018 $ 66,079 231.5 % 66%
Cost of Building
Operations ........... 268,400 114,454 134.5 % 17%
--------- ---------
Net Income,
before income taxes ..... $ (49,382) $ (48,375) (2.1)% 49%
========= =========
Laptop Solutions-Texas uses a portion of the building for its offices and
warehouse facilities. Certain additional office space is leased to other
tenants. As of the end of 1995, the vacancy rate was approximately 50%. Leases
signed during the third and fourth quarters reduced the vacancy rate to 17% at
the end of 1996. The increase from 1995, on an annualized basis, in revenue of
66% and the related increase in cost of operating the building of 17% are the
result of increased occupancy. Laptop Solutions-Texas was charged a market rate
for its office and warehouse space by the Company in the amounts of $104,000 for
the year 1996 and $26,000 for 1995 and are included in Rental Income. Management
believes that, attributing a market rental rate charge to Laptop
Solutions-Texas, the building should break-even at the present level of
occupancy.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1996, the Company had stockholders' equity totaling
$1,722,857 as compared to $2,524,708 at November 30, 1995, a decrease of
$801,851. This decrease resulted from a net loss of $1,070,064, the issuance of
1,940 shares of stock valued at $1,213, the exercise of 89,000(post-split)
warrants for a cash consideration of $143,100 and a discount on warrants granted
of $123,900 during the twelve month period ended November 30, 1996. The
Company's working capital was $189,310 at November 30, 1996 as compared to
$679,252 at November 30, 1995, a decrease of $489,942. This decrease was
primarily the result of the net loss for the period and the utilization of the
Company's working capital loan.
The Company executed a working capital loan agreement in the amount of
$500,000 on January 19, 1996 (amended as of June 1, 1996). The loan is due May
31, 1997 with interest paid monthly at 2% above the prime rate and is secured by
accounts receivable and inventory. The Company borrowed $500,000 as of November
30, 1996.
Effective December 31, 1996, the Company completed the minimum portion of a
private offering of its 8.6% Cumulative Convertible Preferred Stock to
investors. The closing resulted in gross proceeds to
-14-
<PAGE>
the Company of $800,000, and net proceeds of approximately $765,000.
Management plans that income generated from operations, along with the
private placement funds, will be sufficient to implement planned capital
expenditures of approximately $150,000 and product development expenditures of
approximately $250,000 during 1997 contribute to the financing of the Company's
operations. NB Engineering, Laptop Solutions-Texas and -California plan to
obtain purchase commitments during the first and second quarter of 1997 that
will provide funds to finance their operations and repayment of the working
capital loan. 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.
-15-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ENHANCED SERVICES COMPANY, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
November 30, 1996 and 1995
-16-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
November 30, 1996 and 1995
Table of Contents
PAGE
Report of Independent Certified Public Accountants 18
Consolidated Financial Statements:
Consolidated Balance Sheet 19
Consolidated Statements of Operations 20
Consolidated Statement of Changes in Stockholders'
Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
-17-
<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, 1996 and related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the two years ended November 30, 1996 and 1995. 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, 1996 and the
results of its operations, its changes in stockholders' equity and its cash
flows for the two years ended November 30, 1996 and 1995 in conformity with
generally accepted accounting principles.
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
January 14, 1997
-18-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
November 30, 1996
Current Assets
Cash in bank ............................................. $ 156,432
Inventory ................................................ 551,603
Accounts receivable, net of allowance
for doubtful accounts of $42,863 ....................... 992,379
Other current assets ..................................... 105,180
-----------
Total Current Assets ................................... 1,805,594
Property and equipment, net of accumulated
depreciation of $505,650 (Notes 2 and 7) ...................... 1,241,273
Goodwill net of accumulated amortization
of $236,775 (Note 3) .......................................... 868,152
Other assets .................................................... 47,544
-----------
Total Assets .................................................... $ 3,962,563
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses .................... $ 861,279
Notes payable, current portion (Note 7) .................. 698,960
Mortgage payable, current portion (Note 7) ............... 9,229
Other current liabilities ................................ 46,816
-----------
Total Current Liabilities .............................. 1,616,284
Mortgage payable, net of current portion (Note 7) ............... 602,878
Other liabilities ............................................... 20,544
-----------
Total Liabilities ........................................ 2,239,706
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;
1,103,174 shares issued and
outstanding ............................................ 1,103
Additional paid-in capital ............................... 2,397,063
Accumulated (deficit) .................................... (675,309)
-----------
Total Stockholders' Equity ............................... 1,722,857
-----------
Total Liabilities and Stockholders' Equity ...................... $ 3,962,563
===========
The accompanying notes are an integral part of the financial statements.
