FORM 10-Q - 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 FEBRUARY 28, 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 33-20399-D
ENHANCED SERVICES COMPANY, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1075908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
16000 BARKERS POINT LANE, HOUSTON TX 77079
(Address of principal executive offices) (Zip Code)
(713) 566-5051
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 1998, Registrant had 1,125,489 shares of common stock, $.001
Par Value, outstanding.
<PAGE>
INDEX
PAGE
NUMBER
------
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets as of February
28, 1998 (Unaudited) and November 30, 1997 2
Consolidated Statements of Operations, Three
Months Ended February 28, 1998 and
February 28, 1997 (Unaudited) 3
Consolidated Statements of Cash Flows,
Three Months Ended February 28, 1998 and
February 28, 1997 (Unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 6
Part II. Other Information 7
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
February 28 November 30
1998 1997
----------- -----------
Current Assets
Cash in bank ........................... $ 51,821 $ 262,510
Inventory .............................. 490,055 499,814
Accounts receivable, net of allowance
for doubtful accounts .............. 779,748 624,671
Other current assets ................... 200,182 145,173
----------- -----------
Total Current Assets ............... 1,521,806 1,532,168
Property and equipment, net of accumulated
depreciation ............................. 330,943 355,868
Goodwill, net of accumulated amortization .. 670,842 710,304
Other assets ............................... 40,180 92,079
----------- -----------
Total Assets ............................... $ 2,563,771 $ 2,690,419
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses .. $ 755,606 669,326
Notes payable .......................... 598,500 517,261
Other current liabilities .............. 145,479 7,782
----------- -----------
Total Current Liabilities .......... 1,499,585 1,194,369
Total Liabilities .................... 1,499,585 1,194,369
----------- -----------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized
8,000 issued and outstanding
(liquidation preference of $800,000).. 8 8
8.6% cumulative preferred
Common stock - $.001 par value,
15,000,000 shares authorized;
1,125,489 shares issued and
outstanding .......................... 1,126 1,126
Additional paid-in capital ............. 3,229,957 3,229,957
Accumulated (deficit) .................. (2,166,905) (1,735,041)
----------- -----------
Total Stockholders' Equity (Note 3). 1,064,186 1,496,050
----------- -----------
Total Liabilities and Stockholders' Equity.. $ 2,563,771 $ 2,690,419
=========== ===========
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Periods Ended
(Unaudited)
February 28, February 28,
1998 1997
----------- -----------
Revenue:
Sales .............................. $ 1,083,702 $ 1,530,281
Cost of sales (exclusive
of depreciation and salaries
shown separately below) .......... 425,006 582,070
----------- -----------
Gross Profit .................... 658,696 948,211
----------- -----------
Operating Expenses:
Salaries ........................... 531,508 534,274
Advertising and promotion .......... 11,654 47,662
Contract services .................. 29,008 14,449
Rent ............................... 102,265 80,769
Travel and entertainment ........... -- 24,584
Depreciation ....................... 45,445 51,626
Other operating expenses ........... 350,015 346,007
----------- -----------
Total Operating Expenses ......... 1,069,895 1,099,371
----------- -----------
Net Operating (Loss) ................... (411,199) (151,160)
Interest expense ....................... (14,553) (21,517)
Other income ........................... 11,088 59,298
----------- -----------
Net (Loss) ............................. (414,664) (113,379)
Provision for preferred dividends ...... (17,200) (11,466)
----------- -----------
Net (Loss) to Common Shareholders ...... $ (431,864) $ (124,845)
=========== ===========
Net (Loss) Per Common Share ............ $ (.38) $ (.11)
=========== ===========
Weighted Average Common Shares
Outstanding ........................... 1,125,489 1,103,174
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended
(Unaudited)
February 28, February 28,
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net (loss) ............................. $(414,664) $(113,379)
Adjustments to Reconcile Net
(Loss) to Net Cash Used
in Operating Activities
Depreciation and amortization ....... 84,907 91,089
Increase (decrease) in accounts
payable and accrued expenses ....... 86,286 (107,359)
(Increase) decrease in accounts
receivable ......................... (155,077) 262,290
(Increase) decrease in inventory .... 9,759 (148,943)
