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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934
For the quarterly period ended: September 30, 1995, or
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ---------------- to -------------------
Commission file number : 1-10386
CONVEX COMPUTER CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1838006
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 Waterview Parkway
Richardson, Texas 75080
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 497-4000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 30 days. Yes X No ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 1995
Common Stock - $0.01 Par value 26,795,314
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONVEX COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
Sept. 30, Dec. 31,
Assets 1995 1994
------------- --------
Current assets: (Unaudited)
Cash and cash equivalents $ 16,929 $ 34,422
Short-term investments 6,855 5,194
Receivables, net 33,446 44,922
Inventory 19,282 23,655
Current portion of long-term receivables 9,163 13,122
Prepaid expenses and other current assets 7,235 7,998
-------- ---------
Total current assets 92,910 129,313
-------- ---------
Fixed assets, net 27,326 29,433
Long-term receivables 9,734 16,594
Long-term investments 5,973 6,373
Other assets, net 5,130 4,477
-------- ---------
Total assets $141,073 $186,190
======== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,168 $ 10,547
Accrued payroll and related taxes 4,612 4,327
Current portion of notes payable 7,944 9,884
Deferred revenue 11,156 14,207
Other current liabilities 20,308 25,912
-------- --------
Total current liabilities 51,188 64,877
-------- ---------
Long-term liabilities:
Notes payable 5,369 9,678
6% convertible subordinated debentures 53,500 53,500
-------- --------
Total long-term liabilities 58,869 63,178
-------- --------
Contingencies and commitments -- --
Shareholders' equity:
Preferred stock ($.01 par value); 5,000,000 shares
authorized, and none outstanding -- --
Common stock ($.01 par value); 80,000,000 and 40,000,000
shares authorized in 1995 and 1994, respectively;
26,790,465 shares and 26,533,485 shares outstanding
in 1995 and 1994, respectively 267 265
Additional capital 154,780 153,574
Accumulated (deficit) (123,451) (94,305)
Cumulative translation adjustment (580) (1,399)
--------- --------
Total shareholders' equity 31,016 58,135
--------- --------
Total liabilities and shareholders' equity $ 141,073 $ 186,190
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CONVEX COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Revenue:
Product and other revenue $ 12,937 $ 20,537 $ 55,873 $ 47,279
Service revenue 12,262 15,906 39,563 52,610
--------- --------- --------- ---------
Total revenue 25,199 36,443 95,436 99,889
Costs and Expenses:
Cost of product and other revenue 9,375 12,018 36,847 32,236
Cost of service revenue 7,511 9,565 23,257 34,283
Research and development 8,172 7,697 23,469 23,771
Selling, general and
administrative 13,142 14,970 39,117 45,847
Restructuring and other charges 0 0 0 18,345
--------- --------- --------- ---------
Total costs and expenses 38,200 44,250 122,690 154,482
--------- --------- --------- ---------
Operating (loss) (13,001) (7,807) (27,254) (54,593)
Other (expense), net (860) (552) (1,618) (1,327)
---------- --------- --------- ---------
(Loss) before provision for income
taxes (13,861) (8,359) (28,872) (55,920)
---------- --------- --------- ---------
Provision for income taxes 1 427 274 541
--------- --------- --------- --------
Net (loss) $ (13,862) $ (8,786) $ (29,146) $ (56,461)
========== ========= ========== ==========
Net (loss) per common share $ (.52) $ (.33) $ (1.09) $ (2.18)
========== ========= ========== ==========
Weighted average number of
common shares outstanding 26,770 26,321 26,715 25,846
The accompanying notes are an integral part of these consolidated financial
statements.