-19-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30
1996 1995
----------- -----------
Revenue:
Sales ................................. $ 5,051,296 $ 6,210,996
Cost of sales (exclusive
of depreciation and salaries
shown separately below) ............. 1,758,255 2,790,515
----------- -----------
Gross Profit ....................... 3,293,041 3,420,481
----------- -----------
Operating Expenses
Salaries .............................. 2,071,278 1,706,275
Bad debts ............................. 35,170 123,327
Advertising ........................... 189,090 182,412
Rent .................................. 181,714 117,035
Amortization of goodwill .............. 157,848 78,926
Depreciation .......................... 274,600 180,405
Other operating expenses .............. 1,406,074 1,471,905
----------- -----------
Total Operating Expenses ............ 4,315,774 3,860,285
----------- -----------
Net Operating (Loss) ....................... (1,022,733) (439,804)
----------- -----------
Other Income (Expenses)
Investment income ..................... 695 20,888
Interest expense ...................... (48,026) (41,718)
----------- -----------
Total Other ......................... (47,331) (20,830)
----------- -----------
Net (Loss) ................................. $(1,070,064) $ (460,634)
=========== ===========
Net (Loss) per Share ....................... $ (1.01) $ (.51)
=========== ===========
Weighted Average Shares Outstanding ........ 1,058,480 900,492
=========== ===========
The accompanying notes are an integral part of the financial statements.
-20-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1994 through November 30, 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained Earnings/
--------------------- Paid-in Accumulated
Shares Amount Capital (Deficit) Total
---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
Common stock issued ........................... 1,940 2 1,211 -- 1,213
Reverse stock split ........................... (4,056,694) (4,057) 4,057 -- --
Common stock issued, exercise of warrants ..... 89,000 89 266,911 -- 267,000
Net (loss) for the year ended November 30, 1996 -- -- -- (1,070,064) (1,070,064)
---------- ------- ---------- ----------- -----------
Balance at November 30, 1996 .................. 1,103,174 $ 1,103 $2,397,063 $ (675,309) $ 1,722,857
========== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-21-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30
1996 1995
----------- ---------
Cash Flows from Operating Activities:
Net (loss) ................................ $(1,070,064) $(460,634)
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization ......... 432,448 259,331
(Decrease) in accounts payable
and accrued expenses ................. (227,165) (309,327)
(Increase) decrease in accounts
receivable ........................... (306,555) 377,167
(Increase) decrease in inventory ...... 70,562 (146,215)
(Increase) in income tax refund
receivable ........................... 128,800 (128,200)
Increase (decrease) in
income taxes payable ................. -- (174,269)
Other, net ............................ 49,412 (151,999)
----------- ---------
Net Cash (Used in) Operating
Activities ............................... (922,562) (734,146)
----------- ---------
Cash Flows from Investing Activities:
Disposition of investments ................ -- 722,717
(Purchases) of property and
equipment ................................ (63,707) (288,197)
----------- ---------
Net Cash Provided by (Used
in) Investing Activities ................. (63,707) 434,520
----------- ---------
Cash Flows from Financing Activities:
Proceeds from notes payable ............... 665,000 --
Principal payments on notes
and mortgages payable .................... (21,750) (11,695)
Common stock issued ....................... 144,313 293,750
----------- ---------
Net Cash Provided by Financing
Activities ............................... 787,563 282,055
----------- ---------
(Decrease) in Cash ............................. (198,706) (17,571)
Cash, Beginning of Period ...................... 355,138 372,709
----------- ---------
Cash, End of Year .............................. $ 156,432 $ 355,138
=========== =========
Interest Paid .................................. $ 48,026 $ 41,718
=========== =========
Income Taxes Paid .............................. $ -- $ 302,469
=========== =========
Note: In addition, during the year ended November 30, 1995, the Company issued
855,596 (post-split 171,119) shares of its restricted common stock for the
acquisition described in Note 1, and it assumed liabilities totaling
approximately $1,212,000 as part of the acquisition of NB Engineering, Inc.