Other, net .......................... 117,381 (9,529)
--------- ---------
Net Cash (Used in) Operating
Activities ............................ (271,408) (25,831)
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and
equipment ............................. (20,520) (15,643)
--------- ---------
Net Cash (Used in) Investing
Activities ............................ (20,520) (15,643)
--------- ---------
Cash Flows from Financing Activities:
Common stock issued .................... -- 60,000
Preferred stock issued ................. -- 767,546
Proceeds from notes payable ............ 90,000 --
(Repayment) of notes payable ........... (8,761) (128,265)
--------- ---------
Net Cash Provided by Financing
Activities ............................ 81,239 699,281
--------- ---------
Increase (Decrease) in Cash ................ (210,689) 657,807
Cash, Beginning of Period .................. 262,510 156,432
--------- ---------
Cash, End of Period ........................ $ 51,821 $ 814,239
========= =========
Interest Paid .............................. $ 14,553 $ 21,517
========= =========
Income Taxes Paid .......................... $ -- $ --
========= =========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1998 and February 28, 1997
(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 February 28, 1998, the statements of operations
and the statements of cash flows for the three month periods ended
February 28, 1998 and February 28, 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
February 28, 1998, and for all periods presented, have been made.
(3) SUBSEQUENT EVENT
Effective March 3, 1998, the Company entered into a securities
acquisition agreement pursuant to which the Company is issuied 220,000
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 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 consent to the loan participants, to convert the loan
into equity.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-QSB and the documents incorporated
herein by reference contain forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in sales, gross margin, anticipated expense levels and liquidity and
capital resources, as well as other statements, including, but not limited to,
words such as "anticipate," "believe," "plan," "estimate," "expect," `Seek," and
"intend" and other similar expressions, constitute forward-Looking statements.
These forward-looking statements are not guarantees of future performance and
are subject to certain risk and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Except as required by law, the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise. Readers, however, should carefully
review the other reports or documents that the Company files from time to time
with the SEC.
EVENT SUBSEQUENT TO FEBRUARY 28, 1998 AND FILED ON FORM 8-K ON MARCH 16, 1998
Pursuant to action by the Board of Directors of Enhanced Services
Company, Inc. ("Registrant"), [NASDAQ SmallCap Market: ESVS] the Registrant
entered into a Securities Acquisition Agreement ("Agreement"), dated as of March
3, 1998 (attached to Form 8-K and filed on March 16, 1998 as Exhibit 1 thereto),
pursuant to which it implemented a series of transactions on March 6, 1998.
Under the Agreement, the Registrant exchanged 220,000 of its Common
Shares, $.001 par value ("Enhanced Common Stock") and 1,000,000 of its newly
authorized 1998 Series Preferred Stock, $3.00 par value per share ("1998
Preferred Stock" and collectively, with the Enhanced Common Stock, the "Enhanced
Stock") for 12,000,000 common shares $.001 par value ("ZULU-tek Common Stock"),
of ZULU-tek, Inc., a Utah corporation ("ZULU-tek") and 1,000,000 shares of
Series D Preferred Stock $.001 par value ("ZULU-tek Preferred" and collectively,
with the ZULU-tek Common Stock, the "ZULU-tek Stock") held by Netvest Capital
Partners LP, a Delaware limited partnership ("Netvest").
All of the securities issued and exchanged in the transactions are
restricted securities. Prior to the transactions, there were 1,131,474 shares of
Enhanced Common Stock outstanding and 283,973 shares reserved for issuance for a
total of 1,415,447 shares on a fully diluted basis (with a result that the
220,000 shares of Common Stock issued in the transactions constituted an
issuance of approximately 19.4% of Enhanced Common Stock or 15.5% on a fully
diluted basis). The Enhanced 1998 Preferred Stock is convertible on the basis of
2.772 shares of Enhanced Common Stock for each share of 1998 Preferred Stock,
solely at the option of the Registrant and only after receipt of shareholder
approval at a meeting duly called for such purposes. It is expected that the
Registrant's meeting of its shareholders will be convened promptly after
appropriate proxy materials are prepared for circulation.
