SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): DECEMBER 31, 1996
ENHANCED SERVICES COMPANY, INC.
(Exact name of registrant as specified in charter)
COLORADO 0-24256 84-1075908
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
16000 BARKERS POINT LANE, HOUSTON, TEXAS 77079
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code 713-566-5051
<PAGE>
Item 5. Other Events.
Effective December 31, 1996, Enhanced Services Company, Inc. (the
"Company") completed the minimum portion of a private offering (the "Offering")
of Units to investors under exemptions from the registration requirements of
Federal and state securities laws. Each Unit consists of 500 shares of the
Company's newly created 8.6% Cumulative Convertible Preferred Stock (the
"Preferred Stock") and was offered at $50,000 per Unit. The Offering, commenced
on October 28, 1996, was for a minimum of 15 Units ($750,000 gross proceeds) and
a maximum of 30 Units ($1.5 million gross proceeds) at $50,000 per Unit ($100
per share of Preferred Stock). The initial closing of 16 Units resulting in
gross proceeds to the Company of $800,000, and net proceeds of approximately
$765,000. The placement of the minimum portion of the offering was completed by
the Company through its officers and directors.
Preferred Stock pays dividends at the rate of 8.6% per annum and is
not subject to redemption. Each share of Preferred Stock sold in this placement
is convertible into 22 shares of the Company's common stock, based on a
conversion price of $4.55 per share. Conversions are at the election of the
Company during the two-year period ending December 30, 1998. All shares of
Preferred Stock sold in this placement which have not been previously converted,
will convert automatically on the second anniversary of the closing. The
conversion rate is subject to adjustment under certain circumstances.
The Company will use the net proceeds from the initial closing of
approximately $765,000 to reduce outstanding debt. The Offering has been
extended until February 28, 1997. The Company plans to use the proceeds of any
future closings of Units to provide working capital.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Unaudited Financial Statement - December 31, 1996 Page 3
(b) Audited Financial Statement - November 30, 1996 Page 9
2
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31 November 30
1996 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash in bank ......................................................... $ 1,146,461 $ 156,432
Inventory ............................................................ 663,787 551,603
Accounts receivable, net of allowance
for doubtful accounts .............................................. 653,167 992,379
Other current assets ................................................. 132,000 105,180
----------- -----------
Total Current Assets ............................................... 2,595,415 1,805,594
Property and equipment, net of accumulated
depreciation ............................................................. 1,222,611 1,241,273
Goodwill, net of accumulated amortization .................................. 854,999 868,152
Other assets ............................................................... 53,209 47,544
----------- -----------
Total Assets ............................................................... $ 4,726,234 $ 3,962,563
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses ................................ $ 871,675 $ 861,279
Notes payable, current portion ....................................... 711,081 698,960
Mortgage payable, current portion .................................... 9,229 9,229
Other current liabilities ............................................ 28,418 46,816
----------- -----------
Total Current Liabilities .......................................... 1,620,403 1,616,284
Mortgage payable, net of current portion ................................... 586,163 602,878
Other liabilities .......................................................... 20,544 20,544
----------- -----------
Total Liabilities .................................................. 2,227,110 2,239,706
----------- -----------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized ........................................ -- --
Preferred stock. 8.6% - Cumulative
Convertible $.001 par value
15,000 authorized, 8,000 issued ................................... 8 --
Common stock - $.001 par value,
15,000,000 shares authorized;
1,103,174 shares issued and
outstanding at November 30, 1996
and 1,123,174 at December 31, 1996 ................................. 1,123 1,103
Additional paid-in capital ........................................... 3,224,581 2,397,063
Retained earnings .................................................... (726,588) (675,309)
----------- -----------
Total Stockholders' Equity ......................................... 2,499,124 1,722,857
----------- -----------
Total Liabilities and Stockholders' Equity ................................. $ 4,726,234 $ 3,962,563
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED UBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
One Month Twelve Months
Ended Ended
December 31 November 30
1996 1996
----------- -----------
Revenue:
Sales ......................... $ 478,053 $ 5,051,296
Cost of sales (exclusive
of depreciation and salaries
shown separately below) ..... 185,465 1,758,255
----------- -----------
