SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter year ended Commission File Number
June 30, 1996 1-11065
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ENCON SYSTEMS, INC.
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(Name of Small Business
Issuer As Specified In Its Charter)
Delaware 04-3069270
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
86 South Street, Hopkinton, Massachusetts 01748
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(Address of Principal Executive Offices, Zip Code)
(508) 435-7700
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes X No
--- ---
As of August 16, 1996, the Company had outstanding 8,428,245 shares of
Common Stock, $.01 par value per share.
ENCON SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets;
June 30, 1996 (Unaudited) and
December 31, 1995 (Audited) 1
Consolidated Statements of 2
Operations (Unaudited); Three
and Six months ended June
30, 1996 and 1995
Consolidated Statements of Cash Flows 3
(Unaudited); Six months ended
June 30, 1996 and 1995
Notes to Consolidated Financial 4
Statements (Unaudited)
Item 2. Management's Discussion and 6
Analysis of Financial
Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1996 1995
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<S> <C> <C>
Current assets:
Cash $ 179,025 $ --
Accounts receivable - net 3,555,105 7,460,777
Inventories 570,036 1,228,389
Costs in excess of billings -- 44,883
Prepaid expenses and other current assets 75,260 240,262
Notes receivable from current and former officers 50,303 100,967
Refundable income tax credits 264,465 263,383
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Total current assets 4,694,194 9,338,661
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Property and equipment - net 467,995 614,027
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Long-term accounts receivable - net 1,591,873 1,550,189
Long-term lease receivables 44,808 84,682
Organizational costs - net 14,969 39,481
Other assets - net 237,233 449,048
Cost in excess of net assets of businesses acquired - net 2,515,841 4,784,645
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Total assets $ 9,566,913 $ 16,860,733
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Liabilities, Minority Interest and Stockholders' Equity
Current liabilities:
Cash overdraft $ 109,104 $ 754,680
Notes payable - bank 3,525,480 3,621,647
Notes payable - utility 2,284,132 626,788
Current portion of notes payable to stockholders 276,353 346,785
Current portion of long-term debt 81,017 262,394
Current portion of GEPP financing 441,021 372,694
Accounts payable 4,426,509 3,281,276
Accrued expenses 585,154 1,119,124
Billings in excess of costs -- 424,968
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Total current liabilities 11,728,770 10,810,356
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Long-term GEPP financing 448,795 625,983
Notes payable to stockholders, net of current portion 256,164 321,323
Long-term debt, net of current portion 98,369 1,353,854
Other long-term debt 12,447 32,872
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Total liabilities 12,544,545 13,144,388
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Minority interest (Note 3) - 896,980
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value; 8,000,000 shares authorized,
5,363,728 shares issued and outstanding (4,258,634 at
December 31, 1995) 53,637 42,587
Additional paid-in capital 9,519,324 7,452,863
Accumulated deficit (12,540,985) (4,693,224)
Cumulative translation adjustment (9,609) 17,139
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Total stockholders' equity (2,977,633) 2,819,365
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Total liabilities, minority interest and stockholders' equity $ 9,566,913 $ 16,860,733
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-1-
ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales and revenues $ 3,379,965 $ 4,754,995 $ 9,049,955 $ 9,904,492
Cost of sales 2,996,767 2,857,008 6,655,589 6,235,953
------------ ------------ ----------- -----------
Gross profit 383,198 1,897,987 2,394,366 3,668,539
Selling, general and administrative expenses 2,380,414 1,890,905 4,851,841 3,476,801
Consolidation of operations (Note 2) 5,199,050 - 5,199,050 -
------------- ----------- ----------- ------------
Income (loss) from operations (7,196,266) 7,082 (7,656,525) 191,738
------------- --------------- ----------- -------------
Other income (expense)
Interest expense (135,250) (110,626) (257,868) (151,298)
Interest income 7,257 401 9,146 1,390
Other income -- -- 25,000 --
Foreign currency exchange gain (loss) (21,996) 41,385 11,201 75,663
--------------- -------------- ------------- -------------
(149,989) (68,840) (212,521) (74,245)
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Income (loss) before income taxes (7,346,255) (61,758) (7,869,046) 117,493
Income tax expense (benefit) -- (42,960) -- 10,816
----------------- ------------- -------------- -------------
Net income (loss) $(7,346,255) $ (18,798) $ (7,869,046) $ 106,677
=========== ============= ============ =============
Net income (loss) per share $ (1.42) $ (.01) $ (1.52) $ .04
=========== ============= ============ =============
Weighted average number of shares
outstanding 5,166,472 2,595,219 5,166,472 2,595,219
=========== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-2-
ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
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1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,869,046) $ 106,677
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 245,694 155,345
Write-down of costs in excess of net assets of
businesses acquired - net 2,136,366 --
Write-down of organization costs - net 16,067 --
Write-down of other assets - net 188,171 --
Write-down of property and equipment - net 76,418 --
Refundable income tax credits (1,082) (11,180)
Changes in assets and liabilities, net of effects of acquisition
of businesses:
Accounts receivable - net 3,863,988 (2,577,729)
Leases receivable 39,874 61,942
Inventories 658,353 11,712
Cost in excess of billings 44,883 (7,008)
Prepaid expenses and other current assets 165,002 (823,876)
Cash overdraft (645,576) --
Accounts payable 1,145,233 1,560,872
Billings in excess of costs (424,968) (11,201)
Accrued expenses (533,970) 7,061
Other assets - net -- (39,626)
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Net cash used for operating activities (893,990) (1,567,011)
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Cash flows from investing activities:
Additions to property and equipment - net (12,155) (52,186)
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Net cash used for investing activities (12,155) (52,186)
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Cash flows from financing activities:
(Issuance) payments of notes receivable from officers 50,664 (77,406)
Proceeds from note payable to bank (96,167) 1,913,582
Proceeds from notes payable to utility 305,712 --
Payments on notes payable to utility (73,030) --
Payments on loans from stockholders (135,589) (28,862)
Net proceeds from long-term debt (141,488) (177,458)
Issuance of common stock 1,180,532 --
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Net cash provided by financing activities 1,090,634 1,629,856
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Effect of exchange rate changes on cash (5,464) --
Net increase in cash 179,025 10,659
Cash at beginning of period -- 253,050
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Cash at end of period $ 179,025 $ 263,709
============= ============
Supplemental disclosures of cash flow information: Cash paid for:
Interest $ 414,211 $ 533,097
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Income taxes $ -- $ 26,605
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The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
(1) BASIS OF PRESENTATION
As permitted by the rules of the Securities and Exchange Commission
(the "Commission") applicable to quarterly reports on Form 10-QSB, these notes
are condensed and do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-KSB, which was filed with the Commission on April 15, 1996.