The transactions, described in exhibit 1, provide the Registrant with
access to ZULU-tek's interactive sales and marketing expertise which, when
combined with the advanced multi-media capabilities of Enhanced Services' NB
Digital Solutions products and services, will allow the Registrant to offer its
customers a complete Internet technology and sophisticated program development
solutions.
The Registrant intends to develop a business plan that builds on
strategic similarities of the Registrant and ZULU-tek and allows for the
refocusing of the business efforts of both entities, as appropriate. In that
connection, the Registrant intends to pursue a financing of up to $50 million
through a private placement of convertible preferred equity securities of the
Registrant, although no assurance can be given that the Registrant will be
successful in arranging for this private placement.
In addition, in the transactions, FCA Investment Company, an unaffiliated
entity which serves as a loan custodian for a group of certain individuals and
entities which made a $500,000 accounts receivable loan to the Registrant, has
recommended to its loan participants that they convert the loan into equity of
the Registrant on terms comparable to the investors in the private placement.
One of the directors of the Registrant is an officer of, and a director of the
advisor to, FCA Investment Company.
The ZULU-tek Common Stock currently trades on the NASDAQ Bulletin Board
under the symbol "NETZ". As of March 2, 1998, there were 47,579,910 shares of
ZULU-tek Common Stock outstanding and 10,753,037 shares of ZULU-tek Common Stock
reserved for issuance. The ZULU-tek Preferred exchanged in the transactions is
non-voting except in certain corporate reorganizations, mergers and similar
matters and in such instances, each share entitles the holder to fifty votes per
share.
Netvest is a Delaware limited partnership of which Netvest Capital
Funding, Inc., a Delaware corporation, is the general partner. The limited
partnership interests are held by a number of independent investors and investor
entities with no prior relationship to the Registrant. Netvest and certain of
its limited partners may hold shares of ZULU-tek Common Stock and therefore,
while each of the parties disclaim beneficial ownership of each other's
interest, Netvest may be deemed to be an affiliate of ZULU-tek.
Robert Smith will continue as Chief Financial Officer and will be
Assistant Secretary of the Registrant; Kenneth M. Duckman will continue as a
consultant to Registrant, responsible for the oversight and development of the
Laptop solutions divisions and general product lines of the Registrant and its
operating subsidiaries; and Ralph LaBarge will continue as an employee
responsible for oversight of the digital video compression, DVD format authoring
and custom engineering development services. On March 9, 1998, Messrs. Duckman
and LaBarge and Bertram Pariser, John Meaney and Michael Bernard resigned as
directors of Registrant and Bill S. Murski continued as a director and appointed
Paul Messina and Robert H. Tourtelot to serve as directors until the next annual
meeting of the Registrant's shareholders.
On February 26, 1998, the Registrant received a letter from NASDAQ
indicating that it was not in compliance with the new requirements for
maintaining a listing on the NASDAQ SmallCap Market. As a result of the
transactions, and as reflected in the PRO FORMA balance sheet included herein,
Management of the Registrant believes it now meets or exceeds all of the net
tangible asset requirements for continued listing on the NASDAQ Small Cap
Market. On March 10, the Registrant received a letter from NASDAQ stating that
subject to receipt of this Report on Form 8-K, the Registrant was in compliance
with the requirements for continued listing on the NASDAQ SmallCap Market.
As noted above, in connection with the transactions, certain of the
directors of the Registrant resigned. Such resignations did not arise because of
any disagreement with the Registrant.
PROFORMA balance sheet of the Registrant at November 30, 1997 giving
effect to the Transaction described above.
