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, 1996
or
[ ] Transition Report Pursuance to Section 13 or 15(d) of the Securities
Exchange act of 1934. For the transition period from to
Commission File Number 0-24256
ENHANCED SERVICES COMPANY, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1075908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
16000 BARKERS POINT LANE, HOUSTON TX 77079
(Address of principal executive offices) (Zip Code)
(713) 566-5051
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 31, 1996, Registrant had 1,059,174 shares of common stock, $.001
Par Value, outstanding.
INDEX
PAGE
NUMBER
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets as of August 31,
1996 (Unaudited) and November 30, 1995 2
Consolidated Statements of Operations Three
Months Ended August 31, 1996 and
August 31, 1995 (Unaudited) 3
Consolidated Statements of Operations, Nine
Months Ended August 31, 1996 and
August 31, 1995 (Unaudited) 4
Consolidated Statement of Changes in Stock-holders'
Equity from November 30, 1995 through August 31,
1996 (Unaudited) 5
Consolidated Statements of Cash Flows,
Three Months Ended August 31, 1996 and
August 31, 1995 (Unaudited) 6
Consolidated Statements of Cash Flows,
Nine Months Ended August 31, 1996 and
August 31, 1995 (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 16
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS
(Unaudited)
August 31 November 30
1996 1995
Current Assets
Cash in bank $ 118,588 $ 355,138
Inventory 691,951 622,165
Income tax refund receivable - 128,200
Accounts receivable, net of allowance
for doubtful accounts 689,802 685,824
Other current assets 175,028 53,491
------------------- -------------------
Total Current Assets 1,675,369 1,844,818
Property and equipment, net of accumulated
depreciation 1,284,126 1,430,230
Goodwill, net of accumulated amortization 907,614 1,026,001
Other assets 102,169 83,213
------------------- -------------------
Total Assets $ 3,969,278 $ 4,384,262
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 531,635 $ 1,088,444
Notes payable, current portion 544,886 47,520
Mortgage payable, current portion 82,185 8,490
Other current liabilities 138,887 21,112
------------------- -------------------
Total Current Liabilities 1,297,593 1,165,566
Notes payable, net of current portion 63,752 67,488
Mortgage payable, net of current portion 532,357 611,807
Other liabilities 14,721 14,693
------------------- -------------------
Total Liabilities 1,908,423 1,859,554
------------------- -------------------
Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized - -
Common stock - $.001 par value,
15,000,000 shares authorized;
1,013,786 shares issued and
outstanding at November 30, 1995
and 1,059,174 at August 31, 1996 1,059 1,014
Additional paid-in capital 2,330,007 2,128,939
Retained earnings (270,211) 394,755
------------------- -------------------
Total Stockholders' Equity 2,060,855 2,524,708
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 3,969,278 $ 4,384,262
=================== ===================
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
August 31 August 31
1996 1995
Revenue:
Sales $ 1,124,503 $ 2,259,400
Cost of sales (exclusive
of depreciation and salaries
shown separately below) 287,075 1,086,263
-------------------- ---------------------
Gross Profit 837,428 1,173,137
-------------------- ---------------------
Operating Expenses
Salaries 523,413 628,589
Advertising and promotion 28,785 40,997
Contract services 23,055 19,793
Rent 80,903 51,861
Travel and entertainment 29,485 12,289
Depreciation/amortization 107,589 81,416
Other operating expenses 276,692 335,453
-------------------- ---------------------
Total Operating Expenses 1,069,922 1,170,398
-------------------- ---------------------
Net Operating Income (Loss) (232,494) 2,739
Other Income 11,184 13,373
-------------------- ---------------------
Net income (loss), before provision
for income taxes (221,310) 16,112
Provision for income taxes - -
-------------------- ---------------------
Net Income (Loss) $ (221,310) $ 16,112
==================== =====================
Net Income (Loss) per Share $ (.21) $ .02
==================== =====================
Weighted Average Shares Outstanding 1,036,674 1,042,919
==================== =====================
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Nine Months