In the opinion of management of the Company, the accompanying financial
statements reflect all adjustments which were of a normal recurring nature
necessary for a fair presentation of the Company's results of operations for the
three and six months ended June 30, 1996 and June 30, 1995.
The results disclosed in the consolidated statements of operations are
not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the financial statements
of ENCON Systems, Inc. and its subsidiaries, Kemper Management Services, Inc.,
Enera Inc., BFR Industries Ltd., CLM Lighting Solutions of Canada, Inc., EEP
Distribution Services of Canada, Inc., Elray Services Inc. and Encon Systems
Canada Inc. (formerly known as Leader Lighting and Energy Service, Inc.). All
significant intercompany accounts and transactions have been eliminated by
consolidation.
(2) CONSOLIDATION OF OPERATIONS
In June 1996, the Company commenced a consolidation of its operations.
The consolidation is intended to eliminate unprofitable operations and to reduce
the ongoing selling, general and administrative costs of the Company. The
consolidation included a winding down of the Company's Canadian operations, the
closing of the Company's New Jersey office and an overall reorganization of the
remaining operations. In connection with the consolidation of operations, the
Company recorded charges of approximately $5,199,000 during the three months
ended June 30, 1996. These charges consisted of the write-down of intangible
assets of approximately $2,417,000, the write-down of receivables totaling
approximately $2,010,000 due to the closing of operations and non-completion of
work in progress, the write-down of inventories in the operations being closed
down totaling
-4-
approximately $370,000 and other costs associated with the consolidation
totaling approximately $402,000.
(3) MINORITY INTEREST
On JUNE 10, 1996, the Company's minority interest was converted into
197,000 shares of the Company's Common Stock pursuant to the provisions of a
Share Exchange Agreement between the Company and G. Morneau Investments Limited.
(4) SUBSEQUENT EVENTS
According to the terms of the 1995 and 1996 Private Placements,
purchasers were entitled to receive additional shares of Common Stock from the
Company if the average price per share of the Common Stock, determined by an
agreed upon formula, was less than $1.50 on the day that the Securities and
Exchange Commission declared effective a registration statement covering the
shares sold in the Private Placements. In July 1996, the purchasers in the 1995
and 1996 Private Placements received an aggregate of 3,064,517 additional shares
of Common Stock pursuant to these provisions.
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
During the six months ended June 30, 1996, the Company engaged in
extensive discussions with third parties regarding arrangements for financing.
Such financing was critical for the Company to implement its operating plans. In
late May, when discussions about the Company's financing options deteriorated,
the Company commenced a restructuring of its management, operations and banking
and other obligations. In early June 1996, the Company engaged The Recovery
Group in connection with the consolidation of the Company's operations and
appointed Robert Wexler as interim Chief Executive Officer of the Company and
its subsidiaries. Since the appointment of Mr. Wexler, the Company has
restructured a significant portion of its debt, closed its Canadian operations,
closed its operations in New Jersey, substantially reduced its operating
expenses, and reassigned management responsibilities. The Company intends to
continue to restructure its management, operations and banking and other
obligations.
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 the Canadian Imperial Bank of Commerce ("CIBC") against Enera Inc.
("Enera"), a wholly owned Canadian subsidiary of the Company. The Petition
requested that Enera be adjudged a bankrupt and that a receiving order be made
with respect to the property of Enera. The Company consented to the Petition and
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.