Gross Profit ............... 292,588 3,293,041
----------- -----------
Operating Expenses
Salaries ...................... 177,498 2,071,278
Advertising and promotion ..... 12,406 189,090
Bad Debts ..................... -- 35,170
Rent .......................... 28,486 181,714
Amortization of Goodwill ...... 13,154 157,848
Depreciation .................. 17,667 274,600
Other Operating Expenses ...... 100,224 1,406,074
----------- -----------
Total Operating Expenses .... 349,435 4,315,774
----------- -----------
Net Operating Income (Loss) ....... (56,847) (1,022,733)
Other Income(expense) ............. 5,563 (47,331)
----------- -----------
Net income (loss), before provision
for income taxes ................ (51,284) (1,070,064)
Provision for income taxes ........ -- --
----------- -----------
Net Income (Loss) ................. $ (51,284) $(1,070,064)
=========== ===========
Net Income (Loss) per Share ....... $ (.05) $ (1.01)
=========== ===========
Weighted Average Shares Outstanding 1,123,174 1,058,480
=========== ===========
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, 1994 through November 30, 1996
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/
COMMON STOCK 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
--------- -------- ----------- ----------- -----------
Common stock issued, exercise of
warrants ......................................... 20,000 20 59,980 -- 60,000
Net (Loss) for the month ended
December 31, 1996 ................................ -- -- -- (51,284) (51,284)
--------- -------- ----------- ----------- -----------
Balance at December 31, 1996 ...................... 1,123,174 $ 1,123
========= ========
Preferred Stock 8.6% issued ....................... 8,000 $800,000 (32,449) 767,551
--------- -------- ----------- ----------- -----------
Balance at December 31, 1996 ...................... 8,000 $800,000 $ 2,424,594 $ 726,593 $ 2,499,124
========= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended November 30, 1996
the Month of December, 1996
NOV. 1996 DEC. 1996
----------- -----------
Cash Flows from Operating Activities:
Net (loss) ......................... $(1,070,064) $ (51,284)
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization .. 432,448 30,821
(Decrease) in accounts payable
and accrued expenses .......... (227,165) (8,002)
(Increase) decrease in accounts
receivable .................... (306,555) 339,212
(Increase) decrease in inventory 70,562 (112,184)
(Increase) in income tax refund
receivable .................... 128,800 --
Other, net .................... 49,412 30,687
----------- -----------
Net Cash (Used in) Operating
Activities ........................ (922,562) 166,378
----------- -----------
Cash Flows from Investing Activities:
(Purchases) of property and
equipment ......................... (63,707) (804)
----------- -----------
Net Cash Provided by (Used
in) Investing Activities .......... (63,707) (804)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from notes payable ........ 665,000 --
Principal payments on notes
and mortgages payable ............. (21,750) (4,594)
Preferred stock issued ............. -- 767,551
Common stock issued ................ 144,313 60,000
----------- -----------
Net Cash Provided by Financing
Activities ........................ 787,563 990,833
----------- -----------
(Decrease) in Cash ..................... (198,706) 990,029
Cash, Beginning of Period .............. 355,138 156,432
----------- -----------
Cash, End of Year ...................... $ 156,432 $ 1,146,461
=========== ===========
Interest Paid .......................... $ 48,026 $ 4,871
=========== ===========
Income Taxes Paid ...................... $ -- $ --
=========== ===========
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 December 31, 1996, the statements of income and
the statements of cash flows for the month of December, 1996 and the
statement of changes in stockholders' equity for month ended December 31,
1996 have been prepared by the Registrant without audit. All references to
the financial statements dated November 30, 1996 are audited, and is
included as Exhibit X. 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
December 31, 1996, 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 the number of outstanding shares of common stock in the
financial statements have been adjusted to give effect to such split.
7
<PAGE>
(4) PRIVATE PLACEMENT OF 8.6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company commenced, on October 28, 1996 offering for sale, through a
confidential offering memorandum, 30 units of 8.6% Cumulative Convertible
Preferred Stock. Each unit consisted of 500 shares at the issue price of
$100.00 each. The cumulative preferred stock is automatically convertible
into 22 shares of common stock on the second anniversary date of the
closing. The Company closed 16 units with net proceeds of $767,546 as of
December 31, 1996 and the offering was extended until February 28, 1997
with the intent to close the remaining 14 units with gross proceeds of
$700,000. (see item 5 for a more complete description)
8
<PAGE>
Item 7 (b) - Audited Financial Statement dated November 30, 1996
ENHANCED SERVICES COMPANY, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
November 30, 1996 and 1995
9
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
November 30, 1996 and 1995
Table of Contents
PAGE
Report of Independent Certified Public Accountants .....