<PAGE>
PRO FORMA
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
NOVEMBER 30, 1997 ADJUSTMENTS PRO FORMA
----------- ----------- ----------
<S> <C> <C> <C>
Current Assets
Cash in bank ...................................... $ 262,510 $ $ 262,510
Inventory ......................................... 499,814 499,814
Accounts receivable, net of allowance for
doubtful accounts of $90,920 .................... 624,671 624,671
Other current assets .............................. 145,173 145,173
----------- ----------
Total Current Assets ............................ 1,532,168 1,532,168
Property and equipment, net of accumulated
depreciation of $470,748 ............................... 355,868 355,868
Goodwill net of accumulated amortization
of $394,623 ............................................ 710,304 710,304
Other assets ............................................. 92,079 92,079
Investments
Investment in Zulu-tek, Inc. (Note 2) ............. 4,045,000 4,045,000
----------- ----------- ----------
Total Assets ............................................ $ 2,690,419 $ 4,045,000 $6,735,419
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses ............. $ 669,326 $ $ 669,326
Notes payable (Note 1) ............................ 517,261 (500,000) 17,261
Other current liabilities ......................... 7,782 7,782
----------- ----------- ----------
Total Current Liabilities ....................... 1,194,369 (500,000) 694,369
----------- ----------- ----------
Total Liabilities ................................. 1,194,369 (500,000) 694,369
----------- ----------- ----------
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 8
Preferred stock - $3.00 par value per share,
1,000,000 Authorized, issued and outstanding ...... 3,000,000 3,000,000
Common stock - $.001 par value,
15,000,000 shares authorized;
1,125,489 shares issued and outstanding .......... 1,126 220 1,346
Additional Equity ................................... (1) 500,000(1) 500,000
Additional paid-in capital .......................... 3,229,957 1,044,780 4,274,737
Accumulated (deficit) ............................... (1,735,041) (1,735,041)
Total Stockholders' Equity .......................... 1,496,050 4,545,000 6,041,050
----------- ----------- ----------
Total Liabilities and Stockholders' Equity ............... $ 2,690,419 $ 4,045,000 $6,735,419
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the pro forma Balance Sheet
<PAGE>
Notes to Pro forma and un-audited Balance Sheet
November 30, 1997 and adjustments
The preceding pro forma balance sheet of November 30, 1997 has been
adjusted to reflect certain transactions of March 6, 1998 as if they had taken
place on November 30, 1997. These transactions are more fully described in
above.
1. The Company anticipates that the $500,000 accounts receivable loan will
be converted to equity on the same basis as the private placement and is
more fully described above. Other Events.
2. 220,000 shares of Enhance Services Company, Inc. restricted common stock
were issued in connection with the transaction described above and have
been reflected at the closing price of $4.75 on the NASDAQ Stock Market
on March 3, 1998, in a manner consistent with the presentation of
"liquidity and Capital Resources" in the Company's annual report on form
10-KSB and without any discount for the restricted status of the common
stock. In certain other transactions the Company has applied, in its
audited statements, a 50% discount which would reduce additional paid in
capital $552,500 to $3,782,237 and accordingly, would reduce the total
liabilities and stockholder equity, on a pro forma basis, to $6,242,919.
Investment in Zulu-tek, Inc. Series D Preferred Stock and Common Stock
has been valued at the market value on March 3, 1998 and liquidation
value of Enhanced Services Company's Common and Preferred Stock.
3. The transaction described above did not affect the income statement of
November 30, 1997, and accordingly is not shown.
OVERVIEW
Enhanced Services Company, Inc. (NASDAQ: ESVS) (the "Company") provides
(1) repair and maintenance, upgrade, fulfillment and related technical and asset
management services for users of portable computers, (2) certain enhancement,
accessory or peripheral products for portable computer manufacturers,
distributors, dealers and users, and (3) digital multimedia development services
for marketing, sales, training, entertainment, technical reference, archival
storage and other applications. The Company's portable computer services and
products are provided through its wholly-owned Laptop Solutions-Texas and
- -California subsidiaries, and its multimedia services are offered through its
wholly-owned NB Engineering, Inc. (d/b/a NB Digital Solutions) subsidiary.
