SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 2, 1996
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ENCON SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
1-11065 04-3069270
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(Commission File Number) (I.R.S. Employer Identification No.)
86 South Street, Hopkinton, Massachusetts 01748
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(Address of Principal Executive Offices) (Zip Code)
(508) 435-7700
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
TABLE OF CONTENTS
FORM 8-K
July 2, 1996
Item Page
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ITEM 5. OTHER EVENTS 1
SIGNATURES 2
EXHIBITS None
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ITEM 5. OTHER EVENTS
1. (a) On March 29, 1996, the borrowing availability pursuant to the
Company's revolving note agreement with Public Service Conservation Resources
Corporation ("PSCRC") was increased from $750,000 to $990,000 (the "Increased
Note"). On July 1, 1996, the Company, PSCRC and Fleet Bank, N.A. ("Fleet")
entered into an agreement in principle (the "PSCRC/Fleet Agreement"), pursuant
to which the actual receivables due to the Company from PSCRC for products and
services provided to customers of PSCRC under one of its energy conservation
programs (the "PSCRC Receivables") were agreed to be $850,000 for purposes of
the PSCRC/Fleet Agreement. A portion of the PSCRC Receivables was used to
satisfy in full the remaining indebtedness outstanding under the Increased Note
of $425,000.
(b) Under the PSCRC/Fleet Agreement, which will not take effect unless
a forebearance agreement between Fleet and the Company is agreed to and
executed, the PSCRC Receivables are to be allocated and distributed as follows:
(a) $212,500 for Fleet to be applied to the Company's outstanding credit
facilities with Fleet and to be released to Fleet in two equal installments on
or about July 2 and July 15, 1996; (b) $425,000 for PSCRC to be applied to
satisfy the Increased Note from the Company held by PSCRC, $212,500 of which is
to be readvanced to the Company pursuant to a note to be agreed upon, and
$70,000 of which is to be readvanced to the Company or returned to PSCRC,
subject to the terms of an escrow arrangement; and (c) $212,500 for the Company
as a cash payment of the PSCRC Receivables.
(c) On June 28, 1996, the Company and Encon Systems Canada, Inc.
("Encon Canada") received notice from PSCRC demanding payment under a certain
term note, dated December 21, 1994, in the face amount of $600,000 (the "1994
Term Note"), as a result of the occurrence of one or more events of default. As
of June 28, 1996, approximately $528,000 was outstanding under the 1994 Term
Note. Also on June 28, 1996, the Company received notice from PSCRC demanding
payment under two unsecured loans, pursuant to which an aggregate of
approximately $475,000 is presently outstanding.
(d) In April 1996, Enera Inc. ("Enera") and Encon Canada, the Company's
Canadian subsidiaries (the "Canadian Subsidiaries"), issued a demand term note
to PSCRC in exchange for $175,000 (the "1996 Demand Note"). The 1996 Demand Note
bears interest at 15% per annum. As of June 28, 1996, approximately $136,000 was
outstanding under the 1996 Demand Note, and the Canadian Subsidiaries were in
default under the terms of such note as a result of their defaults under other
notes issued to PSCRC. To date, neither of the Company's Canadian Subsidiaries
have received notice from PSCRC demanding payment of the 1996 Demand Note.
In connection with the PSCRC/Fleet Agreement, PSCRC has agreed to
forbear from any collection action against the Company or the Canadian
Subsidiaries, or otherwise exercise its rights under currently outstanding
indebtedness, so long as Fleet's forebearance is in effect.
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2. The Company is in default of its financial covenants pursuant to its
credit facilities with Fleet. Fleet has notified the Company of its defaults and
of Fleet's desire to be repaid by the Company and for the Company to establish
an alternative source of financing to Fleet. As of March 31, 1996, the Company
owed Fleet approximately $1,675,000 under a line of credit arrangement and
$136,000 under a term loan arrangement (collectively, the "Fleet Loan"). On June
14, 1996, Fleet exercised a right of setoff against the Company's primary
deposit account with Fleet in the amount of $100,000. On July 1, 1996, in
connection with the PSCRC/Fleet Agreement, Fleet has indicated that it will
agree to a forbearance period until July 31, 1996 (the "Forebearance Period"),
subject to the execution of a forebearance agreement with the Company. Upon the
expiration of the Forebearance Period and in the event that Fleet does not agree
to an additional forebearance period, Fleet may, among other rights and remedies
available to it, declare all amounts outstanding under the Fleet Loan due and
immediately payable.