The Company derives its revenue principally from the design and
implementation of energy efficient systems for commercial, industrial and
institutional facilities, and to residential customers in the United States and,
historically, in Canada. The Company sells its systems directly to the end-user
and through participation in Demand Side Management ("DSM") programs sponsored
by various utilities, such as Public Service Electric & Gas of New Jersey,
Consolidated Edison of New York, Florida Power and Light of Florida and
Massachusetts Electric Company of Massachusetts. However, as a result of recent
changes in DSM programs, the Company has decreased its sales and marketing
efforts on such programs, and is emphasizing working directly with the end-user
customer. Accordingly, in the context of a forward-looking statement, management
believes that the Company will derive an increasing portion of its revenue from
non-DSM projects in the future. However, no assurance of such a result can be
given because of numerous factors that may cause such a result to vary,
including but not limited to, changes in the DSM and non-DSM markets and changes
in the Company's clientele.
The Company periodically enters into large, one-time energy savings
contracts from which it has derived significant revenues and profits. Prior to
December 31, 1995, the Company accounted
-6-
for revenue and costs for construction of these contracts on the completed
contract method of accounting. Under this method of accounting, revenue and
costs for contracts are recognized when contracts are completed. Due to the
varying lengths of time required to complete certain large contracts, the
operating results of the Company under the completed contract method of
accounting could vary substantially from quarter to quarter and from year to
year. Effective December 31, 1995, the Company adopted the percentage of
completion method of accounting for construction projects that last for more
than thirty days. The Company believes that it is appropriate to change from the
completed contract method of accounting to the percentage of completion method
of accounting as a result of the Company's acquisition of Enera on December 30,
1994. Enera was primarily engaged in long term contracts. The financial
statements for the six months ended June 30, 1995 have been restated to apply
the newly adopted method of accounting retroactively. As a result, the net
income for the six months ended June 30, 1995 decreased by approximately
$125,000 from the amount previously reported by the Company.
The results for the quarter and six months ended June 30, 1996 are not
necessarily indicative of the results of the Company's operations that may be
expected for the year ending December 31, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1995
Net sales and revenues for the three months ended June 30, 1996 were
approximately $3,380,000 compared to net sales and revenues of approximately
$4,755,000 for the same period in 1995, a decrease of approximately $1,375,000,
or 29%. The decrease in net sales and revenues is principally a result of
reduced sales from the Company's Canadian operations due to the wind-down of
such operations (the "Canadian Wind-down") as well as the closing of the
Company's operations in New Jersey, partially offset by the increase in sales
realized from the operation of Kemper Management Services, Inc. ("Kemper"),
which the Company acquired in November 1995.
Net loss for the three months ended June 30, 1996 was approximately
$7,346,000 compared to a net loss of approximately $19,000 for the three months
ended June 30, 1995, a change of approximately $7,327,000. Approximately
$5,199,000 of the net loss resulted primarily from the Canadian Wind-down, costs
associated with the consolidation of the Company's domestic operations (the
"Domestic Consolidation"), and costs associated with the negotiation of suitable
financing for the Company. The balance of the net loss of approximately
$2,147,000 resulted primarily from reduced sales realized in connection with the
closing of the New Jersey office and lower than expected sales from the
operations of Kemper with no corresponding decrease in selling, general and
administrative expenses. The Company elected to maintain the level of such
expenses during such period because of ongoing negotiations for major
transactions involving such entities and the belief that a significant financing
would occur. Since the termination of
-7-
financing negotiations, however, the Company has commenced a reduction in its
selling, general and administrative expenses.
The Company derives a substantial portion of its revenues from the sale
of energy efficient systems through participation in DSM programs sponsored by
various utilities. Although, a majority of the Company's revenues are currently
realized from DSM projects, as a forward-looking statement, management believes
that the percentage of revenues derived from DSM program participation will
decrease in the future. No assurance of such a result can be given, however,
because of numerous factors that may cause such a result to vary, including but
not limited to, changes in the DSM and non-DSM markets and changes in the
Company's clientele.
Gross profit margin for the three months ended June 30, 1996 was
approximately 11% compared to approximately 40% for the three months ended June
30, 1995. The decrease in gross profit margin was primarily attributable to
significant costs incurred in connection with the Canadian operations, including
costs associated with the satisfaction of union contracts and significant cost
overruns associated with the operations of Enera. The gross profit margin for
the three months ended June 30, 1996 is not necessarily indicative of the gross
profit margin that may be obtained by the Company for the year ending December
31, 1996 as the Company's gross profit margin is dependent on the mix of
products sold and the type of DSM, non-DSM or other energy savings program in
which the Company participates.
Selling, general and administrative expenses increased by approximately
$489,000, or 26%, from approximately $1,891,000 for the three months ended June
30, 1995 to approximately $2,380,000 for the three months ended June 30, 1996.
This increase is primarily due to the additional selling, general and
administrative costs incurred as a result of the normal operation of Kemper,
which the Company acquired in November 1995, and costs of approximately $150,000
incurred in connection with the negotiation of suitable financing for the
Company, partially offset by a reduction in costs due to the Canadian Wind-down
and the Domestic Consolidation. Selling, general and administrative expenses
increased as a percentage of revenue from approximately 40% to 70% for the three
month periods ended June 30, 1995 and 1996, respectively. This increase is
principally due to a significant reduction in the Company's sales revenue
resulting primarily from the Canadian Wind-down and the closing of the New
Jersey operations, and the additional selling, general and administrative costs
incurred as a result of the normal operation of Kemper.