The three-month period of the first fiscal quarter ended on February 28,
1998 and the respective quarter of 1997 are referred to in the discussions below
as 1998 and 1997.
The Company's consolidated results of operations and position for and as
of the end of its three months ended February 28, 1998 and 1997 are summarized
below:
Change
1998 1997 %
----------- ----------- ------
Sales ................................ 1,083,702 $ 1,567,624 (31)%
Cost of sales
(exclusive of depreciation
and salaries) ....................... 425,006 605,490 (30)%
Gross Profit ......................... 658,696 962,134 (32)%
Operating &
Other Expenses ....................... 1,069,895 1,099,371 (3)%
Net Operating Income ................. (411,199) (137,237) (200)%
Interest Expense ..................... (14,553) (21,517) 32 %
Other Income ......................... 11,088 45,375 (46)%
----------- -----------
Net Income (Loss)
before income taxes ................ $ (414,664) $ (113,379) (265)%
Provision for preferred dividends .... (17,200) (11,466) 50 %
----------- -----------
Net (Loss) to Common Shareholders .. $ (431,864) $ (124,845) (245)%
=========== ===========
<PAGE>
a. OPERATIONS OF LAPTOP SOLUTIONS-TEXAS
Laptop Solutions-Texas' results of operations for three months ended
February 28, 1998 and 1997 are summarized and discussed below:
Change
1998 1997 %
--------- ---------- -------
Sales .............................. $ 495,458 $1,176,568 (58)%
Cost of sales
exclusive of depreciation
and salaries) .................... 227,544 502,340 (55)%
--------- ----------
Gross Profit ....................... 267,914 661,280 (59)%
Operating &
Other Expenses ................... 551,472 612,419 (10)%
--------- ----------
Net Operating Income ............... (283,558) 48,861 (680)%
Other Income ....................... 5,482 20,541 (73)%
--------- ----------
Net Income (Loss)
before income taxes .............. $(278,076) $ 82,350 (437)%
========= ==========
SALES: Revenue from upgrade and enhancement sales decreased $281,405 from
$495,863 in 1997 to $214,458 in 1998, a decrease of 57%. The per unit revenue
and the number of units declined as a result of competitive pressure. Also,
laptops that were introduced by manufactures that were equipped with larger
drives and memory reduced the demand for upgrades. Revenue from Compatibility
Plus(TM) sales, the removable hard disk pak, decreased $141,327 in 1998 to
$44,227 from $185,554 in 1998 as demand declined as a result of increased
competition. Overall, revenues from warranty, non-warranty repair and contract
maintenance decreased $199,481, or 45%, from $440,582 in 1997 to $241,101 in
1998. Management believes that the decline of warranty and non-warranty revenue
was primarily the result of manufacturers extending the warranty period from one
year to three years and users being more inclined to replace a three year old
unit that is technologically obsolete than to purchase upgrade and enhancement
components. Recognizing this declining revenue trend in upgrade and repair
revenues, in late 1997, management has redirected the primary thrust of its
marketing and sales efforts towards the asset management and pre-delivery
preparation and integration services. While initial results are positive, it may
be the 3rd quarter before the result of this effort is realized. There can be no
assurance, however, that this change in focus will achieve the desired results,
at all.
COST OF SALES: Cost of sales of upgrade and enhancements services, as a percent
of sales, decreased 56% in 1998 to $97,266, a decrease of $123,557 from $220,823
in 1997. Cost of Compatibility Plus(TM) decreased 75% in 1998 to $21,703, a
decrease of $65,847 from $87,550 in 1997. Cost of warranty, non-warranty and
contract maintenance services decreased 41% in 1998 to $63,150, a decrease of
$63,150 from $153,598 in 1997. All other direct cost of sales decreased $1,362
to $18,127 in 1998 from $19,489 in 1997, a decrease of 7%.