Ended Ended
August 31 August 31
1996 1995
Revenue:
Sales $ 3,674,243 $ 4,750,802
Cost of sales (exclusive
of depreciation and salaries
shown separately below) 1,229,452 2,049,220
-------------------- ---------------------
Gross Profit 2,444,791 2,701,582
-------------------- ---------------------
Operating Expenses
Salaries 1,498,924 1,129,350
Advertising and promotion 139,595 129,676
Contract services 111,123 38,011
Rent 241,218 98,828
Travel and entertainment 66,162 30,365
Depreciation/amortization 326,730 96,316
Other operating expenses 794,236 650,504
-------------------- ---------------------
Total Operating Expenses 3,177,988 2,173,050
-------------------- ---------------------
Net Operating Income (Loss) (733,197) 528,532
Other Income 68,231 19,783
-------------------- ---------------------
Net income (loss), before provision
for income taxes (664,966) 548,315
Provision for income taxes - 189,207
-------------------- ---------------------
Net Income (Loss) $ (664,966) $ 359,108
==================== =====================
Net Income (Loss) per Share $ (.64) $ .41
==================== =====================
Weighted Average Shares Outstanding 1,036,480 878,239
==================== =====================
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From November 30, 1995 through August 31, 1996
(Unaudited)
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN RETAINED
NO./SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------- ---------- --------- -----------
Balance at November 30, 1995 ................. 5,068,928 $ 5,069 $2,124,884 $ 394,755 $ 2,524,708
Stock issued ................................. 1,940 2 1,211 -- 1,213
One for five reverse stock split
(4,056,694) (4,057) 4,057 -- --
Stock issued for cash ........................ 45,000 45 75,955 -- 76,000
Discount on options .......................... -- -- 123,900 -- 123,900
Net (loss) for the nine
month period ended August
31, 1996 ..................................... -- -- -- (664,966) (664,966)
---------- ------- ---------- --------- -----------
Balance at August 31, 1996 ................... 1,059,174 $ 1,059 $2,330,007 $(270,211) $ 2,060,855
========== ======= ========== ========= ===========
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
August 31 August 31
1996 1995
Cash Flows from Operating Activities:
Net income (loss) $ (221,310) $ 16,112
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization 107,588 81,416
(Decrease) in accounts payable
and accrued expenses (337,587) (341,058)
(Increase) decrease in
accounts receivable 107,921 (421,024)
(Increase) in inventory (95,410) (45,104)
(Increase) in unearned revenue - (68,202)
Other, net (88,894) (58,422)
-------------------- ---------------------
Net Cash (Used in) Operating
Activities (527,692) (836,282)
-------------------- ---------------------
Cash Flows from Investing Activities:
(Purchases) of property and
equipment (13,288) (121,977)
Disposition of investments - 634,999
-------------------- ---------------------
Net Cash Provided by (Used in)
Investing Activities (13,288) 513,022
-------------------- ---------------------
Cash Flows from Financing Activities:
(Repayment) from notes and
mortgages payable (2,555) (115,564)
Proceeds from notes payable 250,000 -
Common stock issued 199,900 -
-------------------- ---------------------
Net Cash Provided by (Used in)
Financing Activities 447,345 (115,564)
-------------------- ---------------------
(Decrease) in cash (93,635) (438,824)
Cash, Beginning of Period 212,223 652,486
-------------------- ---------------------
Cash, End of Period $ 118,588 $ 213,662
==================== =====================
Interest Paid $ 13,977 $ 17,864
==================== =====================
Income Taxes Paid $ - $ -
==================== =====================
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
August 31 August 31
1996 1995
Cash Flows from Operating Activities:
Net income (loss) $ (664,966) $ 359,108
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization 326,730 96,316
Increase (decrease) in accounts
payable and accrued expenses (556,809) (262,845)
(Increase) in accounts
receivable (3,978) (446,184)
(Increase) in inventory (69,786) (213,637)
(Decrease) in income taxes
payable - (113,262)
Decrease in income tax refund
receivable 128,200 -