Consolidated Financial Statements:
Consolidated Balance Sheet .......................
Consolidated Statements of Operations ............
Consolidated Statement of Changes in Stockholders'
Equity ..........................................
Consolidated Statements of Cash Flows ............
Notes to Consolidated Financial Statements .......
10
<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
11
<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.
12
<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.
13
<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>
RETAINED
ADDITIONAL EARNINGS/
COMMON STOCK 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.
14
<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.
15
<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.
16
<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.
17
<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.
18
<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.
19
<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
20
<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
this 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:
21
<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.
22
<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 there unto duly authorized.
Dated: February , 1997
ENHANCED SERVICES COMPANY, INC.
(Registrant)
By: /s/ KENNETH M. DUCKMAN
Kenneth M. Duckman, President
and Chief Executive Officer
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<PAGE>
EXHIBIT (3)(A)(I) FORM OF ARTICLES OF AMENDMENT TO THE ARTICLES OF
INCORPORATION THE COMPANY AS FILED WITH THE COLORADO SECRETARY OF
STATE ON JANUARY 9, 1997.
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC.
CREATING
8.6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
(PURSUANT TO SECTION 7-106-102 OF THE
COLORADO BUSINESS CORPORATION LAW)
Pursuant to SECTION 7-106-102 of the Colorado Business Corporation
Act of the State of Colorado (the "CBCA") and SECTION 2 OF ARTICLE IV of the
Articles of Incorporation of Enhanced Services Company, Inc., a corporation
organized and existing under the CBCA (this "CORPORATION"), this Corporation
hereby adopts the following Articles of Amendment to its Articles of
Incorporation:
FIRST: The name of this Corporation is Enhanced Services Company, Inc.
SECOND: The following amendment to the Articles of Incorporation was
adopted on October 2, 1996, as prescribed by SECTION 7-106-102 of the CBCA, by
the Board of Directors of Directors of this Corporation, no action of the
shareholders being required pursuant to ARTICLE IV of the Articles of
Incorporation of this Corporation:
ARTICLE IV of the Articles of Incorporation shall be amended by
adding the following section, designating a class of authorized Preferred
Stock, par value $.001 per share, of this Corporation, and the designation
and amount thereof and the voting powers, preferences and relative
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are
all follows:
Section 3. 8.6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.
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<PAGE>
3.1 DESIGNATION AND AMOUNT; DEFINITIONS. The shares of such
series shall be designated as the "8.6% Cumulative Convertible
Preferred Stock" (the "8.6% PREFERRED STOCK") and the number of
shares initially constituting such series shall be 15,000, which
number may be decreased by the Board of Directors without a vote of
stockholders; PROVIDED, HOWEVER, that such number may not be
decreased below the number of then currently outstanding shares of
8.6% Preferred Stock. Capitalized terms used herein and not
otherwise defined have the meanings ascribed to them in SECTION 3.8.
3.2 DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
8.6% Preferred Stock, in preference to the holders of Common Stock,
par value $.001 per share, of this Corporation (the "COMMON Stock")
and of any other stock ranking junior to the 8.6% Preferred Stock as
to the payment of dividends ("JUNIOR STOCK"), shall be entitled to
receive, when, as and if declared by the Board of Directors out of
funds legally available for the payment of dividends, cumulative
dividends payable in cash, at the annual rate of $8.60 per share,
and, subject to the other provisions of this SECTION 3.2, no more.
Dividends payable in respect of the outstanding shares of the 8.6%
Preferred Stock shall begin to accrue and be cumulative from the
respective dates of original issue of such shares (which dates shall
be reflected on the certificates evidencing the same), and shall be
payable in quarterly payments on March 15, June 15, September 15,
and December 15 (or, if any such day is not a Business Day, the
Business Day next preceding such day) in each year (each such date
being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE" and
any dividend not paid on such date being referred to herein as "PAST
DUE") for each of the fiscal quarters ended February 28, May 30,
August 30 and November 30, respectively, commencing in respect of
each share of 8.6% Preferred Stock on the first Quarterly Dividend
Payment Date which is at least 10 days after the date of original
issue thereof.
