<PAGE> 1
FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the period ended August 31, 1998
or
[ ] Transition Report Pursuance to Section 13 or 15(d) of the Securities
Exchange act of 1934. For the transition period from to
Commission File Number 0-24256
ENHANCED SERVICES COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1075908
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3415 South Sepulveda Blvd., Suite 500 90034
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 397-3003
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ X ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 25, 1998, Registrant had 3,245,118 shares of common stock, $.001
Par Value, outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets as of August 31,
1996 (Unaudited) and November 30, 1997 2
Consolidated Statements of Operations, Three
Months Ended August 31, 1998 and
August 31, 1997 (Unaudited) 3
Consolidated Statements of Operations, Nine
Months Ended August 31, 1998 and
August 31, 1997 (Unaudited) 4
Consolidated Statement of Changes in Stock-
holders' Equity from November 30, 1997
through August 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows,
Three Months Ended August 31, 1998 and
August 31, 1997 (Unaudited) 6
Consolidated Statements of Cash Flows,
Nine Months Ended August 31, 1998 and
August 31, 1997 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 9
Part II. Other Information 11
</TABLE>
1
<PAGE> 3
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 31 November 30
1998 1997
----------- -----------
<S> <C> <C>
Current Assets
Cash in bank $ 63,059 $ 262,510
Inventory 254,826 499,814
Accounts receivable, net of allowance
for doubtful accounts 585,178 624,671
Other receivables 2,333.249
Other current assets 177,391 145,173
----------- -----------
Total Current Assets 3,413,703 1,532,168
Property and equipment, net of accumulated depreciation 108,661 355,868
Goodwill, net of accumulated amortization 0 710,304
Investment in Zulu-tek, Inc. 4,045,000 0
Other assets 19,708 92,079
----------- -----------
Total Assets $ 7,587,072 $ 2,690,419
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,127,895 $ 669,326
Notes payable, current portion 908,500 517,261
Other current liabilities 106,945 7,782
----------- -----------
Total Current Liabilities 2,143,340 1,194,369
Notes payable, net of current portion 2,266,249 --
----------- -----------
Total Liabilities 4,409,589 1,194,369
----------- -----------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized, 8,000 issued and outstanding
8.6% cumulative preferred (Liquidation preference of $800,000) 8 --
Preferred stock - $3.00 par value 3,000,000 --
Common stock - $.001 par value, 15,000,000 shares authorized;
1,123,174 shares issued and
outstanding 3,208 1,103
Additional paid-in capital 5,170,806 3,229,957
Retained earnings (4,996,539) (1,735,041)
----------- -----------
Total Stockholders' Equity 3,177,483 1,496,050
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,587,072 $ 2,690,419
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
August 31 August 31
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Sales $ 563,314 $ 1,477,284
Cost of sales (exclusive
of depreciation and salaries
shown separately below) 134,010 749,687
----------- -----------
Gross Profit 429,304 727,597
----------- -----------
Operating Expenses
Salaries 242,207 584,283
Advertising and promotion 5,156 82,701
Contract services 45,044 107,298
Rent 131,114 98,997
Travel and entertainment 17,730 44,640
Depreciation/amortization 21,300 55,378
Other operating expenses 422,731 420,063
----------- -----------
Total Operating Expenses 885,282 1,393,360
----------- -----------
Net Operating (Loss) (455,978) (665,763)
Interest Expense (14,311) (28,391)
Gain from disposition of property -- 719,562
Other Expense (600,000) --
Other Income 19,233 5,971
----------- -----------
Net income (loss) $(1,051,056) $ 31,379
=========== ===========
Provision for preferred dividends 17,200 17,201
----------- -----------
Net Income (Loss) to Common
Shareholders $(1,068,256) $ 14,178
=========== ===========
Net Income (Loss) per Common Share $ (.34) $ .01
=========== ===========