3. As a result of the Company's relationship with the potential buyer
of the Company's Canadian Subsidiaries (the "Buyer"), the Buyer provided funding
to the Company pursuant to loans or other arrangements (collectively, the
"Loans"). The discussions with the Buyer regarding the possible sale of the
Company's Canadian Subsidiaries have been terminated. In addition, as a result
of the termination of these discussions and because the Canadian operations have
been an ongoing burden on the results of operations and cash flow of the
Company, the Company is evaluating other strategic alternatives for its Canadian
operations, including, but not limited to, the possible wind down of all of the
Canadian operations.
4. Canadian Imperial Bank of Commerce ("CIBC"), as of March 31, 1996,
has loaned $1,359,000 to certain of the Company's Canadian Subsidiaries pursuant
to certain loan arrangements (the "CIBC Loan"). The Company has guaranteed the
CIBC Loan and it is currently in default of its financial covenants under the
CIBC Loan. CIBC has demanded payment by the Company of the CIBC Loan pursuant to
the Company's guarantee of the CIBC Loan. CIBC has also demanded payment by the
Company's Canadian Subsidiaries either directly and/or pursuant to guarantees
for the CIBC Loan. With respect to the Company's guarantee, CIBC has stated that
it will take further action at any time as it deems necessary to receive payment
of the CIBC Loan unless immediate payment or arrangements satisfactory to CIBC
for such payment is made. As of June 26, 1996, no further action has been taken
by CIBC in connection with the payment by the Company of the CIBC Loan, and the
Company is negotiating with CIBC to forebear from any action against the Company
in the United States.
With respect to the Company's Canadian Subsidiaries, CIBC has stated
that it will take further action at any time as it deems necessary to receive
payment of the CIBC Loan unless immediate payment or arrangements satisfactory
to CIBC for such payment is made. At the request of CIBC, the Company agreed to
allow CIBC's consultant, A. Farber Associates ("Farber"), to investigate and
monitor the Company's Canadian business, including but not limited to, reviewing
the financial position and cash flow forecasts of the Canadian Subsidiaries.
Farber reported its findings to CIBC regarding the Canadian Subsidiaries and
generally recommended, among other things, that Enera be wound down and that
Encon Canada be continued, at least temporarily, as an operating entity.
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On June 24, 1996, the Ontario Court (General Division) in Bankruptcy
(the "Court") issued a Petition for Receiving Order (the "Petition") that was
filed by CIBC. The Petition requested that Enera be adjudged a bankrupt and that
a receiving order be made with respect to the property of Enera. CIBC indicated
in the Petition that Farber is qualified and acceptable to CIBC to act as
trustee with respect to Enera's receivership. The Company has consented to the
Petition and the appointment of Farber as the trustee. On June 28, 1996, by
order of the Court, Enera was adjudged bankrupt effective as of June 24, 1996
and a receiving order was made with respect to all of the assets and tangible
and intangible property of Enera (collectively, the "Assets"). The trustee will
be administering the Assets of Enera, subject to the rights of the secured
creditors of Enera, who include but are not limited to, CIBC. The Company and
CIBC are continuing to negotiate with respect to the balance of the Company's
Canadian operations.
5. On June 14, 1996, the Company announced that it engaged The Recovery
Group, Inc. to assist the Company in restructuring its banking and other
obligations. As part of its restructuring plans, the Company has appointed
Robert Wexler as its interim Chief Executive Officer and President. Mr. Wexler
is a principal of The Recovery Group, Inc. and is the former Senior Vice
President of The Rockport Company. He was also President of The Rosewood Stone
Group, a $100 million venture capital company. The Company also announced the
resignation of Alan L. Freidman as the Company's Chief Executive Officer and
Chairman of the Board and the resignation of Robin E. Read as the Company's
President and as a Director. Mr. Freidman will continue as an employee of the
Company concentrating on the Company's national sales accounts. Mr. Read is no
longer employed by the Company.
6. The Company issued certain promissory notes in the aggregate of
approximately $469,000 in connection with the acquisition of Kemper Management
Services, Inc. in November 1995 (the "Kemper Notes"). As of June 25, 1996, the
Company had not made payments of approximately $22,000 in the aggregate that
were due and payable under the terms of the Kemper Notes. At the option of the
payee, a default may be deemed to exist if the Company fails to make any
required payment for more than 15 days after written notice from the payee is
given to the Company that such payment has become due and payable. To date, the
Company has not received any such notice from any of the payees under the Kemper
Notes.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
ENCON Systems, Inc.
By:/s/ Robert Wexler
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Robert Wexler
Interim Chief
Executive Officer
Date: July 2, 1996
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