Decrease in unearned revenue - (52,137)
Other, net (22,690) (100,505)
-------------------- ---------------------
Net Cash (Used in) Operating
Activities (863,299) (733,146)
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchases of property and
equipment and other (62,239) (866,869)
Disposition of investments - 640,782
-------------------- ---------------------
Net Cash (Used in) Investing
Activities (62,239) (226,087)
-------------------- ---------------------
Cash Flows from Financing Activities:
(Repayment) of notes payable (12,125) (115,564)
Proceeds from notes and mortgage
payables 500,000 622,000
Common stock issued 201,113 293,750
-------------------- ---------------------
Net Cash Provided by Financing
Activities 688,988 800,186
-------------------- ---------------------
Increase (decrease) in cash (236,550) (159,047)
Cash, Beginning of Period 355,138 372,709
-------------------- ---------------------
Cash, End of Period $ 118,588 $ 213,662
==================== =====================
Interest Paid $ 29,382 $ 17,864
==================== =====================
Income Taxes Paid $ - $ 281,290
==================== =====================
The accompanying notes are an integral part of the financial statements.
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1996 and 1995
(1) ORGANIZATION
Enhanced Services Company, Inc. (ESC) a Colorado corporation, was
incorporated in 1987.
Laptop Solutions, Inc. (LSI), a Texas corporation was incorporated in
1991. LSI is in the business of internal hard drive, processor and RAM
upgrades for laptop and notebook computers and has selected November 30
as its fiscal year end. LSI is a wholly-owned subsidiary of ESC.
Effective May 31, 1995, NB Engineering, Inc. (NBE), a wholly-owned
subsidiary of ESC, incorporated in Delaware, acquired substantially all
of the assets and assumed certain liabilities of NB Engineering, Inc.
(NB) a privately held Maryland corporation. NBE provides applications
development and digital video compression services and selling related
video and networking products.
The consolidated financial statements include the accounts of ESC and
subsidiaries since acquisition or formation. All intercompany accounts
and transactions have been eliminated.
(2) UNAUDITED STATEMENTS
The balance sheet as of August 31, 1996, the statements of income and
the statements of cash flows for the three and nine month periods ended
August 31, 1996 and August 31, 1995 and the statement of changes in
stockholders' equity for the nine month period ended August 31, 1996
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, 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.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Enhanced Services Company, Inc. (the "Company") provides upgrade, repair and
maintenance and asset management services for portable computers (hardware
services) as well as digital video multimedia presentation and processing
services for marketing, training, archival storage, video formatting and other
applications.
CONSOLIDATED RESULTS OF OPERATIONS
The following is a summary of the consolidated results of operations for the
third fiscal quarters of 1996 and 1995:
1996 1995 CHANGE (%)
----------- ----------- ----------
Sales ....................... $ 1,124,503 $ 2,259,400 (50.2%)
Cost of sales (exclusive
of depreciation and
salaries) ................... 287,075 1,086,263 (73.6%)
----------- -----------
Gross Profit ................ 837,428 1,173,137 (28.7%)
Operating Expenses .......... 1,069,922 1,170,398 (8.6%)
Other Income ................ 11,184 13,373 (16.4%)
----------- -----------
Net Income,
before income taxes ......... (221,310) 16,112 (1473.6%)
Income taxes ................ -0- -0-
Net Income .................. $ (221,310) $ 16,112 (1473.6%)
=========== ===========
During The three months ended August 31, 1996, the Company, on a consolidated
basis, incurred a net loss of $221,310 as compared to a net income of $16,112
for three months ended August 31, 1995, a negative change in profitability of
$237,422. Overall, consolidated sales decreased from $2,259,400 to $1,124,503, a
decrease of $1,134,897, or 50.2%. Cost of sales, exclusive of depreciation and
salaries, decreased from $1,086,263 to $287,075, a decrease of $799,188 or
73.6%. Gross profit margins decreased from $1,173,137 to $837,428, a decrease of
28.6%.
