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
September 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 November 18, 1996, the Company had outstanding 8,448,245 shares
of Common Stock, $.01 par value per share.
ENCON SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Consolidated Balance Sheets;
September 30, 1996 (Unaudited) and
December 31, 1995 (Audited) 1
Consolidated Statements of 2
Operations (Unaudited); Three
and Nine months ended September
30, 1996 and 1995
Consolidated Statements of Cash Flows 3
(Unaudited); Nine months ended
September 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 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 259,196 $ --
Accounts receivable - net 1,286,229 7,460,777
Inventories 491,904 1,228,389
Costs in excess of billings -- 44,883
Prepaid expenses and other current assets 40,147 240,262
Notes receivable from current and former officers 29,079 100,967
Refundable income tax credits 265,222 263,383
----------- -----------
Total current assets 2,371,777 9,338,661
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Property and equipment - net 444,565 614,027
----------- -----------
Long-term accounts receivable - net 2,762,536 1,550,189
Long-term lease receivables 44,966 84,682
Organizational costs - net 12,554 39,481
Other assets - net 193,536 449,048
Cost in excess of net assets of businesses acquired - net 2,474,709 4,784,645
----------- -----------
Total assets $ 8,304,643 $ 16,860,733
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
Current liabilities:
Cash overdraft $ -- $ 754,680
Notes payable - bank 3,135,757 3,621,647
Notes payable - utility 2,387,210 626,788
Current portion of notes payable to stockholders 303,930 346,785
Current portion of long-term debt 76,213 262,394
Current portion of GEPP financing 113,526 372,694
Accounts payable 4,304,734 3,281,276
Accrued expenses 562,306 1,119,124
Billings in excess of costs -- 424,968
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Total current liabilities 10,883,675 10,810,356
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Long-term GEPP financing 778,839 625,983
Notes payable to stockholders, net of current portion 229,079 321,323
Long-term debt, net of current portion 91,335 1,353,854
Other long-term debt 4,655 32,872
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Total liabilities 11,987,583 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; 20,000,000 shares authorized,
8,428,245 shares issued and outstanding (4,258,634 at
December 31, 1995) 84,282 42,587
Additional paid-in capital 9,490,995 7,452,863
Accumulated deficit (13,232,135) (4,693,224)
Cumulative translation adjustment (26,082) 17,139
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Total stockholders' equity (3,682,940) 2,819,365
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Total liabilities, minority interest and stockholders' equity $ 8,304,643 $ 16,860,733
=========== ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues ............................... $ 2,498,729 $ 3,131,608 $ 11,548,684 $ 13,036,100
Cost of sales ........................................ 1,658,293 1,981,208 8,313,882 8,791,380
------------ ------------ ------------ ----------
Gross profit ................................ 840,436 1,150,400 3,234,802 4,244,720
Selling, general and administrative expenses ......... 1,495,491 1,561,673 6,347,332 4,464,255
Consolidation of operations (Note 2) ................. -- -- 5,199,050 --
------------ ------------ ---------- ------------
Income (loss) from operations ............... (655,055) (411,273) (8,311,580) (219,535)
------------ ------------ ------------ ------------
Other income (expense)
Interest expense ............................ (47,662) (96,897) (305,530) (248,195)
Interest income ............................. 4,186 604 13,332 1,994
Other income (expense) ...................... -- (237,870) 25,000 (237,870)
Foreign currency exchange gain .............. 10,525 75,000 21,726 150,663
------------ ------------ ---------- ------------
(32,951) (259,163) (245,472) (333,408)
------------ ------------ ---------- ------------
Income (loss) before income taxes ........... (688,006) (670,436) (8,557,052) (552,943)
Income tax expense (benefit) ......................... -- (775) -- 30,278
------------ ------------ ---------- -----------
Net income (loss) .................. $ (688,006) $ (669,661) $ (8,557,052) $ (583,221)
============ ============ ============ ==========
Net income (loss) per share ........ $ (.13) $ (.26) $ (1.64) $ (.22)
============ ============ ============ ==========
Weighted average number of shares
outstanding ................................. 5,232,704 2,577,795 5,232,704 2,580,993
============ ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $(8,557,052) $ (583,221)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization ................................ 353,876 244,276
Write-down of costs in excess of net assets of
businesses acquired - net ................................... 2,136,366 --
Write-down of organization costs - net ....................... 16,670 --
Write-down of other assets - net ............................. 188,171 --
Write-down of property and equipment - net ................... 76,418 --
Refundable income tax credits................................. (1,839) (21,530)
Changes in assets and liabilities, net of effects
of acquisition of businesses:
Accounts receivable - net ............................. 4,855,889 (2,270,564)
Leases receivable ..................................... 39,716 63,935
