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
March 31, 1996 1-11065
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ENCON SYSTEMS, INC.
(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____
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As of May 10, 1996, the Company had outstanding 5,166,728 shares of
Common Stock, $.01 par value per share, and 197,000 Special Shares of Encon
Systems Canada, Inc., which are exchangeable at anytime into shares of the
Company's Common Stock.
ENCON SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Consolidated Balance Sheets;
March 31, 1996 (Unaudited)
and December 31, 1995 (Audited) 1
Consolidated Statements of
Operations (Unaudited); Three
months ended March 31, 1996
and 1995 2
Consolidated Statements of Cash Flows
(Unaudited); Three months ended
March 31, 1996 and 1995 3
Notes to Consolidated Financial
Statements (Unaudited) 4
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1996 1995
------ ----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash $ - $ -
Accounts receivable - net 7,881,855 7,460,777
Inventories 1,337,616 1,228,389
Costs in excess of billings 155,087 44,883
Prepaid expenses and other current assets 273,210 240,262
Notes receivable from officers 99,717 100,967
Refundable income tax credits 265,763 263,383
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Total current assets 10,013,248 9,338,661
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Property and equipment - net 577,633 614,027
------------- -------------
Long-term accounts receivable - net (Note 2) 1,390,816 1,550,189
Long-term lease receivables 60,107 84,682
Organizational costs - net 35,258 39,481
Other assets - net 429,886 449,048
Cost in excess of net assets of businesses acquired - net 4,715,561 4,784,645
------------- -------------
Total assets $ 17,222,509 $ 16,860,733
============= =============
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Current liabilities:
Cash overdraft $ 129,543 $ 754,680
Notes payable - bank 3,700,149 3,621,647
Notes payable - utility 1,223,669 626,788
Current portion of notes payable to stockholders 283,186 346,785
Current portion of long-term debt 254,111 262,394
Current portion of GEPP financing 384,652 372,694
Accounts payable 3,920,662 3,281,276
Accrued expenses 598,435 1,119,124
Billings in excess of costs 151,778 424,968
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Total current liabilities 10,646,185 10,810,356
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Long-term GEPP financing 542,417 625,983
Notes payable to stockholders, net of current portion 298,326 321,323
Long-term debt, net of current portion 1,296,684 1,353,854
Other long-term debt 65,377 32,872
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Total liabilities 12,848,990 13,144,388
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Minority interest 896,980 896,980
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 8,000,000 shares authorized,
5,166,728 shares issued and outstanding (4,258,634 at
December 31, 1995) 51,668 42,587
Additional paid-in capital 8,639,543 7,452,863
Accumulated deficit (5,216,015) (4,693,224)
Cumulative translation adjustment 1,344 17,139
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Total stockholders' equity 3,476,540 2,819,365
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Total liabilities, minority interest and stockholders' equity $ 17,222,509 $ 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
March 31,
1996 1995
-------- --------
<S> <C> <C>
Net sales and revenues $ 5,669,990 $ 5,149,497
Cost of sales 3,658,822 3,378,945
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Gross profit 2,011,168 1,770,552
Selling, general and administrative expenses 2,471,427 1,585,896
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Income (loss) from operations (460,259) 184,656
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Other income (expense)
Interest expense (122,618) (40,672)
Interest income 1,889 989
Other income 25,000 -
Foreign currency exchange gain (loss) 33,197 34,278
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(62,532) (5,405)
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Income (loss) before income taxes (522,791) 179,251
Income tax expense (benefit) - 53,776
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Net income (loss) $ (522,791) $ 125,475
============= =============
Net income (loss) per share $ (0.11) $ 0.05
============= =============
Weighted average number of shares
outstanding 4,975,936 2,595,219