During the three months ended June 30, 1996, the Company incurred
consolidation costs of approximately $5,199,000, which included costs of
approximately $4,325,000 associated with the Canadian Wind-down (including the
write down of the assets of the Company's Canadian subsidiaries), approximately
$308,000 associated with the closing of the New Jersey office, and approximately
$154,000 associated with the Domestic Consolidation. In addition, the Company
reduced by approximately $412,000 the value of organization costs and costs in
excess of net assets of K&S Energy Products, Inc. ("K&S") and Marathon Power
Services Corporation ("Marathon"), which businesses the Company acquired in
March 1994 and July
-8-
1993, respectively. At present, and in the context of a forward-looking
statement, the Company does not intend to focus on the areas of business served
by K&S and Marathon. Accordingly, management believes that these businesses no
longer have any value for the Company.
Interest expense increased by approximately $24,000, or 22%, from
approximately $111,000 for the three months ended June 30, 1995 to approximately
$135,000 for the same period in 1996. This increase is principally due to the
Company's increased net working capital borrowing requirements during the three
months ended June 30, 1996 as compared to the same period in 1995.
Interest income increased from approximately $400 for the three months
ended June 30, 1995 to approximately $7,300 for the three months ended June 30,
1996. The increase of approximately $6,900 is primarily attributable to the
increase in the amount of funds invested by the Company during the three months
ended June 30, 1996.
The Company realized a loss on foreign currency transactions for the
three months ended June 30, 1996 of approximately $22,000 compared to a gain of
approximately $41,000 for the three months ended June 30, 1995. This loss is
primarily attributable to currency exchange volatility between the United States
and Canada that resulted in a decrease in the value of the Canadian currency
held by the Company at June 30, 1996.
Income tax benefit was approximately $43,000 for the three months ended
June 30, 1995 compared to no income tax expense or benefit for the three months
ended June 30, 1996. This change was primarily due to the decrease in the
Company's taxable income, which resulted because of decreased revenues and lack
of profitability, for the three months ended June 30, 1996.
The increase in net loss per share from approximately $.01 for the
second quarter of 1995 to a net loss per share for the second quarter of 1996 of
approximately $1.42 reflects the Company's net loss, and the greater number of
shares of the Company's Common Stock outstanding as a result of the Kemper
acquisition completed by the Company in November 1995 and the two private
placements of the Company's Common Stock in December of 1995 and February 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1995
Net sales and revenues for the six months ended June 30, 1996 were
approximately $9,050,000 compared to net sales and revenues of approximately
$9,904,000 for the same period in 1995, a decrease of approximately $854,000, or
9%. The decrease in net sales and revenues was principally a result of reduced
sales from the Canadian operations due to the Canadian Wind-down and the closing
of the Company's operations in New Jersey, partially offset by the increase in
sales realized from the operation of Kemper.
-9-
Net loss for the six months ended June 30, 1996 was approximately
$7,869,000 compared to net income of approximately $107,000 for the six months
ended June 30, 1995, a change of approximately $7,976,000. Approximately
$5,199,000 of the net loss resulted primarily from the Canadian Wind-down, costs
associated with the Domestic Consolidation, and costs associated with the
negotiation of suitable financing for the Company. Approximately $2,147,000 of
the balance of the net loss resulted primarily from reduced sales realized in
connection with the closing of the New Jersey office and lower than expected
sales from the operations of Kemper with no corresponding decrease in selling,
general and administrative expenses. The Company elected to maintain the level
of such expenses during such period because of ongoing negotiations for major
transactions involving such entities and the belief that a significant financing
would occur. Since the termination of financing discussions, however, the
Company has commenced a reduction in its selling, general and administrative
expenses. The remainder of the net loss for the six months ended June 30, 1996
was primarily attributable to the Company's Canadian operations, where operating
inefficiencies and the lack of financial and other resources prevented the
Company from undertaking and completing certain projects.
The Company derives a substantial portion of its revenues from the sale
of energy efficient systems through participation in DSM programs sponsored by
various utilities. Although, a majority of the Company's revenues are currently
realized from DSM projects, as a forward-looking statement, management believes
that the percentage of revenues derived from DSM program participation will
decrease in the future. No assurance of such a result can be given, however,
because of numerous factors that may cause such a result to vary, including but
not limited to, changes in the DSM and non-DSM markets and changes in the
Company's clientele.
Gross profit margin for the six months ended June 30, 1996 and 1995 was
approximately 26% and 37%, respectively. The decrease in gross profit margin was
primarily attributable to significant costs incurred in connection with the
Canadian operations, including costs associated with the satisfaction of union
contracts and significant cost overruns associated with the operations of Enera.
The gross profit margin for the six months ended June 30, 1996 is not
necessarily indicative of the gross profit margin that may be obtained by the
Company for the year ending December 31, 1996 as the Company's gross profit
margin is dependent on the mix of products sold and the type of DSM, non- DSM or
other energy savings program in which the Company participates.
Selling, general and administrative expenses increased by approximately
$1,375,000, or 40%, from approximately $3,477,000 for the six months ended June
30, 1995 to approximately $4,852,000 for the six months ended June 30, 1996.