The accompanying notes are an integral part of the financial statements.
-22-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
November 30, 1996 and 1995
(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. (NB), 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. NB 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 NB since May 31, 1995, the date of the acquisition of NB. All
inter-company 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.
-23-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(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. The shares outstanding for
purposes of computing per share information have been
retroactively adjusted for the one-for-five reverse stock split.
(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, 1996 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. The Company grants credit to various business and
entities, principally in the U.S.A. The Company does not require
collateral for its accounts receivable.
-24-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(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.
(j) ADVERTISING COSTS
Advertising costs are expenses as incurred.
(2) PROPERTY AND EQUIPMENT
As of November 30, 1996 the Company's property and equipment is
summarized as follows:
Office building and land $ 778,341
Furniture and equipment 968,582
-----------
1,746,923
Accumulated depreciation (505,650)
-----------
$ 1,241,273
===========
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.
-25-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(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
pre-split) 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.
-26-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(4) OPTIONS AND WARRANTS OUTSTANDING
The Company has granted certain stock options to employees, consultants
and directors of the Company. As of November 30, 1996, options to
acquire an aggregate of 114,500 shares of common stock were outstanding,
of which options to acquire 100,750 shares were currently exercisable.
The exercise prices for these options ranges from $2.50 to $9.15.
Certain options are subject to vesting provisions. During the year ended
November 30, 1995, 29,300 (post-split) options were granted at an
exercise price of $9.15 per share and 8,000 (post-split) granted at an
exercise price of $9.15 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 6,826 (post-split)
options were exercised during the year ended November 30, 1995 at an
exercise price of approximately $2.50 per share. Outstanding options
expire at various dates through the year 2002.
(5) OPERATING LEASES
The Company leases or rents various equipment and facilities. Future
commitments under these operating leases, with leases terms exceeding
twelve months total approximately:
Year ending November 30:
1997 $ 64,853
1998 46,129
1999 1,061
2000 150
(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 (pre-split) common stock
purchase warrants to CBS. These warrants are exercisable for a one year
period which commenced March 13, 1995 as follows:
100,000 (pre-split) exercisable at $1.00 per share
143,000 (pre-split) exercisable at $1.25 per share
100,000 (pre-split) exercisable at $1.50 per share
-27-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(6) CONSULTING AGREEMENT, CONTINUED
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 (pre-split) warrants
were exercised at $1.00 per share, 143,000 (pre-split) were exercised at
$1.25 per share, and 100,000 (pre-split) warrants at $1.50 per share
were unexercised and expired. During the year ended November 30, 1996
the Company granted 25,750 (post-split) options at $3.25 per share.
During the year ended November 30, 1996, 210,000 (pre-split) warrants
were issued to CBS with an exercise price of $.01 per share. In
addition, the Company issued 335,000 (pre-split) warrants to CBS at $.60
per share. During the year ended November 30, 1996 the 210,000
(pre-split) warrants were exercised at $.01 per share and 235,000
(pre-split) warrants were exercised at $.60 per share. The remaining
100,000 (pre-split) warrants were exercised subsequently during
December, 1996. The difference between the exercise price of the
warrants issued during the year ended November 30, 1996 and the market
value of the shares amounting to $123,900 is being amortized as an
expensed consulting fee over the twelve month term of the CBS agreement.
The president of CBS is a cousin of the president of the Company.
(7) NOTES AND MORTGAGES PAYABLE
As of November 30, 1996 the Company has a mortgage note payable totaling
$612,107, collateralized by the office building and land. Monthly
payments including principal and interest at 12% per annum amount to
$6,849. Included in notes payable is $75,000 payable to an entity
affiliated with the Company's president. This amount was loaned to the
Company in November, 1996 and repaid subsequent to November 30, 1996.