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (522,791) $ 125,475
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 123,536 51,293
Refundable income tax credits (2,380) -
Loss on disposal of assets (5,842)
Changes in assets and liabilities, net effects
of acquisition of businesses:
Accounts receivable - net (333,313) (1,731,795)
Leases receivable 24,575 63,030
Inventories (109,227) (327,677)
Cost in excess of billings (110,204) (7,008)
Prepaid expenses and other current assets (32,948) (586,638)
Accounts payable 639,386 1,658,710
Billings in excess of costs (273,190) 76,408
Accrued expenses (520,689) 104,568
Other assets - net 15,794 27,540
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Net cash used for operating activities (1,101,451) (551,936)
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Cash flows from investing activities:
Additions to property and equipment - net (10,467) (18,754)
----------- -----------
Net cash used for investing activities (10,467) (18,754)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in cash overdraft (625,137)
Issuance (payments) of notes receivable from officers 1,250 (86,582)
Proceeds from note payable to bank 78,502 609,524
Proceeds from note payable to utility 596,881
Payments on loans from stockholders (86,596) (31,410)
Net proceeds from long-term debt (32,948) (147,570)
Issuance of Common Stock 1,195,761 -
----------- -----------
Net cash provided by financing activities 1,127,713 343,962
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(15,975) -
Effect of exchange rate changes on cash ----------- -----------
Net increase in cash - (226,728)
Cash at beginning of period - 253,050
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Cash at end of period $ - $ 26,322
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 212,641 $ 229,839
=========== ===========
Income taxes $ - $ 3,100
=========== ===========
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)
MARCH 31, 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 months ended March 31, 1996 and 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.
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ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(2) Guaranteed Energy Performance Program ("GEPP") Contracts. The components of
the GEPP contracts are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
<S> <C> <C>
Assets
Receivable due from customers in estimated monthly installments
ranging from $17,000 to $89,000 through January 2002;
discounted at rates ranging from 9% through 14.75%
per annum $ 5,852,576 $ 6,190,790
Receivables due from electrical utility for energy
reduction rebates in installments through 1998 727,680 803,706
----------- -----------
6,580,256 6,994,496
Less current portion 2,079,946 2,072,614
----------- -----------
Long-term accounts receivable 4,500,310 4,921,882
Deferred equipment costs 119,155 125,058
----------- -----------
Total assets $ 6,699,411 $ 7,119,554
=========== ===========
Liabilities
Payable due utility in estimated monthly installments ranging from
$10,000 to $60,000 through January 2002; discounted
at rates ranging from 9% through 14.75% per annum 3,758,701 3,987,190
----------- -----------
Financing arrangements
Payable to leasing company in 11 monthly installments of $26,291
and 1 installment of $66,457 per annum through March 1998,
including interest at 9% per annum 657,811 715,657
Payable to leasing company in monthly installments of $5,802
through January 1998, with final payment of $99,356 in
February 1998; including interest at 12.75% per annum 193,769 203,082
Payable to leasing company in monthly installments of $2,229
through January 1998, with final payment of $34,178 in
February 1998; including interest at 12.94% per annum 75,490 79,938
----------- -----------
4,685,771 4,985,867
Less current portion 1,511,688 1,461,951
----------- -----------
Long-term accounts payable 3,174,083 3,523,916
Provision for losses 477,828 473,760
----------- -----------
Total liabilities $ 5,163,599 $ 5,459,627
=========== ===========
Total receivable current portion $ 2,079,946 $ 2,072,614
Total payable current portion 1,511,688 1,461,951
Less financing current portion shown separately 384,653 372,694
----------- -----------
Payable current portion 1,127,035 1,089,257
----------- -----------
Net receivable current portion $ 952,911 $ 983,357
=========== ===========
Long term accounts receivable $ 4,500,310 $ 4,921,882
Total long term payables 3,651,911 3,997,676
Less financing long term shown separately 542,417 625,983
----------- -----------
Total long term payables 3,109,494 3,371,693