Inventories ........................................... 736,485 (731,288)
Costs in excess of billings ........................... 44,883 (7,008)
Prepaid expenses and other current assets ............. 200,115 (920,840)
Cash overdraft ........................................ (754,680) --
Accounts payable ...................................... 1,023,458 1,303,295
Billings in excess of costs ........................... (424,968) 693,608
Accrued expenses ...................................... (556,818) 310,367
Other assets - net .................................... -- (117,994)
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Net cash used for operating activities .............. (623,310) (2,036,964)
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Cash flows from investing activities:
Additions to property and equipment - net ........................... (9,664) (65,783)
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Net cash used for investing activities .............. (9,664) (65,783)
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Cash flows from financing activities:
(Issuance) payments of notes receivable from officers ............. 71,888 (80,089)
Proceeds (payments) from notes payable to bank .................... (485,890) 2,164,989
Proceeds from issuance of notes payable to utility ................ 1,760,422 --
Payments on notes payable to utility .............................. -- --
Proceeds (payments) on loans from stockholders .................... (135,099) 7,319
Proceeds (payments) from long-term debt ........................... (1,476,917) 46,612
Issuance of common stock .......................................... 1,182,847 --
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Net cash provided by financing activities ........... 917,251 2,138,831
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Effect of exchange rate changes on cash .............................. (25,081) --
Net increase in cash ................................................. 259,196 36,084
Cash at beginning of period .......................................... -- 253,050
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Cash at end of period ................................................ $ 259,196 $ 289,134
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest .................................................... $ 414,211 $ 833,127
=========== ===========
Income taxes ................................................ $ -- $ 25,830
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
ENCON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine months ended September 30, 1996 and September 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 approximately $370,000 and other costs associated with the
consolidation totaling approximately $402,000.
-4-
(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.
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the nine months ended September 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 and New
Jersey operations, substantially reduced its operating expenses, and reassigned
management responsibilities. The Company also initiated an aggressive sales
program that has resulted in significant new contracts with Texas Utilities
Electric Company and PepsiCo Food Services, a division of PepsiCo, Inc. which
contracts have contributed to the Company's backlog of approximately $17,000,000
as of November 8, 1996. The Company intends to continue to restructure its
management, operations and banking and other obligations, and in furtherance
thereof is in the process of scheduling a meeting with its creditors to be held
in the near future.
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 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, as 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 incentives provided under DSM programs 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 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
-6-
that last for more than thirty days. The financial statements for the nine
months ended September 30, 1995 have been restated to apply the newly adopted
method of accounting retroactively. As a result, the net income for the nine
months ended September 30, 1995 decreased by approximately $145,000 from the
amount previously reported by the Company.
The results for the quarter and nine months ended September 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 SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995
Net sales and revenues for the three months ended September 30, 1996
were approximately $2,499,000 compared to net sales and revenues of
approximately $3,132,000 for the same period in 1995, a decrease of
approximately $633,000, or 20%. 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 September 30, 1996 was
approximately $688,000 compared to a net loss of approximately $670,000 for the
three months ended September 30, 1995, a change of approximately $18,000. The
net loss resulted primarily from reduced sales realized in connection with the
closing of the Canadian and New Jersey operations, lower than expected sales
from the operations of Kemper, with a small decrease in each of their selling,
general and administrative expenses and an increase of approximately $238,000 in
professional and legal expenses that were incurred in connection with the
consolidation of the Company's domestic operations (the "Domestic
Consolidation").
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 large minority 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 incentives provided under DSM
programs and changes in the Company's clientele.