This balance payable had no written repayment terms and was
uncollateralized. Also, included in notes payable is $623,960 of various
notes payable to a bank and other entities. These notes bear interest at
rates which average approximately 10% per annum and are collateralized
by various equipment and accounts receivable. All of the notes payable
other than the mortgage note payable mature during the year ended
November 30, 1996. Principal payments due on the mortgages and notes
payable are summarized as follows:
-28-
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1996 and 1995
(7) NOTES AND MORTGAGES PAYABLE, CONTINUED
Year ending November 30,
1996 $ 56,010
1997 77,237
1998 10,503
1999 11,836
2000 579,719
--------
Total $735,305
========
In June, 1996 the Company issued options for 10,000 (post-split) shares
of the Company's stock with an exercise price of $4.00 per share
expiring May 31, 2000, as additional consideration for a loan the
Company received.
(8) INCOME TAXES
The Company has net operating loss carryovers of approximately $675,000
expiring in the year 2011. As of November 30, 1996 the Company has total
deferred tax assets of approximately $135,000 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 $135,000 therefore, no tax assets have been recorded in the
financial statements as of November 30, 1996.
(9) SUBSEQUENT EVENT
Subsequent to November 30, 1996, the Company received gross proceeds of
$800,000 related to a private placement securities offering. The
offering consisted of units of 500 shares of 8.6% cumulative preferred
stock at $100.00 per share. The units were sold for $50,000 per unit.
Each share of preferred will automatically convert into 22 shares of
$.001 par value common stock on the second anniversary of the closing.
The Company has outstanding an offering of an additional $700,000 of
units with the same terms.
The following summary gives effect to the $800,000 private placement as
if this transaction had occurred on November 30, 1996:
Total assets $4,730,109
Total stockholders' equity $2,490,403
Offering costs related to this private placement totaled $32,454.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the Company's two most recent fiscal years, it has not changed
accountants nor had disagreements with its accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures.
PART III
ITEM 9. DIRECTORS AND OFFICERS.
The directors, executive officers and key employees of the Company are as
follows:
NAME AGE POSITION
---------------------- --------- -----------------------------------
President, Chief Executive
Officer and director of the
Company and Laptop Solutions,
Inc., and director of NB
Kenneth M. Duckman 44 Engineering, Inc.
Secretary and Director of the
Bertram Pariser, Company, Laptop Solutions, Inc.,
Ph.D. 56 and NB Engineering, Inc. (1)(2)
Director of the Company and
John Meaney 47 Laptop Solutions, Inc.(1)(2)
Director of the Company and
Michael Bernard 44 Laptop Solutions, Inc.(1)(2)
President, NB Engineering, Inc.
and director of the Company and
Ralph LaBarge 41 NB Engineering, Inc.
Chief Financial Officer and
Treasurer of the Company and
Robert Smith 57 Laptop Solutions, Inc.
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Stock Option Committee.
MR. KENNETH M. DUCKMAN has been President and Chief Executive Officer and a
director of the Company since September, 1992. Mr. Duckman has been Chairman of
the Board, President and Chief Executive Officer of Laptop Solutions, Inc. since
its inception in February, 1991, and a director of NB Engineering since June
1995. Mr. Duckman was the founder of LTC Technologies, Inc., d/b/a Source One
Systems (field automation technology specialists) and served as its President
from December, 1984 to February, 1991. In February, 1990, LTC was acquired by
Spectrum Information Technologies, Inc. (diversified technology), and from
February, 1990 to January, 1991 Mr. Duckman served as a member of its Board of
Directors and as vice-president of Corporate Development.
-30-
<PAGE>
DR. BERTRAM PARISER has been a director of the Company and Laptop Solutions,
Inc. since May, 1993, and Secretary of the Company and LSI since December, 1993.
In June, 1995 he became a director and secretary of NB Engineering, Inc. Since
1966, he has been the President of M.I.T.C.U. Corporation, which provides
consultation to investment banking firms and private clients. Since 1991, Dr.