----------- -----------
Net long term receivable $ 1,390,816 $ 1,550,189
============ =============
(Continued)
</TABLE>
-5-
ENCON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The receivable balances are estimated to be collected as follows:
Customer Utility Total
-------- ------- -----
Year ending March 31:
1997 $ 1,735,475 344,471 2,079,946
1998 1,914,332 311,402 2,225,734
1999 1,723,173 71,807 1,794,980
2000 155,071 - 155,071
2001 166,173 - 166,173
Thereafter 158,352 - 158,352
---------- ---------- ----------
$ 5,852,576 727,680 6,580,256
========== ========== ==========
The payable balances are estimated to be paid as follows:
Leasing
Utility Company Total
------- ------- -----
Year ending March 31:
1997 $ 1,127,035 384,653 1,511,688
1998 1,246,189 542,417 1,788,606
1999 1,100,190 - 1,100,190
2000 87,477 - 87,477
2001 101,289 - 101,289
Thereafter 96,521 - 96,521
---------- ---------- ----------
$ 3,758,701 927,070 4,685,771
========== ========== ==========
The payable to leasing company is pursuant to a lease agreement whereby the
lessor has a security interest in the receivables due under the GEPP contract.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company derives its revenue principally from the sale of energy
efficient systems for commercial, industrial and institutional facilities, and
to residential customers in the United States and Canada. The Company sells its
systems directly to the end-user and through participation in Demand Side
Management ("DSM") programs sponsored by various utilities, including Public
Service Electric & Gas of New Jersey ("PSE&G") and Consolidated Edison of New
York ("Con Ed"). However, as a result of changes in DSM programs during the last
two years, the Company has decreased its sales and marketing efforts on such
programs, and is emphasizing working directly with the end-user customer.
Accordingly, management believes that the Company will continue to derive an
increasing portion of its revenue from non-DSM projects going forward. During
the three months ended March 31, 1996 and 1995, the Company derived
approximately 50% and 58%, respectively, of its revenue from non-DSM projects.
On November 20, 1995, the Company acquired the outstanding stock of
Kemper Management Services, Inc. ("Kemper") in exchange for (i) 675,000 shares
of the Company's Common Stock, (ii) promissory notes in the aggregate amount of
approximately $534,000, and (iii) cash of approximately $842,000. The amount of
consideration exchanged was determined by negotiations between the parties.
Kemper, headquartered in Glastonbury, Connecticut, is a leading provider of
energy resource management services, primarily to the residential market. In
connection with the Kemper acquisition, the Company entered into employment
agreements with three principals of Kemper, and a consulting agreement with one
principal of Kemper. Kemper now operates as a wholly-owned subsidiary of the
Company.
The Company is currently negotiating the sale of all of the capital
stock of its two Canadian subsidiaries, Enera Inc. ("Enera") and Encon Systems
Canada Inc. ("Encon Canada") (collectively, Enera and Encon Canada are sometimes
hereinafter referred to as the "Canadian Operations"). In the context of
forward-looking statements, the Company anticipates that the sale of the
Canadian Operations (the "Canadian Sale") will be completed before June 30,
1996. No assurance can be given that such a sale will be completed. However,
management believes that if the sale is completed, the sale will have a positive
impact on the Company's cash flow. Such forward looking statements are subject
to risks and uncertainties, including but not limited to those discussed herein
and other risks detailed from time to time in the Company's filing with the
Securities and Exchange Commission. Completion of the Canadian Sale is
contingent upon the satisfaction of several conditions, including, but not
limited to, (i) the satisfactory completion of negotiations with the prospective
purchaser of the Canadian Operations, (ii) agreement by the parties to the
definitive documentation of the Canadian Sale, and (iii) the obtainment from
third parties of all required consents to the Canadian Sale. In the event that
the Canadian Sale is not completed, the Company is evaluating other strategic
alternatives for the Canadian Operations.
The Company currently participates in a DSM program known as GEPP and
sponsored by Ontario Hydro. Although GEPP is no longer available for new
customers, the Company will continue to service three contracts under GEPP.