Weighted Average Shares Outstanding 3,096,408 2,233,014
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
August 31 August 31
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Sales $ 2,675,226 $ 4,533,411
Cost of sales (exclusive
of depreciation and salaries
shown separately below) 1,113,331 1,961,457
----------- -----------
Gross Profit 1,561,895 2,571,954
----------- -----------
Operating Expenses
Salaries 1,370,753 1,664,493
Advertising and promotion 23,680 207,322
Contract services 265,781 185,766
Rent 349,025 266,984
Travel and entertainment 70,809 102,018
Depreciation/amortization 150,033 163,921
Other operating expenses 1,081,212 1,149,067
----------- -----------
Total Operating Expenses 3,311,293 3,739,571
----------- -----------
Net Operating (Loss) (1,749,398) (1,167,617)
Interest Expense (41,144) (66,925)
Gain from disposition of property -- 719,562
Other Expense (1,431,624) --
Other Income 33,050 94,982
----------- -----------
Net (loss) $(3,189,116) $ (419,998)
=========== ===========
Provision for preferred dividends 51,600 45,867
----------- -----------
Net (Loss) to Common Shareholders $(3,240,716) $ (465,865)
=========== ===========
Net Income (Loss) per Common Share $ (1.05) $ (.21)
=========== ===========
Weighted Average Shares Outstanding 3,096,408 2,233,014
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1997 through Aug 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Preferred Stock Paid-in
No./Shares Amount No./Shares Amount Capital
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1997 8,000 $ 8 1,125,489 $ 1,126 $ 3,229.957
Securities issued on acquisition of
Zulu-tek Interest:
Common Stock 220,000 220 1,044,779
Preferred shares, $3.00 par value 1,000,000 3,000,000
Common stock issued for:
a) Exercise of ESOP 6,670 7 29,382
b) Exercise of warrants 139,500 140 540,365
1:1 stock dividend at May 22, 1998 1,492,580 1,493 (1,493)
Common stock issued for:
a) Exercise of warrants 168,750 168 273,205
b) Consulting services 54,667 55 54,611
Preferred stock dividends
Net (loss) for the nine months ended
Aug 31, 1998
--------- ----------- --------- ----------- -----------
Balance 1,008,000 $ 3,000,008 3,207,656 $ 3,209 $ 5,170,806
========= =========== ========= =========== ===========
<CAPTION>
Accumulated
(Deficit) Total
----------- -----------
<S> <C> <C>
Balance at November 30, 1997 $(1,755,823) $1,475,268
Securities issued on acquisition of
Zulu-tek Interest:
Common Stock 1,044,999
Preferred shares, $3.00 par value 3,000,000
Common stock issued for:
a) Exercise of ESOP 29,389
b) Exercise of warrants 540,505
1:1 stock dividend at May 22, 1998
Common stock issued for:
a) Exercise of warrants 273,373
b) Consulting services 54,666
Preferred stock dividends (51,601) (51,601)
Net (loss) for the nine months ended
Aug 31, 1998 (3,189,116) (3,189,116)
----------- -----------
Balance $(4,996,540) $ 3,177,483
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
August 31 August 31
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(1,068,256) $ 14,178
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization 21,300 94,840
(Decrease) in accounts payable
and accrued expenses 314,156 (133,949)
(Increase) decrease in
accounts receivable (1,487,406) (11,844)
(Increase) decrease in
inventory 10,993 70,925
Other, net 62,325 (124,271)
----------- -----------
Net Cash (Used in) Operating
Activities (2,146,888) (90,121)
----------- -----------
Cash Flows from Investing Activities:
(Purchases) of property and
equipment 4,309 --
Disposition of property -- 814,603
----------- -----------
Net Cash Provided by (Used in)
Investing Activities 4,309 814,603
----------- -----------
Cash Flows from Financing Activities:
(Repayment) from notes and
mortgages payable -- (606,678)
Proceeds from notes payable 1,724,693 --
Common stock issued 365,140 --
----------- -----------
Net Cash Provided by (Used in)
Financing Activities 2,089,833 (606,678)
----------- -----------
Increase (Decrease) in cash 52,746 117,804
Cash, Beginning of Period 10,313 307,858
----------- -----------
Cash, End of Period $ 63,059 $ 425,662
=========== ===========
Interest Paid $ 14,311 $ 28,391
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