OPERATING AND OTHER EXPENSES: Salaries and related payroll cost in 1998 amounted
to $345,603 as compared to $353,528 in 1997, a decrease of 2%. Personnel and
related cost for technician employees declined while sales cost increased as
management focused the marketing effort on the corporate sector. Advertising
cost decreased $23,460 from $34,176 in 1997 to $10,716 in 1998, a decrease of
68%. Computer expense decreased $7,576 in 1998 to $11,752 from $19,328 in 1997,
a decrease of 39% as a result of increasing the computer network capacity and
capabilities in 1997. Other taxes decreased $2,740 from $16,059 in 1997 to
$13,319 in 1998, a decrease of 17%. Telephone and long distance service
decreased $7,069 in 1998 to $16,922 from $23,991 in 1997. Travel expense
declined $6,904 in 1998 to $8,618 from $15,522 in 1997. Laptop Solutions-Texas
was charged a market rate for its office and warehouse space by the Company in
the amounts of $25,998 for 1997, and such amounts are included in Operating and
Other Expenses. Other general and administrative expenses decreased $10,544 from
$299,628 in 1997 to $289,084 in 1998, a decrease of 4%. The decline in operating
expenses was primarily the result of the decline in sales.
b. OPERATIONS OF LAPTOP SOLUTIONS-CALIFORNIA
Laptop Solutions-California's results of operations for three months
ended February 28, 1998 and 1997 are summarized and discussed below.
Change
1998 1997 (%)
-------- --------- ------
Sales ............................. $407,515 $ 73,840 452%
Cost of sales
(exclusive of depreciation
and salaries ..................... 137,863 69,850 97%
-------- ---------
Gross Profit ...................... 269,652 3,990 6,658%
Operating &
Other Expenses ................... 211,245 119,000 78%
-------- ---------
Net Operating Net Income .......... 58,407 (115,010) 151%
Other Income ...................... 3,760 665 465%
-------- ---------
Net Income (Loss)
Before Taxes ..................... $ 62,167 $(114,345) 154%
======== =========
SALES: Repair, enhancement and engineered solution sales increased 482% in 1998
to $46,867 from $8,056 in 1997, an increase of $38,811. CV/AR2000 sales
increased $120,200 in 1998 to $121,120 from $920 in 1998. Warranty and
non-warranty revenue declined 64% in 1998 to $22,392 from $61,349 in 1997, a
decline of $38,957. During the first quarter Laptop Solutions and Panasonic
Personal Computer Company (PPCC) completed a co-development effort on a new
wireless modem for Panasonic line of "ruggedized" laptops that resulted in
revenue of $217,136. Upon completion of the co-development effort, Laptop
Solutions was awarded the manufacturing and integration contract that was begun
in the first month of the second quarter. While there is no guaranteed volumes
or longevity to the agreement, initial market acceptance would indicate a steady
volume for the balance of 1998. Actual results will be dependent upon PPCC's
successful market penetration.
COST OF SALES: (exclusive of salaries and depreciation) Cost of sales of repair,
enhancement and engineered solutions increased $29,488 in 1998 to $33,428 from
$3,940 in 1997, an increase of 748%. Cost of CV/AR2000 increased $41,325 to
$41,549 from $224 in 1997. Non-warranty repair cost of sales deceased $30,079 in
1998 to $8,500 from $38,579 in 1997, a decrease of 78%. PPCC wireless project
development cost amounted to $51,009, exclusive of salaries that are included in
Operating and Other Expenses, in 1998. All other direct cost of sales declined
$20,089 to $2,374 in 1998 from $20,089 in 1997. The decrease is primarily cost
that had previously been associated with the development cost of production and
quality processes of CV/AR2000 in 1997.