Management believes that the unavailability of GEPP will not have a material
adverse effect on the Company's operations, although no assurance can be given.
-7-
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 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 is primarily engaged in long term contracts.
The financial statements for the three months ended March 31, 1995 have been
restated to apply the newly adopted method of accounting retroactively. The
effect of the accounting change on income for the three months ended March 31,
1995 is approximately $96,000.
The results for the quarter ended March 31, 1996 are not necessarily
indicative of the results of the Company's operations that may be expected for
the year ending December 31, 1996.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995
Net loss for the three months ended March 31, 1996 was approximately
$523,000 compared to net income of approximately $125,000 for the three months
ended March 31,1996, a change of approximately $648,000. Approximately $415,000
or 80% of the net loss is attributable to the Canadian Operations, where
operating inefficiencies and the lack of financial and other resources prevented
the Company from undertaking and completing projects that required substantial
capital investment. To a lesser extent, the lack of resources also contributed
to the net loss of approximately $108,000 in the Company's domestic operations.
Net sales and revenues for the three months ended March 31, 1996 was
approximately $5,670,000 compared to net sales and revenues of approximately
$5,149,000 for the same period in 1995, an increase of approximately $521,000,
or 10%. The increase in net sales is primarily a result of the acquisition of
Kemper, offset by the reduced sales from the Company's Canadian operations.
The Company derives a substantial portion of its revenues from the sale
of energy efficient systems through participation in DSM programs sponsored by
utilities such as Con Ed, Florida Power and Light of Florida ("Florida Power"),
Massachusetts Electric Company of Massachusetts ("Mass Electric"), and PSE&G.
Approximately one-half of the Company's revenues are being realized from non-DSM
projects. As forward-looking statements, management expects that the portion of
the Company's revenues derived from DSM and non-DSM projects will temporarily
increase and
-8-
decrease, respectively, following the Canadian Sale, of which no assurance can
be given, because the Canadian Operations generate a significant portion of the
Company's non-DSM revenues. Following the Canadian Sale, the Company expects DSM
program revenue to eventually decrease as the Company reduces its participation
in DSM programs and bids upon and obtains contracts for non-DSM projects,
although no assurance can be given that the Company will obtain such contracts
since the Company must successfully compete with other providers of services
similar to those of the Company. During the three months ended March 31, 1996
and 1995, the Company derived approximately 50% and 58%, respectively, of its
revenue from non-DSM projects.
Gross profit margin for the three months ended March 31, 1996 was
approximately 35% compared to approximately 34% for the three months ended March
31, 1995. The gross profit margin for the three months ended March 31, 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
$885,000, or 56%, from approximately $1,586,000 for the three months ended March
31, 1995 to approximately $2,471,000 for the three months ended March 31, 1996.
This increase is primarily due to the additional selling, general and
administrative expenses incurred in connection with operating Kemper, which the
Company acquired in November 1995. Selling, general and administrative expenses
increased as a percentage of revenue from approximately 33% to 44% for the three
month periods ended March 31, 1995 and 1996, respectively. This increase is
primarily due to the increase in selling, general and administrative expenses
resulting from the Kemper acquisition, and the significantly reduced revenues
derived from the Canadian Operations.
Interest expense increased by approximately $82,000, or 200%, from
approximately $41,000 for the three months ended March 31, 1995 to approximately
$123,000 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 March 31, 1996 as compared to the same period in 1995, and, to a
lesser extent, an increase in the Company's long-term debt obligations. The
Company's loans are more fully described below in "Liquidity and Capital
Resources."
Interest income increased from approximately $1,000 for the three
months ended March 31, 1995 to approximately $2,000 for the three months ended
March 31, 1996. The increase of approximately $1,000 is primarily attributable
to the increase of the amount of funds invested by the Company.