CONVEX COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
------------------------
1995 1994
----------- -----------
Operating activities:
Net income (loss) $ (29,147) $ (56,461)
Adjustments to reconcile net (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization 12,732 13,483
Foreign currency losses (103) (629)
Deferred income taxes 388 256
Changes in assets and liabilities:
Decrease in receivables 12,614 21,628
Decrease in inventory 4,800 2,502
Decrease in prepaid expenses and other current
assets 1,418 8,164
Decrease in long-term receivables 10,974 7,428
(Decrease) in accounts payable (3,511) (2,185)
Increase (decrease) in income taxes payable 152 (1,136)
(Decrease) in deferred revenue (3,549) (8)
(Decrease) in other current liabilities (7,938) (3,710)
----------- -----------
Total adjustments 27,977 45,793
----------- -----------
Net cash (used for) operating activities (1,170) (10,668)
----------- -----------
Investing activities:
(Additions) to fixed assets, net (7,280) (5,400)
(Increase) decrease in short-term investments (1,661) 7,846
Decrease in long-term investments 400 3,360
(Increase) in other assets (2,738) (2,871)
Foreign currency hedging activity (179) (1,195)
----------- -----------
Net cash (used for) provided by investing activities (11,458) 1,740
----------- -----------
Financing activities:
Issuance of common stock under stock option
and purchase plans, net 1,209 2,693
Proceeds from long-term debt 3,424 310
Principal payments on long-term debt (9,670) (8,947)
----------- -----------
Net cash (used for) financing activities (5,037) (5,944)
----------- -----------
Effect of exchange rate fluctuations on cash
and cash equivalents 172 1,832
----------- -----------
(Decrease) in cash and cash equivalents (17,493) (13,040)
Cash and cash equivalents, beginning of period 34,422 43,094
----------- -----------
Cash and cash equivalents, end of period $ 16,929 $ 30,054
========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 3,763 $ 3,833
Income taxes, net of refunds $ (936) $ (5,824)
The accompanying notes are an integral part of these consolidated financial
statements.
CONVEX COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of Convex
Computer Corporation and subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information in footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to those rules
and regulations. However, the Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in connection with the
financial statements and notes thereto included in the Company's most recent
annual report to shareholders.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting of
normal, recurring adjustments) which the Company considers necessary for a
fair presentation of the results of operations for the interim periods covered
and of the financial condition of the Company at the interim balance sheet
dates.
Revenue Recognition
Product revenue is recognized at the time of shipment except in those cases
where (a) specified functional or performance criteria cannot be factory
tested or otherwise verified prior to shipment, or (b) contract terms or
funding contingencies would render the earnings process not substantially
complete. In cases where revenue is deferred at the time of shipment, revenue
will be recognized when the product functionality or performance can be
verified or when contract terms or funding contingencies are resolved.
Service revenue is recognized ratably over the term of each maintenance
contract or, for other services, as those services are provided. For
maintenance contracts, customers are given the option to prepay for service,
in which case the prepayment is accounted for as deferred revenue and
recognized ratably over the service period.
Inventory
Inventory is recorded at the lower of cost (on a first-in, first-out basis) or
market. Inventory consists of the following (in thousands):
Sept. 30, Dec. 31,
1995 1994
----------- ----------
Raw material $ 7,137 $ 10,119
Work-in-process 2,671 2,957
Finished goods 9,474 10,579
------- --------
$ 19,282 $ 23,655
======== ========
Income Taxes
The operating loss for the Company in the third quarter of 1995 is anticipated
to result in no tax benefit in the current year. The Company believes it may
incur tax expenses in various foreign subsidiaries which could result in a net
tax expense for the year. At September 30, 1995, the Company had foreign and
domestic operating loss carryforwards which are available to offset future
taxable income. The realization of the tax benefits related to the loss
carryforwards is dependent on the future profitability of the Company and its
foreign subsidiaries.
Earnings per Common and Common Equivalent Share
The computation of primary earnings per share is based on the weighted average
number of common and common equivalent (stock options) shares assumed to be
outstanding during the period. Because of net losses in the periods
presented, common stock equivalents have been excluded from the computation
since the effect of their inclusion would be anti-dilutive.
Legal Proceedings
On September 22, 1995, an action titled Joanne Hoffman v. Robert J. Paluck,
Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith,
Howard D. Wolfe, Convex and Hewlett-Packard (the "Hoffman Action") was filed
in the State of Delaware against Convex, Hewlett-Packard and the Convex Board.