Pariser has also been a member of the faculty at Technical Career Institutes, in
the department of electronic engineering technology, lecturing in physics. Dr.
Pariser earned a B.S. degree from M.I.T. in 1961 and an M.S. and Ph.D. in
electrical engineering from Columbia University in 1963 and 1965, respectively.
Dr. Pariser is a cousin of Mr. Duckman.
MR. JOHN MEANEY has been a director of the Company and LSI since December,
1993. From 1972 to 1986, Mr. Meany served in a variety of sales and management
positions with IBM. From 1986-1988, he served as Director of Product Marketing
at NYNEX Business Centers in Atlanta, GA. As a Director of the Southern Region
for Toshiba from 1988 to 1992, Mr. Meaney had responsibility for building the
region to the leading producer for Toshiba. From 1992 to 1996, Mr. Meaney served
as Vice-President and General Manager of for the Panasonic Personal Computer
Company and, since 1996, is currently the Vice-President of Sales for Olicom,
Inc. Mr. Meaney earned his BA in Economics from the University of Notre Dame in
1968 and his MBA in Marketing and Finance from Long Island University and
Fairleigh Dickenson University in 1982.
MR. MICHAEL BERNARD has been a director of the Company and LSI since March,
1993. Mr. Bernard is currently the President and CEO of a start-up software
company, MindMap Software Corporation. Prior to this, he was a consultant in the
field of international marketing and distribution for high technology
communications and computer products. From 1991 through 1992, Mr. Bernard was
Vice-President, International Sales and Marketing, for Portable Products at U.S.
Robotics, Inc. (computer modems). Prior to its acquisition by U.S. Robotics,
Inc., Mr. Bernard was the co-founder of Touchbase Systems, Inc. (modem and
communication products), serving as Director of International Sales and
Marketing from 1985.
MR. RALPH LABARGE has been a director of the Company since June, 1995. Since
founding NB Engineering, Inc. in January, 1985, Mr. LaBarge has served as its
President and Chief Technical Officer. Mr. LaBarge has a bachelors degree in
Electrical Engineering from the University of Delaware, a masters degree in
Computer Science from Johns Hopkins University and a masters degree in
Electrical Engineering from Johns Hopkins University. Prior to his employment
with the Company, Mr. LaBarge served as a Principal Engineer for HRB-Singer,
Inc. A State College, PA based defense contractor.
MR. ROBERT SMITH has been Chief Financial Officer of Laptop Solutions, Inc.
since October 1993. Prior to Laptop Solutions, Inc., Mr. Smith served as
President of Horizon Computer Resources, Inc., a full service consulting and
automation advisory firm, since 1986. Prior to founding Horizon, Mr. Smith
served as Chief Financial Officer of Lynn Elliott Company (1980-1986), a
diversified holding company with 19 subsidiaries in the petrochemical industry.
From 1960 to 1980, Mr. Smith was a certified public accountant in public
accounting practice. Mr. Smith received his BS in Accounting from Mississippi
State University in 1961 and his CPA license in 1970.
-31-
<PAGE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held formal six meetings during the
fiscal year ended November 30, 1996. Each Director other than Michael Bernard
and John Meany attended in person (or participated by telephone in) more than
75% of the total number of Board of Directors' meetins held during the last
fiscal year. The Board of Directors has no standing audit or nominating
committees. The Board has a Compensation Committee to assist it in reviewing the
compensation levels of officers and directors of the Company, including all
stock option grants made under the Company's Incentive Stock Option Plan. Its
members are Michael Bernard, John Meaney and Bertram Pariser.
COMPENSATION OF DIRECTORS
Directors do not receive a salary for their services as directors, although
they are reimbursed for expenses incurred in attending Board meetings. The
Company has granted its directors non-qualified stock options in consideration
of their services to the Company. In the last fiscal year the Company granted
options for a total of 6,000 shares of its Common Stock to three directors.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth all compensation paid to the Company's
President and Chief Executive Officer during the last three fiscal years. The
Company had no executive officer as of November 30, 1996 who earned in excess of
$100,000 in compensation during the fiscal year then ended.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------- -----------------------
Fiscal All Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ------ ------- ------- ------- --------------
Kenneth M. Duckman 1996 $70,000 $-0- -0- *
President and 1995 $90,000 -0- -0- *
Chief Executive Officer 1994 $60,000 6,000 39,000 *
- --------------
* Constitutes less than 10% of annual compensation.