The Company had other income of approximately $25,000 for the three
months ended March 31, 1996 compared to no other income for the same period in
1995. The other income is primarily attributable to a non-refundable deposit
from a completed utility program.
The Company realized a gain on foreign currency transactions for the
three months ended March 31, 1996 of approximately $33,000 compared to a gain of
approximately $34,000 for the three
-9-
months ended March 31, 1995. The decrease is immaterial and 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 March 31, 1996.
Income tax expense was approximately $54,000 for the three months ended
March 31, 1995 compared to no income tax or benefit for the three months ended
March 31, 1996. This change of approximately $54,000 was primarily due to the
decrease in the Company's taxable income, which resulted because of lack of
profitability, for the three months ended March 31, 1996. The Company has not
recorded any potential income tax benefit that may be realized in future periods
as a result of net operating loss carryforwards.
The change from net income per share of $.05 per share for the first
quarter of 1995 to a loss of $.11 per share for the first quarter of 1996
reflects the Company's net loss, and the greater number of shares of the
Company's Common Stock outstanding as a result of the acquisition of Kemper
completed by the Company in November 1995 and the private placements of the
Company's Common Stock completed in December of 1995 and February of 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1996, the Company used cash of
approximately $1,101,000 for operating activities. The major use of cash was to
finance the loss on operations and the growth in receivables during the three
months ended March 31, 1996. In addition, the Company used cash of approximately
$10,000 for investing activities, which was used to purchase additions to
property and equipment. The Company also had cash of approximately $1,128,000
provided by financing activities, which activities included the sale by the
Company of 908,094 shares of its Common Stock in its private placement completed
in February 1996 (the "1996 Private Placement") and additional bank and other
borrowings.
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 three month periods ended March 31, 1996 and 1995. 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 ten
weeks following the completion of an installation. As a result, the Company's
accounts receivables from utilities for commercial and industrial projects
average approximately 120 days. Although the Company anticipates its cash flow
will continue to be affected by the payment policies of the utilities, as a
forward-looking statement, management expects that as the Company reduces its
participation in DSM programs, its cash flow will be favorably impacted. The
Company's operating cash flow is also affected by the Company's maintaining
inventory levels to support certain sales levels.
In February 1996, the Company received net proceeds of approximately
$1,196,000 from the closing of its 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
-10-
of a private placement (the "1995 Private Placement") in which it sold 1,243,556
shares of its Common Stock.
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
March 31, 1996) plus .75% per annum. At March 31, 1996, approximately $687,000
was outstanding under the revolving line. 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.
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 June 1, 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 March 31, 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 March 31, 1996, the Company had
borrowed approximately $1,675,000 of the funds available under the Line of
Credit and the balance for the Term Loan was approximately $136,000. Aggregate
borrowings under the Line of Credit and Term Loan are limited to 80% of
qualifying accounts receivables and 30% of qualifying inventories. Encon 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. Although the Company has violated these loan covenants,
Fleet has not declared the Company in default and has allowed the Company to
remain in violation of these covenants. The Company expects to receive written
notification of such default, however, the Company is currently negotiating with
Fleet for a waiver of these violations. In addition, Fleet has requested that
the Company establish an alternative source of financing. Management expects
that as a condition to such waiver the Company will be required to have such
financing source in place on or before September 30, 1996.
In July 1995, Encon Canada and Enera (the "Canadian Subsidiaries")
received approval from the Canadian Imperial Bank of Commerce ("CIBC") for a
$2,000,000 Cdn. ($1,470,000 U.S.) demand working capital line of credit
subordinated to certain acquisition indebtedness. Amounts outstanding under a
prior working capital line of credit approved by CIBC in October 1994 and
amended in February 1995 were incorporated into the working capital line of
credit approved in July
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1995. At March 31, 1996, approximately $1,817,000 Cdn. ($1,339,000 U.S.) was
outstanding under this line of credit. Interest accrues at CIBC's prime rate
(7.5% at March 31, 1996) plus 2%. In addition, as of March 31, 1996,
approximately $27,000 Cdn. ($20,000 U.S.) was outstanding under a term loan
agreement with CIBC. This loan matures in August, 1997 and bears interest at a
fixed rate of 7%. The Company and Encon Canada have guaranteed the indebtedness
to CIBC under both the working capital line or credit and the term loan. The
line of credit and the term loan are secured by the personal property of Encon
Canada and Enera.
