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 Nine Months Ended Commission File Number
September 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 November 14, 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 been completed.
<PAGE>
Part I, Item I
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1996 and December 31, 1995
(In thousands, except share data)
September 30, December 31,
1996 1995
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 13 $ 8
Accounts receivable 6 291
Inventory 101 200
Prepaid expenses 11 23
-------- --------
Total current assets 131 522
-------- --------
NON-CURRENT ASSETS
Real estate, 15 15
Fixed assets, net 4 8
Goodwill, net 489 507
-------- --------
508 530
-------- --------
Total assets $ 639 $ 1,052
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 334 $ 371
Accrued liabilities 46 100
Lines of credit 1,235 1,238
-------- --------
Total current liabilities 1,615 1,709
PENSION LIABILITIES 248 248
-------- --------
Total liabilities 1,863 1,957
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 (28,155) (27,836)
Pension Liability Adjustment (157) (157)
Total stockholders' deficit (1,224) (905)
Total liabilities and stockholders' deficit $ 639 $ 1,052
======== ========
2
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the periods ended September 30, 1996 & 1995
(In thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
-------------------------------------------
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
SALES $ 77 $ 506 $ 737 $ 1,335
LESS COST OF SALES 86 323 535 827
------- ------- ------- -------
GROSS PROFIT (9) 183 202 508
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 116 186 496 578
------- ------- ------- -------
Operating income (loss) (125) (3) (294) (70)
NON-OPERATING REVENUES & EXPENSES
Other income - - - -
Other expense (5) (6) (15) (15)
Interest expense (3) (41) (10) (111)
Total non-operating
revenues & expenses (8) (47) (25) (126)
------- ------- ------- -------
NET INCOME (LOSS) $ (133) $ ( 50) $ (319) $ (196)
PER SHARE
Net income (loss)
per share $ (.02) $ (.01) $ (.05) $ (.03)
Average common
shares outstanding 6,112,848 6,112,848 6,112,848 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.
3
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE ENCORE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1996 & 1995
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (319) $ (196)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 4 10
Amortization of goodwill 18 18
Loss on disposal of assets - -
Accounts receivable 285 4
Inventory 99 68
Prepaid expenses and other 12 33
Accounts payable (37) 66
Accrued liabilities (54) (11)
------ ------
Net cash provided by operating activitie s 8 (8)
------ ------
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) (18)
------ ------
Net cash used in financing activities (3) (18)
NET INCREASE (DECREASE) IN CASH 5 (28)
CASH, beginning of period 8 31
CASH, end of quarter $ 13 $ 3
====== ======
INTEREST PAID $ 10 $ 111
====== ======
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 September 30, 1996 and December
31, 1995, and the statements of operations and the statements of cash flows for
the periods ended September 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 has ceased operations. Historically, VDO-Pak had operated profitably,
however, earnings were not enough to offset the Company's debt and associated
interest charges. This 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.
VDO-Pak has been closed and its remaining assets liquidated. The Company has no
operations. 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 September 30, 1996 and December 31, 1995, respectively.
Assets for which the Company has credit risk are trade accounts receivable which
amount to $28 and $322 at September 30, 1996 and December 31, 1995,
respectively.
The Company's trade customers were geographically dispersed throughout the
United States. The Company performs ongoing credit evaluation of its customers'
financial conditions and generally requires no collateral from its customers.
Inventory - Inventory was stated at the lower of cost (first-in, first-out
method) or market at September 30, 1996 and December 31, 1995. Inventory
consisted of components and products for manufacture and resale. At September
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 $179 and $174 at September 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.
5
<PAGE>
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.
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 $161 and $143 at September 30, 1996 and
December 31, 1995. With the closure of the operation the remaining goodwill is
planned to be written off in the last quarter of the year.
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
The Company owns commercial property in Gillette, Wyoming carried 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 $1,484 as of September 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 September 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.
6
<PAGE>
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
September 30, December 31,
1996 1995
Accrued salaries and payroll taxes $ 12 $ 15
Professional fees 10 12
Other 24 73
----- -----
$ 46 $ 100
7
<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 September 30, 1996 Compared to Period Ended September 30, 1995
Operating results for the quarter ended September 30, 1996 include the
operations of the Company and its wholly-owned subsidiary, VDO-Pak. During the
quarter VDO-Pak had sales of $22 and a net loss of $83 versus last year's
quarter with sales of $279 and net loss of $38.
Interest expense for the quarter ended September 30, 1996, was $3, compared to
$41 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 September 30, 1996, was $123 compared to $50
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 September 30, 1996 the Company had a cash balance of $13, an increase 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
$1,484 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. In spite of reassurances from its bank no restructuring
of the outstanding bank debt has occured.
As of the date of this report, the Company has ceased meeting its credit
obligations.
8
<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) Exhibit A, The Encore Group, Inc. Press Release, was filed with a
report on Form 8-K during the quarter. No other exhibits were filed.
(b) A report on Form 8-K was filed on August 7, 1996
9
<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: November 14, 1996
/s/ Kenneth L. Wright
----------------------------
Executive Vice President and
Principal Financial Officer
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 101
<CURRENT-ASSETS> 131
<PP&E> 198
<DEPRECIATION> 179
<TOTAL-ASSETS> 639
<CURRENT-LIABILITIES> 1615
<BONDS> 0
0
0
<COMMON> 6113
<OTHER-SE> (1224)
<TOTAL-LIABILITY-AND-EQUITY> 639
<SALES> 77
<TOTAL-REVENUES> 77
<CGS> 86
<TOTAL-COSTS> 202
<OTHER-EXPENSES> (8)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> (133)
<INCOME-TAX> 0
<INCOME-CONTINUING> (133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