The Hoffman Action alleges, among other things, that the proposed price per
share for the Convex Common Stock is unfairly low and does not accurately
reflect the intrinsic value of the Convex Common Stock. The Hoffman Action
further alleges that the members of the Convex Board breached their fiduciary
duties to Convex by failing to conduct an auction of Convex before signing the
Merger Agreement and that the Convex Board failed to exercise independent
judgment in agreeing to the Merger. The Hoffman Action alleges that HP owes a
fiduciary duty to the stockholders of Convex. The Hoffman Action requests,
among other things, that the court enjoin the consummation of the Merger, as
well as unspecified damages, and certification as a class action.
On October 2, 1995, a second action titled Gail Gomberg v. Robert J. Paluck,
Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith,
Howard D. Wolfe, Convex and Hewlett-Packard (the "Gomberg Action") was filed
in the State of Delaware against Convex, Hewlett-Packard and the Convex Board.
The Gomberg Action alleges, among other things, that the Merger is unfair to
Convex and its stockholders for the following reasons: (i) the Convex Board
did not conduct an auction before entering into the Merger Agreement, (ii) the
price offered for shares of Convex Common Stock in the Merger was below the
market price on the date that the Merger Agreement was signed, (iii) the
Merger will deny the Convex stockholders the right to maximize the value of
their securities through the loss of a premium that could be available from
other suitors, and (iv) by conducting the foregoing acts, the Convex Board
breached their fiduciary duties to Convex and its stockholders. The Gomberg
Action also alleges that HP aided and abetted the members of the Convex Board
in breaching their fiduciary duties. The Gomberg Action seeks an injunction
against the Merger, as well as unspecified damages, certification as a class
and other forms of relief.
On October 3, 1995, a third action titled Glenn Faegenburg v. Robert J.
Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K.
Smith, Howard D. Wolfe and Convex (the "Faegenburg Action") was filed in the
State of Delaware against Convex and the individual members of the Convex
Board. The Faegenburg Action alleges, among other things, that the proposed
price per share is unfairly low and that the members of the Convex Board
breached their fiduciary duties to the Convex stockholders. The Faegenburg
Action seeks an injunction against the Merger, as well as unspecified damages,
certification as a class action and other forms of relief.
While no assurance can be given as to the results of the above described
actions, HP and Convex believe that each of the above actions lacks merit and
intend to defend these actions vigorously.
Restructuring and Other Charges
A summary of the Company's restructuring and other charges is as follows
(in millions):
1994 Quarters
--------------------------
Item 4th 3rd 2nd 1st
- ---- ---- ---- ---- ----
Severance and related employee costs $0.0 $0.0 $2.1 $0.0
Fixed asset write-downs/write-offs 0.0 0.0 2.9 0.0
Demo equipment write-downs 0.0 0.0 1.6 0.0
---- ---- ---- ----
Restructuring charges 0.0 0.0 6.6 0.0
C3 inventory write-downs/write-offs 0.0 0.0 11.7 0.0
---- ---- ----- ----
Other charges 0.0 0.0 11.7 0.0
---- ---- ----- ----
Restructuring and
Other charges $0.0 $0.0 $18.3 $0.0
==== ==== ===== ====
The Company implemented restructuring actions in 1994 primarily as a result of
the substantial decline in order rates and revenues of the Company's C3
product line. These actions were designed to reduce operating costs and to
increase the efficiency of the Company's operations. These actions included
reductions of the Company's workforce and resulted in payments to terminated
employees for salaries and severance, benefits during the severance period and
outplacement services. Additionally, the restructuring actions resulted in
write-downs of certain of the Company's assets which were either obsolete or
lacked future utility to the Company. The fixed asset write-downs included
costs related to the retirement of fixed assets, principally assets used in
the assembly and test of both hardware and software products for the C3
product lines. In addition, the Company wrote-down the carrying value of its
C3 sales demonstration and marketing equipment.
