SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended Commission File Number
June 30, 1996 0-4563
THE ENCORE GROUP, INC.
P.O. Box 69536
Portland, Oregon 97201
IRS Employer Identification Number: 93-0580867
Incorporated in the State of Oregon
Telephone Number: (503) 221-4255
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 Act of 1934
during the preceding 12 months (or for such period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Number of shares of common stock outstanding as of August 13, 1996:
6,112,848. The number of shares outstanding is reported PRIOR TO giving
effect to the reverse stock split of April 23, 1996, which has not yet
been completed.
<PAGE>
<TABLE>
Part I, Item I
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 1996 and December 31, 1995
(In thousands, except share data)
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 3 $ 8
Accounts receivable 121 291
Inventory 158 200
Prepaid expenses 12 23
-------- --------
Total current assets 294 522
-------- --------
NON-CURRENT ASSETS
Real estate, 15 15
Fixed assets, net 4 8
Goodwill, net 495 507
-------- --------
514 530
-------- --------
Total assets $ 808 $ 1,052
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 335 $ 371
Accrued liabilities 81 100
Lines of credit 1,235 1,238
-------- --------
Total current liabilities 1,651 1,709
PENSION LIABILITIES 248 248
-------- --------
Total liabilities 1899 1957
STOCKHOLDERS' EQUITY
Common stock without par value, stated value $1 per share,
10,000,000 shares authorized; 6,156,110 shares issued,
6,112,848 outstanding 6,113 6,113
Additional paid-in capital 20,975 20,975
Retained deficit (28,022) (27,836)
Pension Liability Adjustment (157) (157)
Total stockholders' deficit (1,091) (905)
Total liabilities and stockholders' deficit $ 808 $ 1,052
======== ========
2
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the periods ended June 30, 1996 & 1995
(In thousands, except share and per share data)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
-------------------------------------------
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 279 $ 449 $ 660 $ 829
LESS COST OF SALES 187 284 449 504
------- ------- ------- -------
GROSS PROFIT 92 165 211 325
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 202 191 380 392
------- ------- ------- -------
Operating income (loss) (110) (26) (169) (67)
NON-OPERATING REVENUES & EXPENSES
Other income - - - -
Other expense (5) (4) (10) (9)
Interest expense (5) (33) (7) (70)
Total non-operating
revenues & expenses (10) (37) (17) (79)
------- ------- ------- -------
NET INCOME (LOSS) $ (120) $ ( 63) $ (186) $ (146)
PER SHARE
Net income (loss)
per share $ (.02) $ (.01) $ (.03) $ (.02)
Average common
shares outstanding 6,112,848 6,112,848 6,112,848 6,112,848
3
<FN>
The number of shares outstanding is reported PRIOR TO giving effect to the
reverse stock split of April 23, 1996, which has not yet been completed.
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended June 30, 1996 & 1995
(In thousands)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (186) $ (146)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 4 7
Amortization of goodwill 12 12
Loss on disposal of assets - -
Accounts receivable 170 27
Inventory 42 34
Prepaid expenses and other 11 33
Accounts payable (36) 2
Accrued liabilities (19) 28
------ ------
Net cash provided by operating activitie s (2) (3)
------ ------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Collections on notes and mortgage receivable - -
Proceeds from sale of fixed assets - -
Purchase of fixed assets - (2)
------ ------
Net cash provided by (used in)
investing activities - (2)
------ ------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Net borrowings (payments) re line of credit - -
Principal payments on notes payable (3) (15)
------ ------
Net cash used in financing activities (3) (15)
NET INCREASE (DECREASE) IN CASH (5) (20)
CASH, beginning of period 8 31
CASH, end of quarter $ 3 $ 11
====== ======
INTEREST PAID $ 7 $ 70
====== ======
4
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
THE ENCORE GROUP, INC.