August 31 August 31
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $(3,240,716) $ (465,865)
Adjustments to reconcile net
income to net cash used
in operating activities
Write down of goodwill 710,304
Depreciation and amortization (181,821) 282,307
Increase (decrease) in accounts
payable and accrued expenses 458,569 (196,714)
(Increase) decrease in accounts
receivable (2,293,756) 215,077
(Increase) in inventory 244,988 (152,393)
Other, net (66,945) (153,926)
----------- -----------
Net Cash (Used in) Operating
Activities (4,369,377) (471,514)
----------- -----------
Cash Flows from Investing Activities:
Investment in Zulu-tek, Inc. (4,045,000)
Purchases of property and equipment
and other disposition of property 613,381 684,455
----------- -----------
Net Cash Provided by (Used in)
Investing Activities (3,431,619) 684,455
----------- -----------
Cash Flows from Financing Activities:
(Repayment) of notes payable (8,761) (771,257)
Preferred stock issued 3,000,000 767,546
Proceeds from notes and mortgage
payables 2,666,249 --
Common stock issued 1,944,057 60,000
----------- -----------
Net Cash Provided by Financing
Activities 7,601,545 56,289
----------- -----------
Increase (decrease) in cash (199,451) 269,230
Cash, Beginning of Period 262,510 156,432
----------- -----------
Cash, End of Period $ 63,059 $ 425,662
=========== ===========
Interest Paid $ 41,144 $ 66,925
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998 and 1997
(1) Organization
Enhanced Services Company, Inc. (the Company) a Colorado corporation, was
incorporated in 1987.
The Company began, in May 1998, consolidating its facilities in North
Bergan, New Jersey and Houston, Texas into the Irvine, California facility.
The move was completed by the end of July 1998. The Company closed its NB
Engineering, Inc. subsidiary in Crofton, Maryland in May 1998.
The Company's administrative offices also were relocated from Houston,
Texas to El Segundo and subsequently to Los Angeles, California in May
1998.
The consolidated financial statements include the accounts of ESC and
subsidiaries since acquisition or formation. All inter-company accounts and
transactions have been eliminated.
(2) Unaudited Statements
The balance sheet as of August 31, 1998, the statements of income for the
three and nine month periods ended August 31, 1998 and August 31, 1997 and
the statement of cash flow for the three and nine month period ended August
31, 1998 and August 31, 1997 have been prepared by the Registrant without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at August 31, 1998, and for
all periods presented, have been made.
(3) Stock Dividend
During May 1998 the Company effected a one for one stock dividend/two for
one stock split. All references to common stock in the financial statements
have been retroactively adjusted.
(4) Acquisition Agreement
Effective March 3, 1998, the Company entered into a securities acquisition
agreement pursuant to which the Company issued 220,000 pre-dividend common
shares or approximately 19% of its common shares and 1,000,000 shares of a
new class of nonvoting preferred shares, $3.00 par value per share, in
exchange for stock held by exchanging parties in an interactive advertising
and marketing corporation (the Zulu-tek transaction). The preferred shares
of the Company are convertible into common shares at the Company's option
only after shareholder approval at a meeting called for that purpose and
have a liquidation preference which is junior to the previously issued
preferred shares of the Company. In connection with the transaction, the
holder of the Company's $500,000 accounts receivable collateralized loan
agreed, subject to the consent of the loan participants, to convert the
loan into equity.
8
<PAGE> 10
(5) Subsequent Acquisition Agreement
Effective September 16, 1998, the Company entered into an acquisition
agreement to acquire the assets and certain liabilities of Zulu-tek, Inc.,
in exchange for convertible preferred stock. The convertible preferred
stock will, if approved by the shareholders at the shareholder meeting
currently set for November 20, 1998, convert into 5,200,00 shares of common
stock.