(b) The amount of dividends payable shall be determined
on the basis of twelve 30-day months and a 360 day year. Dividends
paid on the shares of 8.6% Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable
on such shares shall be allocated PRO RATA on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date ( a "REGULAR RECORD DATE") for the
determination of holders of shares of 8.6% Preferred Stock entitled
to receive payment of a dividend declared thereon, which record date
shall be not more than 60 days nor less than ten days prior to the
date fixed for the payment thereof. Any dividend declared by the
Board of Directors as payable and punctually paid or Set Apart for
Payment on a Quarterly Dividend Payment Date will be paid to the
Persons whose names 8.6% Preferred Stock is registered at the close
of business on the Regular Record Date set with respect to that
Quarterly Dividend Payment Date (the "REGISTERED HOLDERS"). Any
dividend not so paid or Set Apart for Payment shall forthwith cease
to be payable to such Registered Holders and may
25
<PAGE>
be paid to the Registered Holder at the close of business on the
record date for the payment of such defaulted dividends and interest
to be fixed on the Board of Directors (a "SPECIAL RECORD DATE"). The
Board of Directors shall provide Registered Holders of 8.6%
Preferred Stock not less than 10 days' prior notice of a Special
Record Date. All such payments shall be made in such coin or
currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts.
(c) The holders of shares of 8.6% Preferred Stock shall
not be entitled to receive any dividends or other distributions in
respect of such shares of 8.6% Preferred Stock, except as provided
in these Articles of Amendment of the Articles of Incorporation.
3.3 VOTING RIGHTS. (a) If at any time the amount of cumulative
dividends then accrued on any shares of 8.6% Preferred Stock shall
equal to or exceed an amount equal to one quarterly dividend on such
shares, then, in every such case the shares of Preferred Stock shall
be voted equally with the shares of the Common Stock at any annual
or special meeting of shareholders of the Corporation, may act by
written consent in the same manner as the Corporation's Common Stock
upon the following basis: each holder of shares of 8.6% Preferred
Stock shall be entitled to such number of votes for the 8.6%
Preferred Stock held by him on the record date fixed for such
meeting, or on the effective date of such written consent, as shall
be equal to the whole number of shares of the Common Stock into
which all his shares of 8.6% Preferred Stock are convertible,
without regard to the provisions of SECTION 3.5(B), immediately
after the close of business on the record date fixed for such
meeting or the effective date of such consent.
If and when full cumulative dividends on all shares of
8.6% Preferred Stock shall have been declared and paid or Set Apart
for Payment for all past quarterly dividend periods and for the then
current quarterly dividend period, thereupon all voting rights of
the holders of 8.6% Preferred Stock shall terminate; SUBJECT,
HOWEVER, to such voting rights again arising when the amount of
cumulative dividends accrued on any shares of 8.6% Preferred Stock
then outstanding equally or exceeding an amount equal to one
quarterly dividend.
(b) Except as otherwise provided in these Articles of
Incorporation, including SECTION 3.3(a), the By-laws of the
Corporation, or by law, the holders of 8.6% Preferred Stock shall
have no voting rights and their consent shall not be required for
taking any corporate action.