Gross profit margin for the three months ended September 30, 1996 was
approximately 34% compared to approximately 37% for the three months ended
September 30, 1995. The decrease in gross profit margin was primarily
attributable to the performance by the Company during the 1996
-7-
period of contracts with lower profit margins. The gross profit margin for the
three months ended September 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 decreased by approximately
$67,000, or 4%, from approximately $1,562,000 for the three months ended
September 30, 1995 to approximately $1,495,000 for the three months ended
September 30, 1996. Selling, general and administrative expenses include certain
direct costs related to the Company's sales and certain restructuring costs in
the approximate amounts of $61,000 and $238,000, respectively. The decrease in
such expenses is primarily due to the significant reduction of selling, general
and administrative costs resulting from the Domestic Consolidation and the
closing of the Company's Canadian and New Jersey operations, offset by a
substantial increase in professional and legal expenses incurred in connection
with the Domestic Consolidation and related matters. Selling, general and
administrative expenses increased as a percentage of revenue from approximately
50% to 60% for the three month periods ended September 30, 1995 and 1996,
respectively. This increase is principally due to a significant reduction in the
Company's sales revenue resulting primarily from the closing of the Canadian and
New Jersey operations, and the additional selling, general and administrative
costs incurred in connection with the Domestic Consolidation and as a result of
the normal operation of Kemper, which the Company acquired in November 1995 and
which normal operation did not generate a proportionately equal increase in the
Company's revenues.
Interest expense decreased by approximately $49,000, or 50%, from
approximately $97,000 for the three months ended September 30, 1995 to
approximately $48,000 for the same period in 1996. This decrease is principally
due to the reduction of interest expense resulting from the wind-down of the
Company's Canadian operations.
Interest income increased from approximately $600 for the three months
ended September 30, 1995 to approximately $4,200 for the three months ended
September 30, 1996. The increase of approximately $3,600 is primarily
attributable to the increase in the amount of funds invested by the Company
during the three months ended September 30, 1996.
The Company realized a gain on foreign currency transactions for the
three months ended September 30, 1996 of approximately $11,000 compared to a
gain of approximately $75,000 for the three months ended September 30, 1995.
This change 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 September 30, 1996.
Income tax benefit was approximately $800 for the three months ended
September 30, 1995 compared to no income tax expense or benefit for the three
months ended September 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 September 30, 1996.
-8-
The decrease in net loss per share from approximately $.26 for the
third quarter of 1995 to a net loss per share for the third quarter of 1996 of
approximately $.13 reflects a comparable aggregate net loss by the Company
divided by a 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,
the Company's two private placements in December of 1995 and February of 1996
(the "Private Placements") and the additional shares issued by the Company in
July pursuant to the terms of the Private Placements.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales and revenues for the nine months ended September 30, 1996
were approximately $11,549,000 compared to net sales and revenues of
approximately $13,036,000 for the same period in 1995, a decrease of
approximately $1,487,000 or 11%. The decrease in net sales and revenues was
principally a result of reduced sales from the closing of the Company's
operations in Canada and New Jersey, partially offset by the increase in sales
realized from the operation of Kemper.
Net loss for the nine months ended September 30, 1996 was approximately
$8,557,000 compared to a net loss of approximately $583,000 for the nine months
ended September 30, 1995, a change of approximately $7,974,000. Of the net loss
of approximately $8,557,000, approximately $7,657,000 was incurred during the
first six months of the year, of which approximately $5,199,000 was incurred
during the second fiscal quarter of 1996 and 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 a small
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 nine months ended September 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 and from increased professional and legal expenses
incurred in connection with the Domestic Consolidation.
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 large minority 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 incentives provided under DSM
programs and changes in the Company's clientele.
-9-
Gross profit margin for the nine months ended September 30, 1996 and
1995 was approximately 28% and 33%, 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 nine months ended September 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
$1,883,000, or 42%, from approximately $4,464,000 for the nine months ended
September 30, 1995 to approximately $6,347,000 for the nine months ended
September 30, 1996. Selling, general and administrative expenses include certain
direct costs related to the Company's sales and certain restructuring costs in
the approximate amounts of $184,000 and $1,159,000, respectively. The increase
in such expenses 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, an increase in professional and
legal expenses incurred in connection with the Domestic Consolidation and
related matters, and costs of approximately $150,000 incurred in connection with
the negotiation of suitable financing for the Company, partially offset by a
reduction in expenses related to ongoing operations because of the Canadian
Wind-down and the Domestic Consolidation. Selling, general and administrative
expenses increased as a percentage of revenue from approximately 34% to 55% for
the nine month periods ended September 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, which normal
operation did not generate a proportionately equal increase in the Company's
revenues.