(6) Consulting Agreement
On April 1, 1998 the Company entered into an agreement with Kennedy Miles
Creative Communication, LTD, (KMCC). Pursuant to the agreement, KMCC shall
provide consulting services to the Company for a term of one year. As
consideration for services rendered by KMCC, the Company issued common
stock purchase warrants exercisable to purchase, in the aggregate 75,000
pre-dividend shares at $2.00 per share. During the second quarter of 1998,
75,000 pre-dividend warrants were exercised and the difference between the
exercise price of the warrants and the market value of the shares amounting
to $150,000 was expensed.
On March 15, 1998 the Company entered into an agreement with Richard A.
Fisher (RAF). Pursuant to the agreement, RAF shall provide consulting
services to the Company for a term of one year. AS consideration for
services rendered by RAF, the Company issued common stock purchase warrants
exercisable to purchase, in the aggregate 50,000 pre-dividend shares at
$4.00 per share. During the second quarter of 1998, 50,000 pre-dividend
warrants were exercised.
(7) Working Capital Note/Equity
The Company executed a $3,000,000 subordinated working capital note with
Netvest Capital Partners, LP. The note proceeds may fund operations of the
Company and the business combination. Funds advanced under the note to the
Company at August 31, 1998 were $2,266,249. Netvest Capital Partners, LP,
subsequent to August 31, 1998, has agreed to convert the working capital
note to equity.
(8) Advances to Zulu-Media
The Company entered into a working capital agreement with Zulu-Media
whereby the Company will provide working capital. The agreement provides
for repayment upon demand by the Company.
9
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Conditions and results
of Operations
Overview
Enhanced Services Company, Inc. (the "Company") historically, through
it's Laptop Solutions -Texas and California subsidiaries, provided certain
services to the portable computing community. The Company, in a move to
consolidate and eliminate duplicate facilities moved all it's operations to
Irvine, California. Because of the consolidation of Laptop Solutions -Texas and
California, the following discussion has been combined into one presentation and
will not be entirely comparable. The Company plans to concentrate more of its
efforts in the custom engineering products and services. The Company, until May
1998, offered digital video compression and DVD-Video services through it's NB
Digital Solutions subsidiary in Crofton, Maryland. NB Digital sustained
substantial losses since it's acquisition in 1995 and in view of the investment
required to continue its' operation and the uncertainty of achieving
profitability, the Company ceased NB Digital operations in May, 1998 and the
operating results are reflected as "Discontinued" in the following discussions.
The Company's second fiscal quarter ended August 31, 1998 and the
nine-month comparable period of 1997 are referred to in the discussions below as
1998 and 1997, respectively.
COMBINED OPERATIONS OF LAPTOP SOLUTIONS -- CALIFORNIA & TEXAS
Laptop Solutions - Results of operations for nine month period ended
August 31, 1998 and 1997 are summarized and discussed below: The discontinued
operation of NB Digital Solutions, Inc. has been presented as other expense
titled "Discontinued operations"
<TABLE>
<CAPTION>
Change
1998 1997 %
---- ---- ------
<S> <C> <C> <C>
Sales $ 2,369,305 $ 3,598,980 (34)%
Cost of sales
exclusive of depreciation
and salaries) 1,009,944 1,833,976 (45)%
----------- -----------
Gross Profit 1,359,361 1,765,004 (23)%
Operating &
Other Expenses 3,116,830 2,389,489 30 %
----------- -----------
Net Operating Income (Loss) (1,757,469) (624,485) (181)%
Other Income 2,004 96,717 (97)%
----------- -----------
Net Income (Loss) $(1,168,288) $ (680,991) (72)%
----------- -----------
Discontinued Operation $(1,433,651) $ (611,338) (134)%
Net Loss $(3,189,116) $ (419,998) (659)%
=========== ===========
</TABLE>
10
<PAGE> 12
SALES: Revenue from upgrade and enhancement sales decreased $772,831 from
$1,394,867 in 1997 to $622,036 in 1998, a decrease of 55%, while the per unit
revenue and volume continue to decline as a result of competitive pressure and
technological change. Revenue from Compatibility Plus(TM) sales, the removable
hard disk pak, decreased $205,780 to $71,790 in 1998, from $277,570 in 1997 as
demand for the pak continues to decline. Revenues from repair and contract
maintenance services decreased from $683,296 in 1997 to $496,655 in 1998 from
$1,179,951 in 1997, a decrease of 57%. Management believes the decrease is a
result of certain manufacturers extending the warranty period to three years
from one year and reducing the warranty reimbursement to the service provider.