3.4 CERTAIN RESTRICTIONS. (a) Whenever dividends or
distributions payable on the 8.6% Preferred Stock as provided in
SECTION 3.2 are in arrears or this Corporation is in default in the
payment thereof, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
8.6% Preferred Stock outstanding shall have been paid or Set Aside
for
26
<PAGE>
Payment in full, this Corporation shall not:
(i) declare or pay dividends or make any other
distributions on any shares of stock
ranking junior to the 8.6% Preferred Stock
(either as to dividends or upon
liquidation, dissolution or winding-up),
other than dividends unpayable in or
distributions of stock ranking junior to
the 8.6% Preferred Stock (both as to
dividends and upon liquidations,
dissolution or winding-up);
(ii) declare or pay dividends or make any other
distributions on any shares of stock
ranking on a parity with the 8.6% Preferred
Stock as to dividends, except (x) dividends
paid ratably on the 8.6% Preferred Stock
and all such parity stock on which
dividends are payable or in arrears in
proportion to the total amounts to which
the holders of all such shares are then
entitled if the full dividends accrued
thereon were to be paid or (y) dividends
payable in or distributions of stock
ranking junior to the 8.6% Preferred Stock
(both as to dividends and upon liquidation,
dissolution or winding-up); or
(iii) redeem or purchase or otherwise acquire for
consideration any shares of stock ranking
junior to or on a parity with the 8.6%
Preferred Stock (either as to dividends or
upon liquidation, dissolution or winding
up); PROVIDED, HOWEVER, that this
Corporation may at any time redeem,
purchase or otherwise acquire shares of any
such junior stock or parity stock in
exchange for shares of any stock of this
Corporation ranking junior to the 8.6%
Preferred Stock (both as to dividends and
upon liquidation, dissolution or
winding-up).
(b) This Corporation shall not permit any subsidiary of
this Corporation to purchase or otherwise acquire for consideration
any shares of stock
27
<PAGE>
of this Corporation unless this Corporation could acquire such
shares at such time and in such manner under SECTION 3.4(A).
3.5 CONVERSION.
(a) AT THE CORPORATION'S OPTION; AUTOMATICALLY. On the
terms and conditions contained herein:
(i) this Corporation may convert up to 50% of
the 8.6% Preferred Stock outstanding (the
"ORIGINAL ISSUE") on the date the first
share thereof is issued (such date, the
"ISSUE DATE") during the period beginning on
the first anniversary of the Issue Date
(such date, the "INITIAL TERMINATION DATE")
and ending on the 183rd day thereafter and
(ii) up to 100% of the Original Issue during
the period beginning on the first day after
the Initial Termination Date and ending on
the second anniversary of the Issue Date
(the "SECOND ANNIVERSARY"). If this
Corporation elects to convert less than all
outstanding shares of 8.6% Preferred Stock,
the shares to be converted shall be selected
by lot, PRO RATA (as nearly as may be), or
in any other equitable manner determined by
the Board of Directors. Notice of any
conversion of shares of 8.6% Preferred Stock
pursuant to this SECTION 3.5(A) (each, a
"CONVERSION NOTICE") shall be mailed not
less than 30, nor more than 60, days before
the date fixed for conversion to each holder
of shares of 8.6% Preferred Stock to be
converted, at such holder's address as it
appears on the transfer books of this
Corporation. At its option, the Corporation
may deliver a notice (a "REGISTRATION
NOTICE") with each Conversion Notice,
stating that the Corporation will cause the
shares of Common Stock issuable upon
conversion to be registered for resale under
the Securities Act of 1933, pursuant to the
terms of the Registration Right Agreements,
dated October 28, 1996, between the
Corporation and certain holders of the 8.6%
Preferred Stock.
(ii) Each share of 8.6% Preferred Stock shall be
converted automatically into fully paid and
non-assessable shares of Common Stock on the
Second Anniversary.
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<PAGE>
(iii) To facilitate the conversion of shares of
8.6% Preferred Stock, the Board of Directors
may fix a record date for the determination
of the holders of shares of 8.6% Preferred
Stock to be converted, not more than 60 days
nor less than 30 days before the date fixed
for such conversion. Notice of conversion
having been mailed as aforesaid, from and
after the conversion date (unless this
Corporation shall fail to issue the shares
of Common Stock issuable upon such
conversion) all dividends on the shares of
8.6% Preferred Stock so called for
conversion shall cease to accrue. Said
shares shall no longer be deemed to be
outstanding. All rights of the holders
thereof as stock holders of this Corporation
(except the right to received from this
Corporation the shares of Common Stock
issuable upon conversion) shall cease and
terminate, and upon surrender according to
said notice of the certificates for any such
shares (properly endorsed or assigned for
transfer), this Corporation shall convert
such shares.