During the nine months ended September 30, 1996 the Company incurred
consolidation costs of approximately $5,437,000, 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
$392,000 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 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 $58,000, or 23%, from
approximately $248,000 for the nine months ended September 30, 1995 to
approximately $306,000 for the same period in 1996. This increase is principally
due to the Company's increased net working capital borrowing requirements during
the nine months ended September 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.
-10-
Interest income increased from approximately $2,000 for the nine months
ended September 30, 1995 to approximately $13,000 for the nine months ended
September 30, 1996. The increase of approximately $11,000 is primarily
attributable to an increase in the amount of funds invested by the Company
during the nine months ended September 30, 1996.
The Company realized a gain on foreign currency transactions for the
nine months ended September 30, 1996 of approximately $22,000 compared to a gain
of approximately $151,000 for the nine months ended September 30, 1995. This
decrease of approximately $129,000 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 September
30, 1996.
Income tax expense was approximately $30,000 for the nine months ended
September 30, 1995 compared to no income tax expense or benefit for the nine
months ended September 30, 1996. This change was primarily due to the decrease
in the Company's taxable income, which resulted because of decreased
profitability, for the nine months ended September 30, 1996.
The increase in the net loss per share from approximately $.22 per
share for the first three quarters of 1995 to a net loss of approximately $1.64
per share for the first three quarters of 1996 reflects the Company's decreased
net income, partially offset by 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, the Private Placements and the additional shares
issued by the Company in July pursuant to the terms of the Private Placements.
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 nine month periods ended September 30, 1996 and 1995. The Company is
currently developing an operating plan to generate additional cash and working
capital.
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 nine months ended September 30, 1996, the Company used cash of
approximately $623,000 for operating activities. The major use of cash was to
finance cost overruns by the Company's Canadian operations and to finance costs
associated with the Domestic Consolidation during the nine months ended
September 30, 1996. In addition, the
-11-
Company used cash of approximately $10,000 for investing activities, which was
used primarily to purchase additions to property and equipment. The Company also
had cash of approximately $917,000 provided by financing activities, which
activities included the sale of Common Stock.
In September 1996, the Company established a $350,000 term loan (the
"ProvEnergy Loan") with Providence Energy Corporation ("ProvEnergy"), which
terminates on March 11, 1997, unless ProvEnergy elects to acquire the Company in
which case the ProvEnergy Loan would be automatically extended until September
11, 1997. The ProvEnergy Loan bears interest at the prime rate per annum as
designated by Fleet National Bank (8.25% at September 30, 1996). The funds under
the ProvEnergy Loan are to be disbursed in accordance with a schedule that is
based upon the Company's performance under its contract with PepsiCo Food
Systems, a division of PepsiCo, Inc. (the "PepsiCo Agreement"). As of September
30, 1996, the Company had borrowed approximately $100,000 of the funds available
under the loan, which is secured by the receivables under the PepsiCo Agreement.
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 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
September 30, 1996) plus .75% per annum. As of September 30, 1996, the Company
had borrowed approximately $722,000 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
-12-
(8.25% at September 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 September 30, 1996, the Company had
reduced during the third quarter of 1996 by approximately $538,000 the amount
outstanding under the Line of Credit to approximately $1,071,000, and the
balance for the Term Loan was approximately $117,000. 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
March 14, 1997. The Company has continued to make payments to Fleet to reduce
the outstanding indebtedness under the Line of Credit to $1,071,000 as of
November 8, 1996, and, as 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.
On July 3, 1996, the Company entered into a Term Note, Pledge and
Security Agreement (the "Term Note") with Public Service Conservation Resources
Corporation ("PSCRC") to borrow $282,500 at an interest rate of 12% per annum.
The Term Note is secured by certain of the Company's assets. Under the Term Note
the principal and accrued interest were due on July 31, 1996, but PSCRC agreed
to forbear from any collection action under the Term Note so long as Fleet's
forbearance remains effective. Fleet's forbearance is currently scheduled to
continue until at least March 14, 1997.