This increase is primarily due to the additional selling, general and
administrative costs incurred as a result of the normal operation of Kemper,
which the Company acquired in November 1995, and costs of approximately $150,000
incurred in connection with the negotiation of suitable financing for the
Company, partially offset by a reduction in costs due to the Canadian Wind-down
and the Domestic Consolidation. Selling, general and administrative expenses
increased as a percentage of revenue from approximately 35% to 54% for
-10-
the six month periods ended June 30, 1995 and 1996, respectively. This increase
is principally due to a significant reduction in the Company's sales revenue
resulting primarily from the Canadian Wind-down and the closing of the New
Jersey operations, and the additional selling, general and administrative costs
incurred as a result of the normal operation of Kemper.
During the six months ended June 30, 1996 the Company incurred
consolidation costs of approximately $5,199,000, which included costs of
approximately $4,325,000 associated with the Canadian Wind-down (including the
write down of the assets of the Company's Canadian subsidiaries), approximately
$308,000 associated with the closing of the New Jersey office, and approximately
$154,000 associated with the Domestic Consolidation. In addition, the Company
reduced by approximately $412,000 the value of organization costs and costs in
excess of net assets of K&S and Marathon, which businesses the Company acquired
in March 1994 and July 1993, respectively. At present, and in the context of a
forward-looking statement, the Company does not intend to focus on the areas of
business served by K&S and Marathon. Accordingly, management believes that these
businesses no longer have any value for the Company.
Interest expense increased by approximately $107,000, or 71%, from
approximately $151,000 for the six months ended June 30, 1995 to approximately
$258,000 for the same period in 1996. This increase is principally due to the
Company's increased net working capital borrowing requirements during the six
months ended June 30, 1996 as compared to the same period in 1995, and, to a
lesser extent, an increase in the Company's long-term debt obligations.
Interest income increased from approximately $1,400 for the six months
ended June 30, 1995 to approximately $9,100 for the six months ended June 30,
1996. The increase of approximately $7,700 is primarily attributable to an
increase in the amount of funds invested by the Company during the six months
ended June 30, 1996.
The Company realized a gain on foreign currency transactions for the
six months ended June 30, 1996 of approximately $11,000 compared to a gain of
approximately $76,000 for the six months ended June 30, 1995. This decrease of
approximately $65,000 is primarily attributable to currency exchange volatility
between the United States and Canada that resulted in an increase in the value
of the Canadian currency held by the Company at June 30, 1996.
Income tax expense was approximately $11,000 for the six months ended
June 30, 1995 compared to no income tax expense or benefit for the six months
ended June 30, 1996. This change was primarily due to the decrease in the
Company's taxable income, which resulted because of decreased profitability, for
the six months ended June 30, 1996.
The decrease in the net income per share from approximately $.04 per
share for the first half of 1995 to a loss of approximately $1.52 per share for
the first half of 1996 reflects the Company's
-11-
decreased net income, and the greater number of shares of the Company's Common
Stock outstanding as a result of the Kemper acquisition completed by the Company
in November 1995 and the two private placements of the Company's Common Stock in
December of 1995 and February of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its capital expenditures, operating
requirements, growth and portions of its acquisitions, through bank borrowing,
the private sale of stock to investors, and financing arrangements with major
suppliers. The Company did not generate a positive cash flow from operations
during the six month periods ended June 30, 1996 and 1995. The Company is
currently experiencing liquidity problems while it implements its operating plan
to generate additional cash and working capital. The Company's cash flow from
operations is affected by utilities' payment policies under DSM programs, which
generally provide payment to the Company only after four to twelve weeks
following the completion of an installation. As a result, the Company's accounts
receivables from utilities average approximately 120 days. The Company expects
that its cash flow will continue to be significantly affected by utilities'
payment policies. The Company's operating cash flow is also affected by the
Company's maintaining inventory levels to support certain sales levels.
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 the Canadian Imperial Bank of Commerce ("CIBC") against Enera Inc.
("Enera"), a wholly owned Canadian subsidiary of the Company. The Petition
requested that Enera be adjudged a bankrupt and that a receiving order be made
with respect to the property of Enera. The Company consented to the Petition and
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.
For the six months ended June 30, 1996, the Company used cash of
approximately $894,000 for operating activities. The major use of cash was to
finance cost overruns by the Company's Canadian operations during the six months
ended June 30, 1996. In addition, the Company used cash of approximately $12,000
for investing activities, which was used primarily to purchase additions to
property and equipment. The Company also had cash of approximately $1,091,000
provided by financing activities, which activities included the sale of Common
Stock.
In February 1996, the Company received net proceeds of approximately
$1,181,000 from the closing of a private placement (the "1996 Private
Placement"), in which it sold 908,094 shares of Common Stock. In December 1995,
the Company received net proceeds of approximately $1,329,000 from the closing
of a private placement (the "1995 Private Placement") in which it sold
-12-
1,243,556 shares of its Common Stock. According to the terms of the 1995 and
1996 Private Placements, purchasers were entitled to receive additional shares
of Common Stock from the Company if the average price per share of the Common
Stock, determined by an agreed upon formula, was less than $1.50 on the day that
the Securities and Exchange Commission declared effective a registration
statement covering the shares sold in the Private Placements. In July 1996, the
purchasers in the 1995 and 1996 Private Placements received an aggregate of
3,064,517 additional shares of Common Stock pursuant to these provisions.