(b) SECOND ANNIVERSARY ADJUSTMENT. If the Corporation
converts any shares of 8.6% Preferred Stock before the Second
Anniversary (such converted shares, the "ADJUSTABLE SHARES"), and
(i) the Market Price on the Second Anniversary is less than $4.55
per share (ignoring adjustments for any stock splits,
recapitalizations and the like) and (ii) this Corporation had not
delivered a Registration Notice with its Conversion Notice, the
Company will issue, within 15 Business Days after the Second
Anniversary, to the holder of the Adjustable Shares on the date of
conversion a number of additional shares of Common Stock equal to
the DIFFERENCE between (i) the QUOTIENT of (x) the Cash Equivalent,
as defined in CLAUSE (C) below, of the Adjustable Shares on the date
of conversion DIVIDED by (y) the Market Price of the Common Stock on
the Second Anniversary LESS (ii) the number of shares of Common
Stock previously issued to such holder with respect to the
conversion of the Adjustable Shares.
(c) CONVERSION PRICE; RATE OF CONVERSION, For the
purpose of any conversion under this SECTION 3.5, each share of 8.6%
Preferred Stock shall be treated as the equivalent of $100 plus
Accrued Dividends (the "CASH EQUIVALENT") to the date set for
conversion by the Board of Directors. The number of shares of Common
Stock issuable in respect of shares of 8.6% Preferred Stock upon any
conversion (the "RATE OF CONVERSION") shall be computed (to the
nearest one one-hundredth of one share of Common Stock ) by dividing
the aggregate Cash Equivalent of all shares of 8.6% Preferred Stock
at any one time called for
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<PAGE>
conversion by this Corporation, by the Conversion Price, as defined
below, in effect at the date of conversion. Subject to SECTION
3.5(B), the price per share at which shares of Common Stock are to
be issuable upon any conversion (the "CONVERSION PRICE") shall be
$4.55. The Conversion Price shall be subject to adjustment from time
to time in certain instances as provided below. The term "conversion
price in effect" at any time shall mean the Conversion Price until
such has been so adjusted, and after any such adjustment, the
Conversion Price resulting from the most recent adjustment. As used
herein, (i) the term "MARKET PRICE" means, with respect to any date,
the arithmetic average of the Closing Sales Price on each of the 20
days preceding such date, and (ii) "CLOSING SALES PRICE" on any day
means the closing sale price of the Common Stock reported on the
Electronic Bulletin Board operated by the National Association of
Securities Dealers, Inc. (or any exchange in which shares of Common
Stock are listed) on such day.
(d) MERGER, CONSOLIDATION. If, while any shares of the
8.6% Preferred Stock remain outstanding, this Corporation shall
enter into any consolidation with or merger into any other
corporation wherein this Corporation is not the surviving
corporation, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such
consolidation, merger, sale, or conveyance, shares of stock or other
securities shall be issuable or deliverable in exchange for the
Common Stock, appropriate provision shall be made that, on the terms
and in the manner provided in this SECTION 3.5, the holder of any
8.6% Preferred Stock may thereafter convert the same into the same
kind and amount of securities as may be issuable by the terms of
such consolidation, merger, sale or conveyance with respect to the
number of shares of Common Stock into which such Preferred Stock is
convertible at the time of such consolidation, merger, sale or
conveyance. After any such consolidation, merger, sale or
conveyance, the right of conversion shall be to convert the 8.6%
Preferred Stock into such securities as the same may from time to
time be constituted.
(e) RECAPITALIZATION. If this Corporation shall effect
any capital reorganization or any reclassification of the capital
stock of this Corporation (except as provided in CLAUSE (D) above),
each holder of 8.6% Preferred Stock, whether theretofore or
thereafter issued, upon conversion thereof, shall be entitled to
receive, instead of the shares of Common Stock to which he would
have become entitled upon conversion immediately before such
reorganizations or reclassification, the shares of stock (of any
class or classes ) or other securities or property of this
Corporation into which such shares of Common Stock would have been
entitled upon such reorganization or reclassification and, in any
such case, appropriate provision (as determined by a resolution of
the Board of Directors) shall be made for the application of this
SECTION 3.5 with respect to the rights and interest thereafter of
the holders of 8.6% Preferred Stock, to the end that this SECTION
3.5, including adjustment of the Conversion Price, shall
30
<PAGE>
thereafter be reflected, as nearly as reasonably practicable, in all
subsequent conversion of 8.6% Preferred Stock into any shares of
stock or securities or other property thereafter deliverable upon
the conversion of 8.6% Preferred Stock.