STOCK OPTIONS
No options were granted to the Company's President and Chief Executive
Officer during the fiscal year ended November 30, 1996.
-32-
<PAGE>
The following table sets forth information concerning options exercised
during the fiscal year ended November 30, 1996 and the number of unexercised
options held by the Company's above named executive officer at the end of such
fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised in-the-Money
Shares Value Options at Options at
Acquired of Realized FY-End(#) FY-End($)
NAME EXERCISE(#) $ EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- -------------------- --------------- --------- -------------------------- ----------------------------
<S> <C> <C> <C> <C>
Kenneth M. Duckman -0- -0- 7,800 $32,214
- -------------------- --------------- --------- -------------------------- ----------------------------
</TABLE>
- --------------------------
(1) Based on the average high/low bid/ask prices of the Company's Common Stock
as reported by the National Quotations Bureau, the fair market value of its
Common Stock as of its fiscal year ended November 30, 1996 was $6.63 per
share.
ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 12, 1997 by (i) each
shareholder who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director of the Company, and (iii) all directors and
officers of the Company as a group.
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS(1) OF BENEFICIAL OWNERSHIP CLASS OUTSTANDING
--------------------------------- ------------------------- -------------------
Kenneth M. Duckman 640,443 (2)(3) 60.6%
Ralph LaBarge
NB Engineering, Inc.
2110 Priest Bridge Drive
Crofton, MD 21114 86,470 (4) 8.2%
Bertram Pariser, Ph.D. 10,000 (5) *
Michael Bernard 14,500 (6) 1.2%
John Meaney 7,000 (7) *
All Directors and Executive
Officers as a Group (6 Persons) 770,913 (8) 69.9%
- -------------------
* Constitutes less than 1%
-33-
<PAGE>
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
Enhanced Services Company, Inc., 16000 Barkers Point Lane, Houston, Texas
77079.
(2) Includes 47,667 shares of Common Stock held by a charitable trust for which
Mr. Duckman is co-trustee.
(3) Includes 7,800 shares underlying stock options for which Mr. Duckman has the
right to acquire.
(4) Includes 2,000 shares underlying stock options for which Mr. LaBarge has the
right to acquire.
(5) Includes 10,000 shares underlying stock options for which Dr. Pariser has
the right to acquire.
(6) Includes 8,000 shares underlying stock options for which Mr. Bernard has the
right to acquire.
(7) Includes 7,000 shares underlying stock options for which Mr. Meaney has the
right to acquire.
(8) In addition to those shares set forth in Notes (2) through (8) above, also
includes 12,500 shares underlying stock options for which one executive
officer has the right to acquire.
ITEM 12. TRANSACTIONS WITH MANAGEMENT AND OTHERS.
On March 13, 1995 the Company entered into an agreement (the "Agreement") with
Creative Business Strategies, Inc. ("CBS"), a beneficial holder, on the exercise
of warrants granted pursuant thereto, of 9.1% of the Company's outstanding
Common Stock. The president of CBS is a cousin of the president of the Company.
Pursuant to the Agreement, CBS is to provide consulting services to the Company
for an initial term of one year. As consideration for all services to be
rendered by CBS under the Agreement, the Company issued to CBS Common Stock
purchase warrants exercisable to purchase, in the aggregate 100,000 (pre-split)
shares of the Company's Common Stock at $1.00 per share, 143,200 (pre-split)
shares at $1.25 per share and 100,000 (pre-split) shares at $1.50 per share. The
warrants to purchase up to 100,000 shares of the Company's Common Stock at an
exercise price of $1.50 per share was not exercised and expired on March 12,
1996.