OPERATING AND OTHER EXPENSES: Salaries and related payroll expenses increased
$39,019 in 1998 to $119,806 from $80,787 in 1997, an increase of 48%. The
increase was primarily related to increased personnel for CV/AR2000 and the PPCC
wireless project. Rent and utilities increased $23,739 to $33,323 in 1998 from
$9,584 in 1997as a result of relocation to a larger facility to accommodate the
production of CV/AR2000 and PPCC project. Computer expenses increased $3,842 in
1998 to $4,308 from $466 in 1997. Public relations and general insurance
expenses in 1997 were recognized in Laptop Solutions - Texas and in 1998 were
allocated to the beneficiaries in the amounts of $4,351 and $4,642 respectively
in 1998. Depreciation increased $5,855 in 1998 to $6,300 from $466 in 1997 as a
result of acquisition of production equipment. Shop tools, supplies and
development cost increased $6,504 in 1998 to $7,398 from $894 in 1997. All other
operating expenses increased $4,282 to $31,117 in 1998 from $26,835 in 1966, an
increase of 16%, primarily as a result of increased production.
c. OPERATIONS OF NB ENGINEERING, INC.
NB Engineering's results of operations for three months ended February
28, 1998and 1997 are summarized and discussed below.
Change
1998 1997 (%)
--------- --------- ---
Sales ............................ $ 180,729 $ 317,216 (43)%
Cost of sales
(exclusive of depreciation
and salaries) ................... 59,599 30,360 96%
--------- --------- ---
Gross Profit ..................... 121,130 286,856 (57)%
Operating &
Other Expenses .................. 321,509 392,410 (18)%
--------- --------- ---
Net Operating Income ............. (200,379) (105,554) (90)%
Other Income ..................... 1,624 4,702 (65)%
--------- --------- ---
Net Income Before
income taxes .................... $(198,755) $(100,852) 97%
========= ========= ===
SALES: DVD titles and NB products increased $97,003 in 1998 to $98,350 from
$1,347 in 1997. Engineering services in 1998 decreased $152,732 in 1998 to
$44,105 from $196,837 in 1997, a decrease of 78%. Compression sales in 1998 were
$36,775, a decline of $80,183, or 69% from 1997 of $116,958. The decline was
primarily the result of competitive pricing, resulting in a decrease in the
price per minute of data compression. NB Engineering, during fiscal 1997,
changed the direction and focus of its business from hardware integration and
engineering services to digital video compression, including DVD, and multimedia
development services. During the first quarter, NB completed the development of
a DVD title (Earthlight) for general distribution to the consumer DVD market in
the early part of the second quarter. As co-publisher of Earthlight, with Mill
Reef Entertainment (Washington, D.C.), NB has executed a distribution agreement
with DVD International (DVDI) for distribution to retailers of Video and DVD-ROM
titles. This agreement calls for a minimum guaranteed purchase of 5,000 units,
no later than March 24, 1998, with an estimated volume of approximately 24,000
units for the 12 months commencing March 1998.
COST OF SALES: Cost of sales in 1997 increased 79% from $33,352 in 1997 to
$59,599 in 1998. as a result of development cost of DVD technology.
OPERATING AND OTHER EXPENSES: Operating and other expenses of $392,410 in 1998
declined 13% from $451,004 in 1997. Salaries, professional fees and related cost
declined $38,508 to $194,017 in 1998 from $232,525 in 1997, a decrease of 17% as
a result of the decline in compression and engineering services. Depreciation
decreased $16,536 in 1998 to $22,645 from $39,181 as a result of the write down
of obsolete equipment. All other operating expenses decreased 10% to $85,936 in
1999 from $95,603 in 1997.
d. ENHANCED SERVICES COMPANY, INC., OFFICE BUILDING IN HOUSTON, TEXAS
The Company, on May 31, 1995, acquired an office building in Houston, Texas and
sold the building on August 6, 1997 as reported on Form 8-K filed on August 21,
1997. Results of operations related to the office building for three months
ended February 28, 1997 are summarized and below.
Rental income includes an allocated rent charge to Laptop Solutions-Texas in the
amount $26,000 in 1997.