AND SUBSIDIARY
Notes to consolidated financial statements
NOTE A - BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
The accompanying consolidated balance sheets at June 30, 1996 and December
31, 1995, and the statements of operations and the statements of cash flows
for the periods ended June 30, 1996 and 1995, have been prepared in
conformity with generally accepted accounting principles. The
management of The Encore Group, Inc. (the "Company") believes that all
adjustments necessary for a fair statement of the results of such interim
periods have been included. It is the Company's opinion that, when the
interim statements are read in conjunction with the audited financial
statements set forth in the annual Form 10-K for the year ended December
31, 1995, the disclosures are adequate to make the information presented
not misleading.
The consolidated financial statements include the accounts of The Encore
Group, Inc., and its wholly owned subsidiary, VDO-Pak, Inc. (referred to
hereafter as the "VDO-Pak"). All significant intercompany accounts and
transactions have been eliminated.
VDO-Pak's operations consist of supplying replacement batteries and power
related accessories to the video and cellular telephone industries, located
primarily in the Eastern Untied States. Historically, VDO-Pak has operated
profitably, however, earnings have not been enough to offset the Company's
debt and associated interest charges. This has resulted in working capital
deficits and net losses. Additionally, the Company has been out of
compliance with its note payable terms since January 31, 1992.
The Company has ceased operations pending a restructuring of its debt
obligations with the bank and acquiring new working capital. Also see
page 7, below.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Accounts receivable - Collectibility of receivables is periodically assessed
by management. This assessment provides the basis for the allowance for
doubtful accounts and the related bad-debt expense. The allowance for
doubtful accounts was $22 and $31 at June 30, 1996 and December 31, 1995,
respectively. Assets for which the Company has credit risk are trade
accounts receivable which amount to $143 and $322 at June 30, 1996 and
December 31, 1995, respectively.
The Company's trade customers are geographically dispersed throughout the
United States, with a significant concentration in the Eastern United States.
The Company performs ongoing credit evaluation of its customers' financial
conditions and generally requires no collateral from its customers.
Inventory - Inventory is stated at the lower of cost (first-in, first-out
method) or market at June 30, 1996 and December 31, 1995. Inventory consists
of components and products for manufacture and resale. At June 30, 1996 and
December 31, 1995, a reserve of $79 and $127, rspectively,was provided to
record slow-moving inventory at its estimated net realizable value.
Fixed assets - Fixed assets are stated at cost, net of accumulated
depreciation of $178 and $174 at June 30, 1996 and December 31, 1995,
respectively. Expenditures for additions to property and equipment are
capitalized. The cost of repairs and maintenance is expensed as incurred.
Depreciation of property and equipment is computed principally on the
straight-line basis over the estimated useful lives of the assets
(generally three to eight years). Leasehold improvements are amortized
on the straight-line basis over the lesser of the term of the lease or
estimated useful lives of the improvements.
Income taxes - Income taxes are recognized during the year in which
transactions enter into the determination of financial statement income
with deferred taxes provided for temporary differences between amounts of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws.
5
<PAGE>
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - continued
Amortization of goodwill - Goodwill relates to the original acquisition of
VDO-Pak and is amortized on a straight line basis over the expected benefit
of 20 years. Accumulated amortization was $155 and $143 at June 30, 1996 and
December 31, 1995. Management periodically assesses the recoverability of
goodwill and believes the existing amortization schedule is appropriate at
June 30, 1996.
Income (loss) per share - Income (loss) per share is based on the weighted
average number of shares of common stock outstanding during each period.
Use of estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassification - During 1995, certain accounts were reclassified to conform
to the current year's presentation. These reclassifications had no effect on
net income.
NOTE C - LAND HELD FOR SALE
In June 1988, the Company took title to commercial property in Gillette,
Wyoming as resolution of the land development project. During 1995, the
Company wrote down this asset by $45, to reflect the property at its
estimated fair market value of $15.
NOTE D - OFFICER RECEIVABLE
During 1995, the Company advanced the majority stockholder $87.5, of which
$13 has been repaid. Subsequent to year-end, the stockholder began working
with the Bank of California to restructure his personal debts as well as the
Company's debt. There is no guarantee that the stockholder will be
successful in his efforts to restructure his debt. Accordingly, the Company
reserved for the entire balance of $74.5 at December 31, 1995. This reserve
was recorded as a non-operating expense.