Kemper had a $1,000,000 line of credit agreement with the Bank of
Boston (the "Bank of Boston Line") when the Company acquired Kemper on November
20, 1995. In January 1996, Kemper refinanced the Bank of Boston Line by entering
into a $2,000,000 revolving loan agreement (the "Revolving Loan") with People's
Bank ("People's"), which terminates on January 30, 1997 unless extended by
People's. The Revolving Loan bears interest at People's prime rate (8.25% at
June 30, 1996) plus .75% per annum. As of June 30, 1996, the Company had
borrowed approximately $587,000 of the funds available under the Revolving Loan.
Aggregate borrowings under the Revolving Loan are limited to 80% of the value of
Kemper's then existing eligible accounts. The Revolving Loan is secured by
substantially all of the assets of Kemper and has been guaranteed by the Company
and the former principals of Kemper.
In August 1995, the Company entered into a $1,700,000 working capital
line of credit (the "Line of Credit") with Shawmut Bank, N.A. ("Shawmut"), which
terminates on September 16, 1996, unless extended by Shawmut (Shawmut has since
been acquired by Fleet Bank, N.A. ("Fleet")). The Line of Credit replaced an
earlier $1,200,000 line of credit that the Company entered into with Shawmut in
February 1995. Interest on the Line of Credit currently accrues at Fleet's prime
rate (8.25% at June 30, 1996) plus .5% per annum. The Company also entered into
a $200,000 term loan (the "Term Loan") with Shawmut in July 1994, which requires
60 monthly payments of principal and interest. Interest on the Term Loan accrues
at a fixed rate of 9.5% per annum. As of June 30, 1996, the Company had borrowed
approximately $1,600,000 of the amount available under the Line of Credit, which
has since been reduced to approximately $1,236,000 as of August 19, 1996, and
the balance for the Term Loan was approximately $127,000. Aggregate borrowings
under the Line of Credit and Term Loan are limited to 80% of qualifying accounts
receivables and 30% of qualifying inventories. Encon Systems Canada Inc. ("Encon
Canada") has guaranteed the indebtedness to Fleet under the Line of Credit and
the Term Loan.
The Line of Credit and Term Loan contain the following restrictive
financial covenants: (i) the Company must maintain a ratio of total current
assets to total current liabilities of not less than 1:1, (ii) the Company must
maintain a ratio of total liabilities to tangible net worth of not less than
1.25:1, and (iii) the Company must maintain a ratio of debt service payments to
unfinanced capital expenditures, as further described in the loan documents, of
not less than 1.15:1. The Company has violated one or more of these loan
covenants and Fleet has declared the Company in default. However, Fleet has
agreed to forbear from taking any action against the Company until at least
September 16, 1996. The Company has continued to make payments to Fleet to
reduce the outstanding indebtedness under the Line of Credit to $1,236,000 as of
August 19, 1996, and, in the
-13-
context of a forward-looking statement, the Company expects that Fleet will
continue to work with it in connection with its consolidation of operations.
Such a result may vary materially, however, depending upon future negotiations
between the Company and Fleet.
In December 1994, the Company entered into a $600,000 term loan with
Public Service Conservation Resources Corporation ("PSCRC"), which requires 48
monthly payments of principal and interest. Interest on the PSCRC term loan
accrues at the fixed rate of 15% per annum. As of June 30, 1996, the balance of
the PSCRC term loan was approximately $452,000. The indebtedness due to PSCRC
under this term loan is secured by a Loan, Assignment and Security Agreement by
and between the Company, Encon Canada, and PSCRC.
In July 1995, the Company entered into a revolving note agreement (the
"Revolving Note") with PSCRC, whereby the Company may borrow up to $990,000, as
amended, at an interest rate of 12% per annum. At June 30, 1996, outstanding
borrowings under the Revolving Note were approximately $283,000 The Revolving
Note matured in June 1996. In connection with a settlement with PSCRC, the
Company entered into a Term Note, Pledge and Security Agreement on July 3, 1996
(the "Term Note"), under which the Revolving Note was fully satisfied. Pursuant
to the Term Note, the Company was required to pay the amount of $282,500, plus
accrued interest thereon, to PSCRC on July 31, 1996, unless extended by PSCRC in
its sole discretion. PSCRC agreed to forbear from any collection action under
the Term Note so long as Fleet's forebearance remains in place (the "Contingent
Forebearance"). Fleet's forebearance is currently effective until at least
September 16, 1996.
In November 1995, the Company also entered into two short term loans
with PSCRC for $125,000 and $350,000 (the "Short Term Loans"), each with an
interest rate of 13% per annum. PSCRC has demanded full repayment of the Short
Term Loans, however, the Company has not made any payments as of August 19,
1996. PSCRC and the Company have agreed to apply the terms of the Contingent
Forebearance to the Short Term Loans.
Certain obligations also exist with respect to the Company's Canadian
operations. In July 1995, Encon Canada and Enera (collectively, the "Canadian
Subsidiaries") received approval from CIBC for a $2,000,000 Cdn. ($1,460,000
U.S.) demand working capital line of credit subordinated to certain acquisition
indebtedness. Interest accrued at CIBC's prime rate plus 2%. The Canadian
Subsidiaries also had a term loan agreement with CIBC that was scheduled to
mature in August, 1997 and bore interest at a fixed rate of 7%. The Company and
Encon Canada guaranteed the indebtedness to CIBC under both the working capital
line of credit and the term loan (collectively, the "CIBC Loans") and the
personal property of Encon Canada and Enera secured the CIBC Loans.