The Company recorded $11.7 million of other charges in 1994. The majority of
these charges related to the write-downs of the carrying values of the
Company's inventories. These write-downs were the result of the continued
decline in demand for C3 products below levels estimated in the second quarter
of 1993 and the resulting reductions in sales prices for the entire C3 family
of products.
Merger with Hewlett-Packard
On September 21, 1995, Convex Computer Corporation, Hewlett-Packard Company
("Hewlett-Packard"), and Gemini Project Corporation, a wholly-owned subsidiary
of Hewlett-Packard ("Subsidiary") entered into an Agreement and Plan of Merger
(the "Merger Agreement"), which contemplates that Hewlett-Packard will acquire
Convex by means of a merger of Subsidiary with and into Convex. Subject to
the approval of the holders of a majority of the outstanding shares of common
stock, $.01 par value, of Convex ("Convex Common Stock") and certain other
conditions set forth in the Merger Agreement, (i) each outstanding share of
Convex Common Stock will be converted into the right to receive that fraction
of a share (the "Conversion Fraction") of common stock, $1.00 par value, of
Hewlett-Packard ("HP Common Stock") as is determined by dividing $4.83 by the
average closing price of HP Common Stock for the ten trading day period ending
two trading days prior to the effectiveness of the Merger (the "Effective
Time"), and (ii) each outstanding option to purchase Convex Common Stock will
thereafter constitute an option to acquire that number of whole shares of HP
Common Stock equal to the number of shares of Convex Common Stock issuable
with respect to such option multiplied by the Conversion Fraction, at a price
equal to the exercise price per share of Convex Common Stock divided by the
Conversion Fraction. Subject to the consummation of the Merger, Convex will
apply the funds credited as of the last payday on or prior to the Effective
Time in each participant's payroll withholdings account under the Convex 1995
Employee Stock Purchase Plan to the purchase of whole shares of Convex Common
Stock. No fractional shares of HP Common Stock will be issued in the Merger.
Cash will be paid in lieu of issuing fractional shares.
After the Effective Time, the 6% Convertible Subordinated Debentures due March
1, 2012 (the "Debentures") issued by Convex will be convertible, at the option
of the holders, into whole shares of HP Common Stock at a conversion price
determined by dividing $21.75, the current price at which the Debentures are
convertible into Convex Common Stock, by the Conversion Fraction.
Hewlett-Packard will not succeed to the rights and obligations of Convex under
the Indenture dated as of March 1, 1987 relating to the Debentures (the
"Indenture") at the Effective Time.
Upon completion of the transaction, which is anticipated by early 1996, Convex
will become a wholly- owned subsidiary of Hewlett-Packard.
Nothing in the Merger Agreement prevents the Board of Directors of Convex (the
"Convex Board") from soliciting or encouraging, or from considering or
negotiating, another proposal for a merger or similar transaction (an
"Acquisition Proposal"). Convex, through its financial advisors, PaineWebber
Incorporated, has commenced efforts to solicit alternative proposals from
potential acquirors. In addition, nothing in the Merger Agreement prevents
the Convex Board from approving or recommending an Acquisition Proposal if the
Convex Board determines that such Acquisition Proposal would result in a
transaction more favorable to Convex's stockholders from a financial point of
view that the transaction contemplated by the Merger Agreement (a "Superior
Proposal"). If Convex accepts or recommends to its stockholders a Superior
Proposal, Convex will be required to pay Hewlett-Packard the sum of
$3,750,000, plus Hewlett-Packard's expenses.
Hewlett-Packard has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form S-4 under the Securities and
Exchange Act of 1933, as amended, with respect to the HP Common Stock to be
issued in the Merger. The Proxy Statement/Prospectus forming part of that
Registration Statement will be mailed to the record holders of Convex Common
Stock after the Registration Statement is declared effective by the
Commission, which is expected to occur before the end of 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On September 21, 1995, Convex Computer Corporation ("Convex"), Hewlett-Packard
Company ("Hewlett-Packard") and Gemini Project Corporation, a wholly-owned
subsidiary of Hewlett-Packard ("Subsidiary") entered into an Agreement and
Plan of Merger (the "Merger Agreement"), which contemplates that
Hewlett-Packard will acquire Convex by means of a merger (the "Merger") of
Subsidiary with and into Convex. Upon completion of the Merger, which is
expected to occur by early 1996, Convex will become a wholly-owned subsidiary
of Hewlett-Packard. Certain terms of the Merger are summarized below under
the heading "Merger with Hewlett-Packard."