Operating expenses decreased from $1,170,398 in third quarter 1995 to
$1,069,922 in third quarter 1996, a decrease of $100,476 or 8.6%. Salaries and
contract employees decreased from $648,382 in third quarter 1995 to $546,468, a
decrease of $101,914, or 15.7%. Depreciation increased from $15,515 in 1995 to
$68,127, an increase of $52,612, or 339%. Professional and Consulting Fees
include $37,170 discount on common stock warrants that were issued for
consulting services, increased from $44,969 in 1995 to $68,927 in 1996, an
increase of $23,958 or 53.3%. Rent increased from $51,861 in 1995 to $80,903 in
1996, an increase of $29,042, or 64.6%. Amortization of goodwill increased from
$15,669 to $39,462, an increase of $23,793, or an increase of 151.8%. Travel
expenses increased from $10,595 in the third quarter of 1995 to $29,394, an
increase of $18,799, or 177.4%. Insurance expenses decreased $62,269 in 1995 to
$22,223 in 1996, a decrease of $40,046, or 64.3%. All other operating expenses
decreased from $256,393 in 1995 to $244,418 in 1996, an decrease of $11,975, or
4.7%. Several factors as described below, contributed to the significant changes
from the third quarter of 1995 to 1996.
A. OPERATIONS OF LAPTOP SOLUTIONS, INC. - TEXAS
The following is a summary of Laptop Solutions, Inc.- Texas results of
operations for the third fiscal quarters of 1996 and 1995:
1996 1995 CHANGE (%)
--------- ---------- --------
Sales ........................ $ 834,505 $1,256,702 (33.6)%
Cost of sales
exclusive of depreciation
and salaries) ................ 231,235 581,612 (60.2)%
---------- ----------
Gross Profit ................. 603,270 675,090 (10.6)%
Operating Expenses ........... 547,616 487,342 12.4 %
Other Income ................. 15,363 13,373 14.9 %
---------- ----------
Net Income,
before income taxes .......... $ 71,017 $ 201,121 (64.7)%
========== ==========
In comparing the results of operations for third quarter 1996 to 1995, it is
important to note the change in sources of Laptop Solutions, Inc. - Texas
revenue. Laptop Solutions, Inc. - Texas received a contract from an
international computer manufacturer to provide integration services, storage,
receiving, shipment and asset management for certain portable computers, as
directed by the manufacturer, for a fixed monthly fee of $11,500 that amounted
to $34,500 in the third quarter of 1996. The Company, during the second quarter
of 1996, announced that it had formed it's Solutions Engineering Division to
provide custom products for specific customers and a peripheral device product
line. While assembly and sale of the peripheral devices will be primarily at the
Laptop Solutions, Inc. - Texas facility in Houston, Texas, other projects will
be assembled and sold through the Laptop Solutions, Inc.-California facility in
Irvine, California. The Company completed design of a pak containing a removable
hard drive for use in a popular laptop computer, and it began shipping units of
the removable hard drive pak in the beginning of the fourth quarter of 1996.
Laptop Solutions, Inc.- Texas continues to encounter significantly more
competition in providing enhancement and upgrade services to several computer
manufacturers' units than in 1995, when it was a more significant supplier of
such services to such customers. During the third quarter of 1996, while margins
increased in Laptop Solutions, Inc. - Texas's enhancement and upgrade services,
the average revenue and related cost of sales decreased substantially due to a
rapid drop in industry pricing of the primary component. Additionally, increased
competition for enhancement and upgrade services contributed to decrease
revenues from such services in third quarter 1996 compared with 1995, while
revenues from repair and warranty services continue to increase.