On June 30, 1996, approximately $1,355,000 (U.S.) was outstanding under
the CIBC Loans. CIBC has demanded full repayment as a result of one or more
defaults of the financial covenants for such loans. 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
-14-
that Enera be adjudged a bankrupt and that a receiving order be made with
respect to the property of Enera. The Company consented to the Petition and 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.
In addition, since September 1995, PSCRC has advanced an aggregate of
$1,075,000 (the "Indebtedness") to the Canadian Subsidiaries. The Indebtedness
is evidenced by a four year $900,000 term note from the Canadian Subsidiaries to
PSCRC (the "Term Note") that bears interest at the rate of thirteen percent
(13%) per annum and is secured by the Canadian Subsidiaries' backlog, and a
$175,000 demand term note that bears interest at fifteen percent (15%) per
annum.
In August 1992, the Company entered into a third party lease agreement
(the "Lease Agreement") with National Trust Company ("National") to finance the
purchase of $341,000 (Cdn.) of equipment that was installed pursuant to a GEPP
contract (the "GEPP Contract"). The amount due from the Company to the leasing
company is payable in monthly installments through January 1998. In connection
with the Lease Agreement and as security for the payments due thereunder, the
Company has assigned to National all of the payments due thereunder. In March
1993, the Company entered into an additional lease agreement to finance the
purchase of $121,000 (U.S.) of equipment pursuant to the GEPP Contract. This
1993 lease contains all of the same terms and conditions as the 1992 lease,
including monthly installments through January 1998.
In December 1993, the Company entered into an additional lease
agreement (the "1993 Lease Agreement") with National to finance the purchase of
approximately $1,125,000 (U.S.) of equipment that was installed pursuant to a
separate GEPP contract (the "1993 GEPP Contract"). The Company is making monthly
installments to National through March 1998. As security for the payments due
under the 1993 Lease Agreement, the Company has assigned to National all of the
payments due the Company under the 1993 GEPP Contract.
The Company currently does not have material commitments for capital
expenditures but it bids on large energy savings contracts in which the Company
obtains independent financing to purchase the equipment needed for such large
contracts. The Company's success in obtaining large contracts and the financing
for the equipment therefore will have a material effect on the Company's
operations.
The Company routinely explores potential acquisitions that are
complementary or related to the Company's business. The Company currently has no
material commitments for acquisitions.
INFLATION
To date, inflation has not had a material effect on the Company's
business.
-15-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 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 Canadian Imperial Bank of Commerce ("CIBC"). The
Petition requested that Enera Inc. ("Enera") be adjudged a bankrupt and that a
receiving order be made with respect to the property of Enera. The Company
consented to the Petition and 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.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On Thursday, June 13, 1996, the Company held its Annual Meeting of
Stockholders (the "Annual Meeting") to vote on the following proposals:
1. To elect four (4) members to the Board of Directors. Nominees
for Director were: (a) Alan L. Freidman; (b) Bernard R.
Patriacca; (c) Robin E. Read; and (d) Donald A. Worth
("Proposal No. 1");
2. To approve an amendment to the Company's 1994 Formula Stock
Option Plan to change the definition of "Administrator" as
used in such plan ("Proposal No. 2");
3. To approve an increase in the number of authorized shares of
the Company's Common Stock from 8,000,000 to 12,000,000
("Proposal No. 3"); and
4. To ratify the selection of KPMG Peat Marwick as independent
auditors for the Company for the fiscal year ending December
31, 1996 ("Proposal No. 4").
Of the 5,166,728 shares of the Company's Common Stock of record as of
April 23, 1996 able to be voted at the Annual Meeting, a total of approximately
2,917,003 shares were voted, or approximately 56% of the Company's issued and
outstanding shares of Common Stock entitled to vote on these matters.
Each of the proposals were adopted, with the vote totals as follows:
-16-
<TABLE>
<CAPTION>
Shares Shares Shares Broker
Proposal Voting For Voting Against Abstaining Non-Votes
-------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
No. 1
(a) Alan L. Freidman 2,169,103 747,100 0 0
(b) Bernard R. Patriacca 2,169,103 747,100 0 0
(c) Robin E. Read 2,169,103 747,100 0 0
(d) Donald A. Worth 2,169,103 747,100 0 0
No. 2 2,146,873 66,967 699,163 0
No. 3 2,051,118 174,772 687,113 0
No. 4 2,242,124 3,100 671,779 0
</TABLE>
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS. The following exhibits are filed herewith:
EXHIBIT
NO. TITLE
--- -----
10 Amendment to Lease Agreement for 86 South
Street, Hopkinton, Massachusetts.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K. One report on Form 8-K and two
amendments to a report on Form 8-K were filed during the quarter for which this
report is filed. On June 11, 1996, the Company filed a report on Form 8-K
reporting the resignation of two of its directors. On each of June 7, 1996 and
June 19, 1996, the Company filed an amendment on Form 8-K/A to revise certain
pro forma financial information provided for its report on Form 8-K that was
filed with the Commission on January 11, 1995.