The Company also received loans with interest rates ranging from 13% to
15% per annum from PSCRC in December 1994 and November 1995, of which an
aggregate principal amount of approximately $927,000 was outstanding as of
September 30, 1996. The loans are primarily unsecured and PSCRC has agreed to
forbear from any collection action so long as Fleet's forbearance remains
effective.
Certain other 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
-13-
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 of the loans from the Canadian
Subsidaries.
In addition, since September 1995, PSCRC has advanced an aggregate of
$1,075,000 to the Canadian Subsidiaries, which is evidenced by a $900,000 term
note that bears interest at the rate of 13% per annum and is secured by the
Canadian Subsidiaries' backlog, and a $175,000 demand term note that bears
interest at 15% per annum. As a result of the Canadian Wind-down, the Company no
longer considers the obligations of the Canadian Subsidiaries under the PSCRC
term notes to be material commitments of the Company.
In August 1992, March 1993 and December 1993, BFR Industries Ltd., a
Canadian subsidiary of the Company ("BFR"), entered into third party lease
agreements (the "Lease Agreements") with National Trust Company ("National") to
finance the purchase of certain equipment that was installed pursuant to certain
Guaranteed Energy Performance Program contracts (the "GEPP Contracts"). Payments
under the Lease Agreements are scheduled to continue until 1998. As security for
the payments due under the Lease Agreements, BFR has assigned to National all of
the payments due to BFR under the GEPP Contracts. As a result of the Canadian
Wind-down, the Company no longer considers the obligations of BFR under the
Lease Agreements to be material commitments of the Company.
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.
-14-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. On September 11, 1996, United Southeast Corp. d/b/a
Holiday Inn ("United") filed a complaint with the Summit Court of Common Pleas
in Akron, Ohio alleging that the Company had breached the terms of an energy
savings contract because the Company's estimated energy savings under the
contract for a sixty month period was not realized during the first twelve
months of the contract. United has requested actual and future damages in the
amount of approximately $150,000.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION.
(a) On October 23, 1996 and October 31, 1996 the Company's
Common Stock was removed from listing and registration on the Boston Stock
Exchange and the NASDAQ SmallCap Stock Market, respectively, because the
Company's stockholder equity as set forth in its Quarterly Report on Form 10-QSB
for the six months ended June 30, 1996 was less than the minimum amounts
required for continued listing on each exchange.
(b) On October 4, 1996, Thomas Beamer, the Company's Chief
Financial Officer tendered his resignation, effective October 15, 1996, in order
to pursue an opportunity in another industry. On October 7, 1996, the Company
hired Stephen Gorgol as its Controller and principal financial and accounting
officer. Mr. Beamer has agreed to serve as a consultant to the Company in
connection with the transition of his duties to Mr. Gorgol.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS. The following exhibits are filed herewith:
EXHIBIT
NO. TITLE
--- -----
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K. One report on Form 8-K was filed
during the quarter for which this report is filed. On July 2, 1996, the Company
filed a report on Form 8-K reporting certain events related to the Company's
restructuring and certain changes in the Company's debt obligations.
-15-
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: November 18, 1996 By: /s/ Robert Wexler
------------------
Robert Wexler
Chief Executive Officer
Date: November 18, 1996 By:/s/ Stephen Gorgol
------------------
Stephen Gorgol
Controller
-16-
EXHIBIT INDEX
-------------
EXHIBIT
NO. TITLE
------- -----
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Company's Quarterly Report on Form 10-QSB
for the period ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 259,196
<SECURITIES> 0
<RECEIVABLES> 1,286,229
<ALLOWANCES> 373,850
<INVENTORY> 491,904
<CURRENT-ASSETS> 2,371,777
<PP&E> 444,565
<DEPRECIATION> 274,288
<TOTAL-ASSETS> 8,304,643
<CURRENT-LIABILITIES> 10,883,675
<BONDS> 0
0
0
<COMMON> 84,282
<OTHER-SE> 9,490,995
<TOTAL-LIABILITY-AND-EQUITY> 8,304,643
<SALES> 2,498,729
<TOTAL-REVENUES> 2,498,729
<CGS> 1,658,293
<TOTAL-COSTS> 1,658,293
<OTHER-EXPENSES> 32,951
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,662
<INCOME-PRETAX> (688,006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (688,006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (688,006)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