During the third quarter of 1995, revenue declined sharply due in substantial
part to customers' continued concern over Convex's financial viability.
Continued intense competition in the technical markets and component shortages
for Convex's C4 systems also played a role in the decline, which was
significantly sharper than expected.
Revenue for the third quarter was $25 million versus $35 million in the
previous quarter and $36 million in the third quarter of 1994. Expenses for
the third quarter increased by $.7 million versus the previous quarter, but
declined by $1 million from the third quarter of 1994. As a result, Convex
incurred a loss of $14 million, or $.52 per share, for the third quarter,
versus a loss of $7 million, or $.27 per share, in the previous quarter and $9
million, or $.33 per share, in the third quarter of 1994. Cash and short-term
investments decreased by $10 million in the third quarter of 1995 to $24
million as of September 30, 1995.
The Company believes that its financial results will continue to be adversely
affected by intense competition in the technical markets, component
availability issues and, unless the Merger is consummated or Convex can obtain
additional capital, customers' concern over Convex's financial viability.
The Company has no established borrowing facility or other source of
additional capital. After a thorough investigation of financing alternatives,
the Company has been unable to locate a source of additional capital willing
to provide an amount of capital sufficient to satisfy the Company's near-term
requirements. While some sources have expressed interest in attempting to
raise or provide additional capital for the Company, none of these sources has
been able to express a high level of confidence in their ability to satisfy
the Company's capital requirements given the Company's recent history of
losses and near-term prospects and general market factors, including the fact
that virtually all of the supercomputer companies still in business in 1994,
including Kendall Square Research, Thinking Machines Corporation and Cray
Computer Corporation, either are experiencing financial difficulties or have
filed bankruptcy.
The Company expects financial performance to be below break-even for at least
the next two quarters and potentially beyond. As a result, the Company
expects cash, cash equivalents and short-term investment balances to decline
to or be below minimum requirements in early 1996 unless it (a) can obtain
additional capital from currently unidentified sources or by consummating the
Merger or (b) curtails or eliminates some of its technology and product
development activities which are important to its success in the long term.
Revenue
Total revenue of $25 million for the third quarter of 1995 was 31% below the
Company'sttotal revenue for the third quarter of 1994 and 28% below the second
quarter of 1995.
Quarter ended
---------------------------
Revenue ($000,000) 9/30/95 9/30/94 6/30/95
------------------ ------- ------- -------
Product and Other $ 13 $ 21 $ 22
Service 12 16 13
Total 25 36 35
9/30/95 Quarter Revenue -
Percent change from quarter ended
---------------------------------
Product and Other Revenue 0% -37% -40%
Service Revenue 0% -23% -9%
Total Revenue 0% -31% -28%
System Shipments
----------------
Exemplar SPP 14 17 18
Meta Series 0 2 1
C4600 1 5 4
C3800 0 0 0
C3200/3400 0 5 5
Third quarter product revenue decreased 37% from the third quarter of 1994,
primarily as a result of a decrease in C Series system shipments, and
decreased 40% from the second quarter of 1995, as a result of decreases in
both C4 system and Exemplar SPP system shipments.
Critical sole-source component shortages coupled with late order placement
allowed shipment of only one C4 system during the third quarter of 1995, and
resulted in an increase of two systems in the C4 system order backlog. The
Company believes that the availability of these critical sole-source
components will continue to limit C4 system shipments in the near term. The
Company also believes that the high average selling price and the low unit
volume of its C4 system will continue to lead to highly variable results for
this product line, sales of which have ranged from one to eight system sales
per quarter.