On April 8, 1996 the Company entered into an agreement (the "96Agreement") with
Creative Business Strategies, Inc. ("CBS"), a beneficial holder, on the exercise
of warrants granted pursuant thereto, of 10.4% of the company's outstanding
Common Stock. Pursuant to the Agreement, CBS is to provide consulting services
to the Company for an initial term of one year. As consideration for all
services to be rendered by CBS under the Agreement, the Company issued to CBS
Common Stock purchase warrants exercisable to purchase, in the aggregate 42,000
(post-split) at $.05 per share, and 67,000 (post-split) shares at $3.00 per
share. During the year ended November 30, 1996 the 42,000 (post-split) warrants
were exercised at $.05 per share and 47,000 (post-split) warrants were exercised
at $3.00 per share. The remaining 20,000 (post-split) warrants were exercised
subsequently during December, 1996. The difference between the exercise price of
the warrants issued during the year ended November 30, 1996 and the market value
of the shares amounting to $123,900 is being amortized as an expensed consulting
fee over the twelve month term of the CBS agreement.
- -34-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
EXHIBIT NO. TITLE
* 3.1 Amended and Restated Articles of Incorporation
** 3.2 Articles of Amendment to Articles of Incorporation
*** 3.2 By-Laws
*** 4.0 Specimen Certificate of Common Stock
**** 4.1 Copy of Company's Amended Stock Incentive Plan
*** 10.1 Copy of signed Stock Transfer Agent Agreement
***** 10.2 Agreement to Exchange Stock, dated as of September 30, 1992
***** 10.3 First Amendment to Agreement to Exchange Stock, dated as
of October 30, 1992
* Incorporated by reference from the Company's Form 10-KSB for its
fiscal year ended November 30, 1994, and filed with the Commission on
or about February 28, 1994.
** Incorporated by reference from the Company's report on Form 8-K as
filed with the Commission on February 7, 1997, as amended under cover
of Form 8-K/A, filed with the Commission on, February 11, 1997
*** Incorporated by reference from the Company's Registration Statement
on Form S-18, SEC Registration No. 33-20399-D.
**** Incorporated by reference from the Company's Proxy Statement for its
1994 Annual Meeting of Shareholders, filed with the Commission on or
about March 30, 1994.
***** Incorporated by reference from the Company's report on Form 8-K as
filed with the Commission on October 15, 1992, as amended under cover
of Form 8, filed with the Commission on November 13, 1992, and as
further amended under cover of Form 8, filed with the Commission on
December 2, 1992.
CURRENT REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the
last quarter of its fiscal year ended November 30, 1996.
-35-
<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: February 26, 1997 By /s/ KENNETH M. DUCKMAN
Kenneth M. Duckman, President
and Chief Executive Officer
Date: February 26, 1997 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: February 26, 1997 /s/ KENNETH M. DUCKMAN
Kenneth M. Duckman, Director
Date: February 26, 1997 /s/ MICHAEL BERNARD
Michael Bernard, Director
Date: February 26, 1997 /s/ RALPH LABARGE
Ralph LaBarge, Director
Date: February 26, 1997 /s/ JOHN MEANEY
John Meaney, Director
Date: February 26, 1997 /s/ DR. BERTRAM PARISER
Dr. Bertram Pariser, Director
-36-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM AUDIT REPORT DATED NOVEMBER 30, 1996, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 156,432
<SECURITIES> 0
<RECEIVABLES> 949,516
<ALLOWANCES> 42,863
<INVENTORY> 551,603
<CURRENT-ASSETS> 1,805,594
<PP&E> 1,746,923
<DEPRECIATION> 505,650
<TOTAL-ASSETS> 3,962,563
<CURRENT-LIABILITIES> 1,616,284
<BONDS> 0
0
0
<COMMON> 1,103
<OTHER-SE> 1,721,754
<TOTAL-LIABILITY-AND-EQUITY> 3,962,563
<SALES> 5,051,296
<TOTAL-REVENUES> 5,051,296
<CGS> 1,758,255
<TOTAL-COSTS> 4,315,774
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,168
<INTEREST-EXPENSE> 48,026
<INCOME-PRETAX> (1,070,064)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,070,064)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