Also, certain manufacturers have begun to compete with its service provider for
the repair business by opening depot repair facilities. Revenues from engineered
products that began shipping in the first quarter of 1998 amounted to $685.357.
Demand for the product, a wireless modem that was custom designed with Panasonic
Personal Computer Company is expected to remain strong through the third and
fourth quarter of 1998. Revenue from CVAR 2000(TM) decreased $132,250 in 1998 to
$494,467 from $625,717 in 1997 as demand for the anti-reflective film
application declined.
COST OF SALES: Cost of sales of upgrade, enhancements, declined $398,090 in 1998
from $733,153 in 1997, a 54% decrease that was primarily the result of declining
demand. Cost of sales for the removable hard disk pak declined $121,794 to
$38,074 in 1998 from $159,868 in 1997, a decline of 76% as the hard disk pak
sales decline. Cost of sales of repair and contract services decreased $348,773
in 1998 to $159,113 from $507,886, a decrease of 69% as a result of declining
demand and competition. Cost of sales of CVAR 2000 decreased $160,586 from
$346,765 in 1997 to $186,179 in 1998 as a result of declining sales. All other
direct cost of sales, primarily freight expense, decreased $132,996 to $42,007
in 1998 from $175,003 in 1997, primarily as a result of the decline in the
volume of shipments.
OPERATING AND OTHER EXPENSES: Salaries and related payroll cost in 1998 amounted
to $839,617 as compared to $1,118,022 in 1997, a decrease of 26%. The decrease
in personnel and related cost was primarily due to consolidating the Houston and
New Jersey facility to Irvine California. Insurance cost in 1998 amounted to
$86,552 as compared to $101,807 in 1997, a decrease of 15%. The decrease was
primarily the result of the facility consolidation. Advertising costs declined
$154,439 from $176,719 in 1997 to $22,280 in 1998, a decrease of 87%, due to
cancellation of ineffective advertising. Computer expense decreased $48,761 in
1998 to $39,945 from $88,706 in 1997 as a result of increasing the computer
network capacity and capabilities in 1997. Laptop Solutions-Texas was charged
rent for its office and warehouse space by the Company of $131,003 for 1997 when
the Company owned the building. The building was sold in August 1997 and Laptop
leased its existing space from the purchasers of the building for the then
market rate of $203,992, an increase of $72,989. The cost of the Houston lease
continued through August 1998. Also, the California facility size was increased
to accommodate the production of engineered products and CVAR 2000, resulting in
additional rent of $49,738 in 1998 to $113,516 from $63,778 in 1997.
Professional fees increased $61,952 to $114,115 in 1998 from $52,163 in 1997,
primarily as a result of increased legal and auditing cost. Consulting fees in
the amount of $150,000 in connection with the exercise of warrant, were expensed
in 1998.
DISCONTINUED OPERATIONS: NB Digital Solutions operations were discontinued in
May 1998. Sales declined $628,510 in 1998 to $305,921 from $934,431 in 1997 and
gross profit from such sales declined $604,227 to $202,534 for the period.