Cost of goods sold decreased in 1996 to $231,235 from $581,612 primarily as a
result of the lower number of enhancement and upgrade units serviced. A
non-recurring credit to Cost of Goods Sold was recorded in the third quarter of
1996 with a positive effect of $62,580. The increase of 461% in warranty repairs
over the last year and the corresponding increase in transaction volumes
contributed to the delay in recognition of the credit. Salaries and contract
employees in 1996 amounted to $308,991 as compared to $286,702 in third quarter
1995, a increase of $22,289, or 7.8%. Personnel and related cost increases were
primarily due to increased level of warranty and repair services. Rent increased
from $19,929 in 1995 to $42,628 in 1996, an increase of $25,699, or 151.8%.
Other operating expenses contributing to increased operating costs included
payroll taxes, professional fees, travel, telephone and other general and
administrative expenses.
Management believes that to achieve profits similar to prior periods will
require greater volume than was required in the past, and there can be no
assurance that Laptop Solutions, Inc. - Texas will be able to achieve such
volume.
B. FORMATION AND OPERATIONS OF LAPTOP SOLUTIONS, INC. OF CALIFORNIA
During the second fiscal quarter of 1995, the Company formed Laptop
Solutions, Inc. - California, a wholly-owned subsidiary, to perform upgrade and
repair services for portable computers on the west coast. This entity was formed
to provide similar services as Laptop Solutions, Inc. - Texas, also a
wholly-owned subsidiary.
Laptop Solutions, Inc. - California's results of operations for third
quarter 1996 are summarized as follows:
1996 1995 CHANGE(%)
-------- -------- -------
Sales ........................ $ 34,479 $ 70,514 (51.1)%
Cost of sales
(exclusive of depreciation
and salaries) ................ 5,571 10,680 (47.8)%
-------- --------
Gross Profit ................. 28,908 59,834 (51.7)%
Operating Expenses ........... 79,498 76,358 4.1%
-------- --------
Net Income,
before income taxes .......... $(50,590) $(16,524) (206.2)%
======== ========
The factors relating to Laptop Solutions, Inc. - Texas's business in 1995
discussed above generally also apply to Laptop Solutions, Inc. - California.
Management continues to believe that a presence in the west coast market is a
prudent investment in the future of the Company. Management and administrative
personnel for the Company's Solutions Engineering Division are also located at
the Irvine, California facility and are included in Laptop Solutions, Inc. -
California's operating expenses. While the removable hard drive product is being
manufactured in the Houston, Texas facility, the Irvine, California facility is
being utilized for custom configuration of laptop computers. Laptop Solutions,
Inc. - California received a purchase order during the third quarter of 1996 to
enhance four hundred laptops with touch screen capabilities. This project is
currently in progress.
Management believes that Laptop Solutions, Inc. - California will improve
during the fourth quarter of 1996 due to existing commitments. However, there
can be no assurance that Laptop Solutions, Inc. - California will become
profitable.
C. ACQUISITION AND OPERATIONS OF NB ENGINEERING, INC.
The Company entered into the custom digital video compression and engineering
services businesses through the acquisition of NB Engineering, Inc. on May 31,
1995. The Company's consolidated results of operations for the third quarter
1996 include the results of operations of NB Engineering, Inc.:
1996 1995 CHANGE(%)
--------- --------- -------
Sales .......................... $ 255,519 $ 932,184 (72.6)%
Cost of sales
(exclusive of depreciation
and salaries) .................. 50,269 493,971 (89.8)%
--------- ---------
Gross Profit ................... 205,250 438,213 (53.2)%
Operating Expenses ............. 408,871 555,416 (26.4)%
Other Income ................... 979 -0- N/A
--------- ---------
Net Income,
before income taxes ............ $(202,642) $(117,203) (72.9)%
========= =========
While management believes that certain steps now being taken with the
operations and direction of NB Engineering, Inc. may result in a turn around in
NB Engineering, Inc.'s profitability, there can be no assurance that results
will improve. It believes that NB Engineering, Inc. may improve during the
fourth quarter of 1996 due to existing commitments However, there can be no
assurance that NB Engineering, Inc. will become profitable.