During the third quarter of 1995, shipments of higher-end Exemplar system XA
models were below the levels of the previous quarter and the same quarter of
1994. The effects of this decline were partially offset by an increase in
shipments of lower-end Exemplar system CD models and an increase in Exemplar
SPP upgrade shipments.
Service revenue in the third quarter of 1995 decreased 23% from the third
quarter of 1994 and 9% from the second quarter of 1995. Service revenue
includes revenue from maintenance contracts and systems integration. Systems
integration includes the integration components for the data management
business and the Meta Series product line. Service revenue from maintenance
contracts, which was approximately $11 million in the third quarter of 1995,
has been declining gradually because the decrease in service revenue from
older systems has not been fully offset by an increase in service revenue from
newer systems. The decline in service revenue also reflects a decline in
systems integration revenue, which Convex believes will fluctuate from quarter
to quarter.
The Company manufactures and ships its products as soon as practicable after
receiving a purchase order, and generally does not maintain a significant
backlog. The Company's future financial performance will depend on its
ability to generate new orders for shipment in the same quarter in which the
orders are received. The Company currently has an order backlog for three C4
systems, shipment of which are constrained by critical sole-source component
shortages and, for one system, export licensing and funding approval. In
addition, shipment of three Exemplar SPP systems that are in backlog require
export licensing and funding approval.
Finally, because a significant portion of the Company's shipments occur in the
last month of a quarter, minor timing differences in the receipt of customer
purchase orders and in the Company's shipments can have a significant impact
on quarterly financial results. Due to the high average selling price and low
unit volume of the Company's sales, failure to complete a small number of
sales transactions before the end of a quarter can have a significant negative
impact on financial results.
Gross Margin
Total gross margin for the third quarter of 1995 decreased to 33% from 40% in
the second quarter of 1995 and 41% in the third quarter of 1994 .
Quarter ended
---------------------------
Gross Margin % Revenue 9/30/95 9/30/94 6/30/95
- ---------------------- ------- ------- -------
Product and Other Margin 28 41 38
Service Margin 39 40 42
Total Margin 33 41 40
Product margin decreased to 28% in the third quarter of 1995 versus the 41%
achieved in the third quarter of 1994 and 38% in the second quarter of 1995.
The primary reason for the decrease was the impact of fixed factory overhead
on the reduced volume. Third quarter margins for Exemplar SPP systems
remained relatively constant versus both prior periods, while third quarter
margins for C Series systems declined versus both prior periods. The Company
expects continued pressure on C Series system margins due to continued intense
pricing competition and increased costs associated with shortages of critical
sole-source components.
Gross margin on the service business was 39% for the third quarter of 1995
compared to 40% a year ago and 42% for the second quarter of 1995. Both
service and integration volumes declined in third quarter of 1995, compared to
the prior period. While service costs have been reduced significantly versus
the third quarter of 1994 the revenue decline in the near term is against a
relatively fixed cost base, resulting in the lower margin compared to the
second quarter of 1995.
Expenses
Expenses for the third quarter of 1995 increased slightly from the second
quarter of 1995 in both research and development and in selling, general and
administrative expenses. Expenses declined from the same quarter in 1994,
with reductions in selling, general and administrative expenses.
Quarter ended
---------------------------
Expenses ($000,000) 9/30/95 9/30/94 6/30/95
------------------- ------- ------- -------
Research and Development 8 8 8
Selling, General and Administrative 13 15 13
Expenses % Revenue
------------------
Research and Development 32% 21% 22%
Selling, General and Administrative 52% 41% 37%
The Company continues to focus on expense management.
New Product Development
- -----------------------
The market for the Company's products is characterized by rapid technological
change, frequent new product introductions, changes in customer needs and
evolving industry standards and is therefore highly dependent upon timely
product innovation. The Company's success is dependent in part on its ability
to enhance and improve its existing products while developing and introducing
new products on a timely basis to replace declining revenues from older
products. The timing and success of product development is unpredictable due
to the technological complexity of the Company's products, the inherent
uncertainty in anticipating technological developments, the need for
coordinated efforts of numerous technical personnel, the Company's reliance on
third party vendors for critical technology and the difficulties in
identifying and eliminating errors prior to production release.