-17-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENCON SYSTEMS, INC.
Date: August 19, 1996 By: /s/ Robert Wexler
------------------
Robert Wexler
Chief Executive Officer
Date: August 19, 1996 /s/ Thomas Beamer
-----------------
Thomas Beamer
Chief Financial Officer
-18-
AMENDMENT TO LEASE AGREEMENT
WHEREAS, on the 23rd day of June, 1993 a certain Lease Agreement was
entered between Jelric Realty Trust, now having an office at 200 Central St.,
Berlin, Massachusetts, ("Lessor") and Encon Systems, Inc. ("Lessee"), covering
certain space being 7,000 square feet at 86 South St., in the Hopkinton
Industrial Park in Hopkinton, Massachusetts.
WHEREAS, it is the desire of the parties to amend the Lease, in certain
particulars.
NOW, THEREFORE, for and in consideration of value received, the
undersigned Lessor and Lessee confirm their agreements as follows:
1. This Lease is hereby extended for a period of Five Years from
July 11, 1996 and with a new termination date of July 11,
2001.
2. The minimum rent to be paid during each month of the extended
term hereof shall increase from $46,041.12 to a new rent which
shall be $57,591.12 per year and $4,799.26 per month.
3. Lessor and Lessee agree that the $3,836.76 security deposit
being held under the original lease shall continue to be held
throughout the extended term of this lease as security for
Lessee's performance hereunder. Said security deposit shall
not be used as credit for rent payment, but shall be held
until restoration is complete and then refunded by Landlord if
restoration is complete. If Tenant uses security deposit for
rent as hereinabove prohibited, then it shall pay to Landlord
a penalty sum equal to $5,000 which amount shall be in
addition to all other penalties and other amounts due or which
may become due hereafter under the Lease or its Amendments.
4. Commencing with the beginning of the Fourth year of the
extended term and for the Two years of the term thereof
remaining, the minimum rent being paid hereunder as shown on
Page 1 on this Lease shall be increased to a new minimum rent
figure to equal $57,591.12 times a fraction, the denominator
of which shall be the "Consumer Price Index for all Urban
Consumers, Seasonally Adjusted U.S. City Average, All Items
(1982-1984 = 100)" as published by the Bureau of Labor
Statistics of the United States Department of Labor
(hereinafter referred to as "the Index") for the month the
Lease is executed, and the numerator of which shall be the
Index for the month in which the Adjustment Date occurs. In
the event that the Index is not then in existence, the parties
shall use such equivalent Price Index as is published by any
successor governmental agency as may then be publishing such
an equivalent Price Index, in lieu of and adjusted to the
Index. If the Index shall cease to use the 1982- 1984 average
of 100 as the basis of calculation or if substantial change is
made in the terms of numbers of items contained in the Index,
the Base Index shall be adjusted to conform to such change,
using such computation thereof, if available, as shall be
employed by the United States Department of Labor in computing
same. Until adjustment of the amount of the annual minimum
rent for Tenant shall be
computable, as aforesaid, Tenant shall pay annual minimum rent
at the annual rate of effect immediately prior to the
Adjustment Date, and when the Annual Minimum Rent is so
determined, Tenant shall pay Landlord immediately any excess
annual minimum rent due for the portion of such additional
period then so expired, in each case, paid monthly, in
advance, on or before the first (1st) day of each calendar
month, in equal monthly installments of one-twelfth the annual
rate thereof then in effect. In the event the above results in
a new minimum rent figure that is less than $57,591.12 then
there shall be no change in the minimum rent and Lessee shall
continue to pay rent for the remainder of the Lease at the
annual rate in effect immediately prior to the Adjustment
Date.
5. Tenant acknowledges its obligations under this extended lease
to clear the snow and debris around the roof drains and
leading to the drains to prevent a water build up which could
lead to roof leaks.
IN ALL OTHER RESPECTS, the terms and conditions of the June 23, 1993
Lease shall remain in full force and effect.
This Amendment shall be binding upon the parties hereto, their
successors and assigns and is hereby made a part of the above described Lease
Agreement.
EXECUTED AND DELIVERED this _____ day of __________, 1996.
LESSOR: LESSEE:
JELRIC REALTY TRUST ENCON SYSTEMS, INC.
______________________________ ___________________________
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 179,025
<SECURITIES> 0
<RECEIVABLES> 3,937,046
<ALLOWANCES> 447,941
<INVENTORY> 570,036
<CURRENT-ASSETS> 4,694,194
<PP&E> 712,636
<DEPRECIATION> 244,641
<TOTAL-ASSETS> 9,566,913
<CURRENT-LIABILITIES> 11,728,770
<BONDS> 0
0
0
<COMMON> 53,237
<OTHER-SE> (2,977,633)
<TOTAL-LIABILITY-AND-EQUITY> 9,566,913
<SALES> 3,379,965
<TOTAL-REVENUES> 3,379,965
<CGS> 2,996,767
<TOTAL-COSTS> 10,576,231
<OTHER-EXPENSES> 7,579,464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,250
<INCOME-PRETAX> (7,346,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,346,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,346,255)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