During the third quarter, the Company finalized the development of its ability
to "format author" (premaster film for video and interactive multimedia
applications) customers' full length motion pictures, using the compression
standard known as Digital Versatile Disk (DVD). DVD allows a full length motion
picture to be stored on a 5.25" optical disc at broadcast quality video and
Dolby AC-3 quality surround sound stereo. This emerging standard is, management
believes, likely to be the future digital standard for home delivery of full
length motion pictures. The company plans to deliver its first completed title
towards the end of the fourth quarter or early in the first quarter of 1997. NB
Engineering, Inc., during the third quarter, entered into an agreement with a
West Coast post-production facility to jointly develop, and deliver DVD titles
to the entertainment industry located in Southern California.
D. ENHANCED SERVICES COMPANY, INC., ACQUISITION OF OFFICE BUILDING IN HOUSTON,
TEXAS
1996 1995 CHANGE (%)
-------- -------- -------
Rental Income .................. $ 54,570 $ 26,131 108.8 %
Cost of Building
Operations ................. 59,789 38,182 56.6 %
-------- --------
Gross Profit ................... (5,219) (12,051) 56.7 %
Other Expenses ................. 33,937 51,282 (33.8)%
Other Income ................... 61 -0- N/A
-------- --------
Net Income,
before income taxes ............ $(39,095) $(49,439) (20.9)%
======== ========
During 1995, the Company acquired an office building in Houston, Texas. The
Company and Laptop Solutions, Inc. - Texas use a portion of the building for
their offices and as warehouse facilities. Certain additional office space is
leased to other tenants. As of the end of the third fiscal quarter of 1995, the
vacancy rate was approximately 50%. Leases have been signed that reduced the
vacancy to 19% during the third quarter of 1996. Management believes that,
attributing a market rental rate charged to Laptop Solutions, Inc. - Texas, the
building will break-even at that level of occupancy. Management believes that
the Company was able to acquire this property and its improvements at less than
its market value, and it believes that it will prove to be a good long-term
investment. Had the Company not acquired this building and continued renting
facilities in Texas, it is estimated that the rental costs would not be
materially different than the net operating costs of the building during the
third quarter of 1996, and at the current level of occupancy, it will result in
a savings to the Company as well as the opportunity for possible appreciation in
the value of the property. While management believes that this is likely to
continue over a period of time, there can be no assurance that it will.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company had stockholders' equity totaling $2,060,855 as
compared to $2,524,708 at November 30, 1995, a decrease of $463,853. This
decrease resulted from a net loss of $664,966, the issuance of 1,940 shares of
stock valued at $1,213, the exercise of 45,000 warrants for the cash
consideration $76,000 and discount on warrants granted of $123,900 during the
nine month period ended August 31, 1996. The Company's working capital was
$377,776 at August 31, 1996 as compared to $679,252 at November 30, 1995, a
decrease of $301,476. This decrease was primarily the result of the net loss for
the period and an increase in the working capital loan.
The Company executed a working capital loan in the amount of $500,000 on January
19, 1996 (amended as of June 1, 1996). The loan is due May 31, 1997 with
interest paid monthly at 2% above the prime rate quoted by the Wall Street
Journal and is secured by certain accounts receivable and inventory. The Company
had borrowed $500,000 as of August 31, 1996. Management plans that income
generated from the Company's Laptop Solutions, Inc. - Texas and California
operations should be sufficient to finance its existing Laptop Solutions, Inc. -
Texas and California operations. Continuation of NB Engineering, Inc.'s
operations require that additional funds be available at least during the fourth
quarter. Such funds need to be provided through additional equity capital or
other working capital financing. However, there can be no assurances that such
funds will be available, or, if available, on attractive terms.
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
Exhibit 27 - Financial Data Schedule
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 Date