Operating expenses amounted to $635,383 in 1998, a decrease of $628,213 from
$1,263,598 in 1997. Goodwill in the amount of $657,688 and loss on disposition
of assets amounted to $143,112. Cost of discontinuing the operation has been
estimated to be $200,000 and such amount has been reserved for that purpose.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998, the Company had stockholders' equity totaling
$3,177,483, as compared to $1,496,050 at November 30, 1997, an increase of
$1,681,433. The increase of $1,1681,433 resulted from additional capital, offset
by operation losses. The capital included the issuance of 220,000 pre-dividend
common shares at the then market price of $4.75, and issuance of 1,000,000
shares of preferred stock, stated value of $3.00 per share for an aggregate of
$4,045,000. In addition, during the quarter: 75,000 pre-dividend common stock
purchase warrants at $2.00 per share were exercised pursuant to a consulting
agreement with Kennedy Miles and Associates resulting in gross proceeds of
$300,000 before a discount of $150,000 charged to current operations; a 50,000
pre-dividend common stock purchase warrants at $4.00 per share were exercised
pursuant to a consulting agreement with Richard A. Fisher resulting in net
proceeds of $200,000; Creative Business Strategies exercised 7,500 pre-dividend
common stock purchase warrants at $2.00 per share and 85,000 post-dividend
common stock purchase warrants at prices from $1.00 to $2.00 per share with net
proceeds of $138,875. Wall Street Financial exercised 8,500 pre-dividend common
stock purchase warrants at $3.00 per share and 83,000 post-dividend common stock
purchase warrants at prices of $1.50 to $2.00 per share resulting in net
proceeds of $175,000; and, shares were issued pursuant to the 1992 Stock Option
Plan resulting in proceeds of $29,389. The loss for the nine-month period ended
August 31, 1998 amounted to $3,189,116.
The Company's working capital was ($144,331) as compared to $337,799 on
November 30, 1997, a decrease of $481,130. The decrease was primarily the result
of a $879,063 increase in receivables and a $444,439 reduction in cash and an
increase of $849,805 in accounts payable and short-term notes.
The Company sought up to $50,000,000 in private placement and equity
during the second and third quarters but the financing was not successful,
primarily because the market did not respond to a placement premised on a
combined business plan by two separate entities. Consequently, as a result of
the incomplete financing and the advances to Zulu-tek, as well as costs of
consolidating the Laptop facilities, during the third quarter, the Company has
deferred certain payables, pending proceeds of additional funding being pursued
by the Company. On September 18, 1998, the Company entered into a letter of
intent for a private placement of up to $20,000,00 in preferred equity, of which
$1,050,000 was funded on October 13, 1998. The balance is expected to be funded
by the end of the Company's fiscal year on November 30, 1998, and will be
applied, along with operating funds to the Company's operating obligations and
to implement the combined business plan and other capital needs. In that
connection, effective September 14, 1998, the Company announced the acquisition
of the assets and certain liabilities of Zulu-tek, Inc. in exchange for
preferred stock to be converted to 5,200,000 shares of common stock, after
shareholder approval at a shareholder meeting currently set for November 20,
1998.
The Company has historically relied on cash from equity and debt funding
and the exercise of options and warrants to supplement its operating funds.
Management believes that revenue generated from operations, along with funds
generated by financing activities including the proceeds from the current
private placement of equity and debt securities will be sufficient to meet
Company needs and to support the business and strategic plan being undertaken by
the Company for at least the next 12 months. However, there can be no assurance
that anticipated operating results will be achieved or that the current private
placement of funds will be completed on favorable terms and at the levels
required. If the current fundings are not completed or are completed at levels
or on terms which do not provide sufficient funding on acceptable terms,
management will be required to modify Company strategy.
12
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Form 8-K filed on March 16, 1998.
b. Form 8-K filed on September 28, 1998.
13
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENHANCED SERVICES COMPANY, INC.
By /s/ R. C. Smith Date 10/14/98
--------------------------- --------------
R. C. Smith Treasurer
14
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