(f) PRICE THEN IN EFFECT. If this Corporation, at any
time or from time to time, shall subdivide as a whole, by
reclassification, the issuance of a stock dividend or otherwise, the
number of shares of Common Stock then outstanding into a greater
number of shares of Common Stock, with or without par value, the
conversion price then in effect, shall be reduced proportionately.
If this Corporation, at any time or from time to time, shall
consolidate as a whole, by reclassification or otherwise, the number
of shares of Common Stock, then outstanding into a lesser number of
shares of Common Stock, with or without par value, the conversion
price then in effect shall be increased proportionately.
3.6 REACQUIRED SHARES. Any shares of 8.6% Preferred Stock
converted, purchased or otherwise acquired by this Corporation or
any subsidiary of this Corporation in any manner whatsoever shall be
retired promptly after the acquisition thereof, and, if necessary to
provide for the lawful conversion or purchase of such shares, the
capital represented by such shares shall be reduced in accordance
with the CBCA. This Corporation shall take all actions necessary so
that all such shares become authorized but unissued shares of 8.6%
Preferred Stock, $.001 par value per share, of this Corporation.
3.7 LIQUIDATION, DISSOLUTION OR WINDING-UP. Upon any
liquidation, dissolution or winding-up of the affairs of this
Corporation, no distribution shall be made (a) to the holder of
shares of Junior Stock unless, prior thereto, the holder of shares
of 8.6% Preferred Stock shall have received (a) $100 per share, plus
(b) an amount equal to Accrued Dividends.
3.8 DEFINITIONS. (a) As used herein, the following terms shall
have the meanings indicated.
"ACCRUED DIVIDENDS" to a particular date (the APPLICABLE
DATE") means all unpaid dividends payable pursuant to SECTION
2(A), whether or not declared, accrued to the Applicable Date.
"BUSINESS DAY" means any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of
Texas are authorized or obligated by law or executive order to
close.
"PERSON" means any person or entity of any nature
whatsoever, specifically including an individual, a firm, a
company, a corporation, a partnership, a trust or other
entity.
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<PAGE>
"REGISTRATION NOTICE" means a notice delivered by this
Corporation simultaneously with a Conversion Notice stating
that the Corporation will grant the Holder the right to
require this Corporation to register the shares of Common
Stock to be issued upon conversion pursuant to SECTION 3(A) of
the Registration Rights Agreement between the Holder and this
Corporation.
"SET APART FOR PAYMENT" means that this Corporation
shall have deposited with a bank or trust company doing
business in Houston, Texas, and having a capital and surplus
of at least $50 million, in trust for the exclusive benefit of
the holders of shares of 8.6% Preferred Stock, funds
sufficient to satisfy this Corporation's payment obligations.
(b) "CONSTRUCTION OF CERTAIN TERMS AND PHRASES". Unless
the context otherwise requires, (i) words of any gender include each
other gender; (ii) words using the singular or plural number also
include the plural or singular number, respectively; (iii) the terms
"hereof," "herein," "hereby," and derivative or similar words refer
to these entire Articles of Amendment of Articles of Incorporation
(this "Amendment"); and (iv) the term "Section" or "clause" refers
to the specified section or clause of this Amendment. Whenever this
Amendment refers to a number of days, such number shall refer to
calendar days unless Business Days are specified. All accounting
terms used herein and not expressly defined herein shall have the
meanings given to them under generally accepted accounting
principles.
3.9 RANK. The 8.6% Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding-up of the affairs of this
Corporation, prior to all shares of Common Stock of this
Corporation.
3.10 FRACTIONAL SHARES. Each fractional share of 8.6%
Preferred Stock outstanding shall be entitled to a ratably
proportionate amount of all dividends and distributions payable with
respect to each outstanding share of 8.6% Preferred Stock according
to the terms hereof whether as a dividend or upon liquidation
dissolution or winding up of the affairs of this Corporation, and
all such dividends and distributions shall be payable in the same
manner and at the same time as provided herein for each outstanding
phase of 8.6% Preferred Stock.
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<PAGE>
IN WITNESS WHEREOF, the undersigned President and Secretary of this
Corporation do certify that the Board of Directors adopted the amendments set
forth above.
By:
Name: Kenneth M Duckman
President
By:
Name: Bert Pariser
Secretary
33