The timely introduction and market acceptance of the third generation Exemplar
products planned for 1996 are critical to the Company's future financial
performance. The introduction, acceptance and cost of these products is
substantially dependent upon the delivery of acceptable components
manufactured by third parties. The integration of components developed by the
Company with third party components and the performance tuning of the
integrated product are also critical to the overall success of these future
products. Integration and performance tuning efforts typically require
significant development effort and expense.
The Company believes that it will be forced to curtail or eliminate its
development efforts unless the Merger is consummated or another source of
additional capital can be obtained by early 1996.
Components Availability
- -----------------------
Certain components of the Company's products are currently available only from
a single or limited number of sources. In the third quarter of 1995 the
Company experienced a shortage of gallium arsenide gate arrays for the C4
product line, which are only available from Vitesse Semiconductor Corporation.
The Company believes availability of these devices will improve in the fourth
quarter of 1995, but there can be no assurance that the Company will receive
an adequate supply of these components.
Sole-source components also include the PA-RISC microprocessor modules used in
the Exemplar family, which are only available from Hewlett-Packard, and custom
gallium arsenide gate arrays designed by Convex that are manufactured for the
Exemplar family by Fujitsu Microelectronics Incorporated. The Company's
ability to manufacture and ship its products to meet customer demands requires
that the Company receive sufficient quantities of all these semiconductor
devices and other sole-source components. The Company's reliance on these
vendors involves several risks, including the possibility of an interruption
or shortage of components and reduced control over delivery schedules. The
Company's products also use several components such as DRAMs and SRAMs which,
although manufactured by multiple suppliers, have recently been in short
supply. The Company has experienced component shortages in the past, and
there can be no assurance that the Company will receive adequate component
supplies in the future. Delay in the receipt of sole-source or other
components could have a material adverse effect on the Company's results of
operations.
Restructuring and Other Expenses
- --------------------------------
The Company implemented restructuring actions in 1993 and again in 1994 to
reduce operating costs, to increase the efficiency of the Company's
operations, and to align operating expenses with anticipated future business
levels. These charges totaled $54 million and required approximately $20
million in cash expenditures. At September 30, 1995, the accruals to provide
for expenses not yet incurred declined to below $1 million.
The Company ended the third quarter of 1995 with 815 full time employees. The
Company's future success is substantially dependent upon its ability to
attract and retain highly skilled technical and sales personnel. Industry
competition for highly skilled personnel is intense, and the Company's recent
financial performance has challenged its ability to compete for these
personnel. The Company believes that the Merger will improve the Company's
ability to attract and retain key personnel, however, the loss of key
personnel could have a material adverse effect on the Company's business.
Other Income and Expense
Other income and expense consists of interest earned less interest expenses
incurred and certain costs associated with implementing the Company's foreign
currency hedging program. While the net amounts were immaterial in the
periods presented, the Company expects the interest income component to
decline due to lower average cash balances.
Income Taxes
The operating loss for the Company in the third quarter of 1995 is anticipated
to result in no tax benefit in the current year. The Company believes it may
incur tax expenses in various foreign subsidiaries which could result in a net
tax expense for the year. At September 30, 1995, the Company had foreign and
domestic operating loss carryforwards which are available to offset future
taxable income. The realization of the tax benefits related to the loss
carryforwards is dependent on the future profitability of the Company and its
foreign subsidiaries.
Continuing Losses from Operations
The Company has reported losses from operations for each of the last ten
quarters. The Company is experiencing intense competition in its historical
markets as well as in new markets targeted by the Company. The Company
believes that it is experiencing order delays due to customer anticipation of
the introduction of new products in the second half of 1996 and customer
concerns regarding the Company's viability. The result of these factors has
been reduced current demand for the Company's products, slower than expected
acceptance of the Company's products in new markets and reduced gross margins
as compared to the supercomputer industry performance. In response to these
factors, the Company has taken a number of actions to reduce expenses,
including reductions in the size of the Company's workforce. However, the
Company has continued to spend aggressively on research and development.