1998 1997
---- ----
Rental Income - $ 82,946
Cost of Building Operations - 63,479
--------
Net Income,
before income taxes - $ 19,467
========
Laptop Solutions-Texas executed a three-year lease with the building's
purchaser at the prevailing market rate for the space it is occupying.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1998, the Company had stockholders' equity totaling
$1,064,186 as compared to $1,496,050 at November 30, 1997, a decrease of
$431,864. The decrease resulted from the net loss for the period of $431,864.
The Company's working capital was $22,221 at February 28, 1998 as compared to
$337,799 at November 30, 1997, a decrease of $315,578. The decrease was
primarily the result of the net loss for the period of $431,864.
Pursuant to action by the Board of Directors of the Company, the Company
entered into a Securities Acquisition Agreement ("Agreement"), dated as of March
3, 1998 (Filed with 8-K March 16, 1998 and attached as Exhibit 1 thereto),
pursuant to which it implemented a series of transactions on March 6, 1998 .
Under the Agreement, the Company exchanged 220,000 of its Common Shares,
$.001 par value ("Enhanced Common Stock") and 1,000,000 of its newly authorized
1998 Series Preferred Stock, $3.00 par value per share ("1998 Preferred Stock"
and collectively, with the Enhanced Common Stock, the "Enhanced Stock") for
12,000,000 common shares $.001 par value ("ZULU-tek Common Stock"), of ZULU-tek,
Inc., a Utah corporation ("ZULU-tek") and 1,000,000 shares of Series D Preferred
Stock $.001 par value ("ZULU-tek Preferred" and collectively, with the ZULU-tek
Common Stock, the "ZULU-tek Stock") held by Netvest Capital Partners LP, a
Delaware limited partnership ("Netvest").
All of the securities issued and exchanged in the Transactions are
restricted securities. Prior to the Transactions, there were 1,131,474 shares of
Enhanced Common Stock outstanding and 283,973 shares reserved for issuance for a
total of 1,415,447 shares on a fully diluted basis (with a result that the
220,000 shares of Common Stock issued in the Transactions constituted an
issuance of approximately 19.4% of Enhanced Common Stock or 15.5% on a fully
diluted basis). The Enhanced 1998 Preferred Stock is convertible on the basis of
2.772 shares of Enhanced Common Stock for each share of 1998 Preferred Stock,
solely at the option of the Company and only after receipt of shareholder
approval at a meeting duly called for such purposes. It is expected that the
Company's meeting of its shareholders will be convened promptly after
appropriate proxy materials are prepared for circulation.
The Transactions, described in exhibit 1 of the above referenced Form 8-K
and filed on March 16, 1998, provide the Company with access to ZULU-tek's
interactive sales and marketing expertise which will allow the Company to offer
its customers a complete Internet technology and sophisticated program
development solutions.
The Company intends to develop a business plan refocusing on the business
efforts of both entities, as appropriate. In that connection, the Company
intends to pursue a financing of up to $50 million through a private placement
of preferred equity securities of the Company, although no assurance can be
given that the Company will be successful in arranging for this private
placement. The offering is being made to fund a joint business and strategic
plan being undertaken by Enhanced and Zulu-tek, Inc.
Management plans that income generated from operations, along with working
capital and proceeds from the private placement of equity securities will be
sufficient to fund a joint business and strategic plan being undertaken by the
Company and Zulu-tek, Inc. However, there can be no assurance that such funds
will be available, or, if available, on favorable terms.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 5. Other Events -- March 16, 1998
Item 6. Resignation of Registrants Directors -- March 16, 1998
Item 7. Proforma Financial Statement -- Balance Sheet of the
Registrant at November 30, 1997 after giving effect to
the Transactions described in item 5. -- March 16, 1998
<PAGE>
SIGNATURES
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, thereunto duly authorized.
ENHANCED SERVICES COMPANY, INC.
By /s/ ROBERT SMITH Date 4/20/98
Chief Financial Officer
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