NOTE E - NOTE PAYABLE
The Company has a working capital deficit of $1,357 as of June 30, 1996.
This deficit is directly attributable to the Company's outstanding note
payable with the Bank of California. The Company has no further availability
to borrow since the Company is not in compliance with the credit agreement
that required payment of this note on January 31, 1992. The Company does not
have a formal long-term arrangement with the current lender, and the Company
has ceased making monthly principal payments of $2.5 plus interest on the
outstanding balance as of January 1996. The balance on the note totaled
$1,235 at June 30, 1996. The Company and principal stockholder are currently
negotiating with the bank to restructure their obligation through the
conversions of a portion of their obligation to equity or equity like
instrument.
The line is guaranteed by the principal stockholder and is secured by
accounts receivable, inventory, and the principal stockholders'common stock
holdings in the Company.
It is not practicable to estimate the fair value of the Company's short-term
debt, as the note is due on demand.
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
June 30, December 31,
1996 1995
Accrued salaries and payroll taxes $ 6 $ 15
Professional fees 12 12
Other 63 73
----- -----
$ 81 $ 100
6
<PAGE>
Part I, Item 2
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Period Ended June 30, 1996 Compared to Period Ended June 30, 1995
Operating results for the quarter ended June 30, 1996 include the operations
of the Company and its wholly-owned subsidiary, VDO-Pak. During the quarter
VDO-Pak had sales of $92 and a net loss of $17 versus last year's quarter
with sales of $449 and net income of $15.
Interest expense for the quarter ended June 30, 1996, was $5, compared to $33
for the prior year's quarter, consisting mostly of interest on the line of
credit. The lower interest in 1996 is a result of the Company ceasing to pay
interest to the bank while it and the principal stockholder are negotiating
with the bank to restructure their obligations. Other interest expense is
interest paid and accrued on notes payable.
The net loss for the quarter ended June 30, 1996, was $120 compared to $63
loss for the same quarter last year. The increased loss is a result of lower
sales. Other costs were up relating to the Company's 1-for-500 stock split.
These costs will continue into the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 the Company had a cash balance of $3, a decrease of $5
from the end of fiscal year 1995. The primary uses of cash during the period
were funding the operations and working capital requirements of the Company
and its subsidiary.
Accounts receivable decreased during the quarter to provide working capital
needed to fund the operations. Working capital was in a deficit position of
$1,357 compared to deficit $1,187 at the end of 1995. The Company is not in
compliance with its existing credit agreement, which required repayment on
January 31, 1992.
The Company is no longer able to rely on VDO-Pak to provide cash flow for its
day to day operations and must restructure the outstanding bank debt to
continue as a going concern.
As of the date of this report, the Company has ceased operations pending
acceptance by the bank of its restructuring proposal and the attainment of
new working capital.
7
<PAGE>
Part II, Other Information
THE ENCORE GROUP, INC.
Item 1. Legal Proceedings
The Company was not involved in any litigation.
Item 5. Other Information
(a) None.
Item 6. Exhibits and Reports on Form 8-K
(a) There were no exhibits during this quarter.
(b) There were no reports on Form 8-K
8
<PAGE>
Signatures
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
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.
The Encore Group, Inc.
Date: August 13, 1996
/s/ Kenneth L. Wright
Executive Vice President and
Principal Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 143
<ALLOWANCES> (22)
<INVENTORY> 158
<CURRENT-ASSETS> 294
<PP&E> 197
<DEPRECIATION> (178)
<TOTAL-ASSETS> 808
<CURRENT-LIABILITIES> 1651
<BONDS> 0
0
0
<COMMON> 6113
<OTHER-SE> (7204)
<TOTAL-LIABILITY-AND-EQUITY> 808
<SALES> 660
<TOTAL-REVENUES> 660
<CGS> 449
<TOTAL-COSTS> 449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7)
<INCOME-PRETAX> (186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