In addition, the line of credit and term loan with CIBC contain certain
restrictive covenants, as follows: (i) each of the Company and the Canadian
Subsidiaries must maintain a ratio of current assets to current liabilities
equal to or greater than 1.25:1, (ii) each of the Company and the Canadian
Subsidiaries must maintain a ratio of debt to effective tangible net worth equal
to or less than 2:1, and (iii) the Company and the Canadian Subsidiaries must
maintain minimum shareholders' equity of $4,250,000 (U.S.) and $3,500,000
(Cdn.), respectively (the "Minimum Net Worth Requirement"). At March 31, 1996,
the Company was not in compliance with the Minimum Net Worth Requirement. The
Company has requested that CIBC execute a waiver of the Company's non-compliance
solely for the year ended December 31, 1996. CIBC has requested that the Company
establish an alternative source of financing to replace CIBC by July 15, 1996.
As a forward-looking statement, the Company expects that the Canadian Sale will
be completed on or before June 30, 1996. As a result, the requirement to
establish an alternative source of financing to replace CIBC will not have to be
satisfied.
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 March 31, 1996, the balance of
the PSCRC term loan was approximately $475,000. 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 $750,000 at
an interest rate of 12% per annum. At March 31, 1996, outstanding borrowings
under the Revolving Note were approximately $749,000. The Revolving Note matures
in June 1996. In addition, in November 1995, the Company entered into two short
term loans with PSCRC for $125,000 and $350,000, each with an interest rate of
13% per annum.
In addition, since September 1995, PSCRC has advanced an aggregate of
$900,000 (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 of sales
orders received, but upon which the Canadian Subsidiaries have not yet begun
installation (the "Backlog Contracts"). The Company has agreed to maintain the
value of the Backlog Contracts during the term of the Term Note at a level that
is not less than eight (8) times the sum of the outstanding principal balance
under the Term Note plus all unpaid accrued interest thereon, if any.
-12-
The Indebtedness will require 48 monthly payments of interest and a balloon
payment of principal on the due date.
As a forward-looking statement, the Company expects to use a
significant portion of the net proceeds received from the Canadian Sale to
reduce amounts outstanding for long-term debt, notes and accounts payable.
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.
-13-
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS. Not Applicable.
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. In April 1996, the Company hired Thomas R. Beamer to
become its new Chief Financial Officer. Mr. Beamer was the Senior Vice
President and Controller of Hobbs Group, Inc. from April 1985 until
April 1995, and Mr. Beamer holds a Bachelor of Arts degree in
Accounting from Lycoming College.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibit is filed herewith:
Exhibit
No. Title
------- -----
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter for which this report is filed.
-14-
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: May 20, 1996 By: /s/ Alan L. Freidman
---------------------
Alan L. Freidman
Chief Executive Officer
Date: May 20, 1996 /s/ Thomas Beamer
-----------------
Thomas Beamer
Chief Accounting Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
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<RECEIVABLES> 8,325,795
<ALLOWANCES> 443,940
<INVENTORY> 1,337,616
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<PP&E> 1,078,805
<DEPRECIATION> 501,172
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0
<COMMON> 51,668
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<TOTAL-LIABILITY-AND-EQUITY> 17,222,509
<SALES> 5,669,990
<TOTAL-REVENUES> 5,669,990
<CGS> 3,658,822
<TOTAL-COSTS> 6,130,249
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<INCOME-PRETAX> (522,791)
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