<PAGE>
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 Three Months Ended Commission File Number
March 31, 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 April 22, 1996: 6,112,848
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PART I, ITEM I
THE ENCORE GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of March 31, 1996 and December 31, 1995
(In thousands, except share data)
March 31,
1996 December 31,
(Unaudited) 1995
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 14 $ 8
Accounts receivable 91 291
Inventory 214 200
Prepaid expenses 18 23
-------- --------
Total current assets 337 522
-------- --------
NON-CURRENT ASSETS
Land held for sale 15 15
Fixed assets, net 6 8
Goodwill, net 501 507
-------- --------
522 530
-------- --------
Total assets $ 859 $ 1,052
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 283 $ 371
Accrued liabilities 64 100
Note payable 1,235 1,238
-------- --------
Total current liabilities 1,582 1,709
PENSION LIABILITIES 248 248
-------- --------
Total liabilities 1,830 1,957
======== ========
STOCKHOLDERS' DEFICIT
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 (27,902) (27,836)
Pension liability adjustment (157) (157)
--------- --------
Total stockholders' deficit (971) (905)
--------- --------
Total liabilities
and stockholders' deficit $ 859 $ 1,052
======== ========
2
The accompanying notes are an integral part of
these consolidated financial statements.
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THE ENCORE GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 1996 & 1995
(In thousands, except share and per share data)
THREE MONTHS ENDED MARCH 31,
----------------------------------
1996 1995
(unaudited) (unaudited)
----------- -----------
SALES $ 381 $ 380
LESS COST OF SALES 262 220
-------- ---------
GROSS PROFIT 119 160
SELLING, GENERAL & A
ADMINISTRATIVE EXPENSES 178 201
-------- ---------
Operating income (loss) (59) (41)
-------- ---------
NON-OPERATING REVENUES & EXPENSES
Other income - -
Other expense (5) (5)
Interest expense (2) (37)
-------- ---------
Total non-operating
revenues & expenses (7) (42)
-------- ---------
NET INCOME (LOSS) $ ( 66) $ (83)
======== =========
PER SHARE
Net income (loss) per share $ (.01) $ (.01)
======== =========
Average common shares
outstanding 6,112,848 6,112,848
========= =========
3
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THE ENCORE GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 1996 & 1995
(In thousands)
THREE MONTHS ENDED MARCH 31,
---------------------------------
1996 1995
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ ( 66) $ (83)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation 2 4
Amortization of goodwill 6 6
Loss on disposal of assets - -
Accounts receivable 200 140
Inventory (14) -
Prepaid expenses and other 5 27
Accounts payable (88) (92)
Accrued liabilities (36) (13)
---------- ----------
Net cash provided by
operating activities 9 (11)
---------- ----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Collections on notes and
mortgage receivable - -
Proceeds from sale of fixed assets - -
Purchase of fixed assets - -
---------- ----------
Net cash provided by (used in)
investing activities - -
---------- ----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Net borrowings (payments)
related to line of credit - -
Principal payments on notes payable (3) (5)
---------- ----------
Net cash used in financing
activities (3) (5)
---------- ----------
NET INCREASE (DECREASE) IN CASH 6 (16)
CASH, beginning of quarter 8 31
---------- -----------
CASH, end of quarter $ 14 $ 15
========== ===========
INTEREST PAID $ 2 $ 37
========== ===========
4
The accompanying notes are an integral part of
these consolidated financial statements.
<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 March 31, 1996 and December 31,
1995, and the statements of operations and the statements of cash flows for the
periods ended March 31, 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 since January 31, 1992 (See Note E).
The Company has been actively negotiating a restructuring of its debt
obligations with the bank. Additionally, the Company is pursuing alternative
sources of equity to allow the Company to increase VDO-Pak's operating levels.
The restructuring of outstanding debt obligations and an infusion of additional
equity, are essential to return the Company to profitable operating levels,
which are necessary if the Company is to continue as a going concern.
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 $31 and $31 at March 31, 1996 and December 31, 1995, respectively. Assets
for which the Company has credit risk are trade accounts receivables which
amount to $122 and $322 at March 31, 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 March 31, 1996 and December 31, 1995. Inventory consists
of components and products for manufacture and resale. At March 31, 1996 and
December 31, 1995, a reserve of $127, 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 $176 and $174 at March 31, 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 $149 and $143 at March 31, 1996 and
December 31, 1995. Management periodically assesses the recoverability of
goodwill and believes the existing amortization schedule is appropriate at March
31, 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 have been 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 has 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 continues to have a working capital deficit of $1,245. 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 $1,238 at December 31, 1995. 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: March 31, December 31,
1996 1995
------ ------
Accrued salaries and payroll taxes $ 15 $ 15
Professional fees 12 12
Other 37 73
------ ------
$ 64 $ 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 MARCH 31, 1996 COMPARED TO PERIOD ENDED MARCH 31, 1995
Operating results for the quarter ended March 31, 1996 include the operations of
the Company and its wholly-owned subsidiary, VDO-Pak. During the quarter VDO-
Pak had sales of $381 and a net loss of $22 versus last year's quarter with
sales of $380 and net loss of $8.
Interest expense for the quarter ended March 31, 1996, was $2, compared to $37
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 as it and the principal stockholder are currently
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 March 31, 1996, was $66 compared to $83 loss
for the same quarter last year. The decreased loss is a result of lower
interest costs as noted above. Other costs were up relating to the Company's
proposed 1-for-500 stock split. These costs will continue on into the second
quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996 the Company had a cash balance of $4, an increase of $6
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
$1,245 compared to deficit $1,187 at the end of 1995.
The Company intends to continue operating VDO-Pak and is currently relying on
this facility to provide cash flow for its day to day operations since they have
no further availability to borrow on the line of credit. Currently, the Company
is not in compliance with its existing credit agreement, which required
repayment on January 31, 1992. To this point, VDO-Pak has provided enough cash
flow to allow the Company to continue to operate.
The restructuring of outstanding debt obligations and an infusion of additional
equity, are essential to return the Company to profitable operating levels,
which are necessary if the Company is to continue as a going concern.
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) Subsequent Events
The shareholders at a special meeting on April 23, 1996 ratified an
amendment to the Restated Articles of Incorporation resulting in a 1-
for-500 reverse split of the Registrant's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) There were no exhibits during this time frame.
(b) Reports on From 8-K
A Form 8-K was filed on May 6, 1996 reporting the results of the April
23, 1996 shareholder meeting.
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: May 13, 1996
/s/ Kenneth L. Wright
---------------------------------
Kenneth L. Wright
Executive Vice President and
Principal Financial Officer
9
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