The Company expects financial performance to be below break-even for at least
the next two quarters and potentially beyond. As a result, the Company
expects to experience liquidity problems in early 1996 unless it (a) can
obtain additional capital from currently unidentified sources or by
consummating the Merger or (b) curtails or eliminates some of its technology
and product development activities which are important to its success in the
long term.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investment balances
declined by $10 million in the third quarter of 1995, primarily as a result of
the Company's operating loss in that quarter. This decline compares to a
decline of $7 million in the third quarter of 1994 and a decline of $3 million
in the second quarter of 1995. At September 30, 1995, the Company's cash,
cash equivalents and short-term investment balances were a total of $24
million.
The Company continues to focus on cash conservation. Receivables decreased by
$4 million in the third quarter of 1995 and inventory remained at the same
level as the second quarter of 1995. There were essentially no capital
expenditures in the third quarter of 1995, compared to $3 million in the third
quarter of 1994 and the previous quarter.
The Company has no established borrowing facility or other source of
additional capital and no agreement or commitment to provide the Company with
additional capital presently exists. In addition, after a thorough
investigation of financing alternatives, the Company has been unable to locate
a source of additional capital willing to provide an amount of capital
sufficient to satisfy the Company's near-term requirements. While some
sources have expressed interest in attempting to raise or provide additional
capital for the Company, none of these sources has been able to express a high
level of confidence in their ability to satisfy the Company's capital
requirements given the Company's recent history of losses and near-term
prospects and general market factors, including the fact that virtually all of
the supercomputer companies still in business in 1994, including Kendall
Square Research, Thinking Machines Corporation and Cray Computer Corporation,
either are experiencing financial difficulties or have filed bankruptcy.
With financial performance expected to be below break-even for at least the
next two quarters and potentially beyond, the Company expects cash, cash
equivalents and short-term investment balances to decline to or be below
minimum requirements in early 1996 unless it (a) can obtain additional capital
from currently unidentified sources or by consummating the Merger or (b)
curtails or eliminates some of its technology and product development
activities which are important to its success in the long term. The Company
believes it will experience severe liquidity problems if the Merger is not
completed by January 31, 1996.
Dependence on Relationship with Hewlett-Packard
The Company's future success and growth depends significantly on its
relationship with Hewlett-Packard. The Company has licensed certain core
technology from and to, and has an ongoing joint marketing arrangement with,
Hewlett-Packard. The Company's strategy of developing products based on
Hewlett-Packard's microprocessors and operating environment makes it
substantially dependent on the competitiveness of those processors and the
Company's ability to obtain access to, and to develop expertise with,
Hewlett-Packard's current and future product developments.
Competition
The high performance computer business is intensely competitive and
characterized by rapid technological advances. The Company's future success
is dependent upon its ability to develop new products and bring them to market
in the near term. The Company's ability to bring new products to market is
substantially dependent on Hewlett-Packard's timely development and
introduction of new microprocessors. In addition, the availability of other
technologies necessary for the Company's success are not under the Company's
control.
The Company's Exemplar products compete with International Business Machines
Corporation's SP2 product, Silicon Graphics Inc.'s Challenge and Power
Challenge products, and products offered by several vendors who offer high
performance workstation and server products. The Company's entire product
line also competes with that of Cray Research, Inc. Each of these competitors
has significantly greater financial, technical, sales, marketing and other
resources than the Company. The introduction of new products by any of these
competitors could result in material adverse effects on the Company, including
but not limited to delays in orders caused by customer evaluations of new
product offerings.
Merger with Hewlett-Packard
On September 21, 1995, Hewlett-Packard, Subsidiary and Convex entered into the
Merger Agreement, which contemplates that Hewlett-Packard will acquire Convex
by means of a merger of Subsidiary with and into Convex. Subject to the
approval of the holders of a majority of the outstanding shares of common
stock, $.01 par value, of Convex ("Convex Common Stock") and certain other
conditions set forth in the Merger Agreement, (i) each outstanding share of
Convex Common Stock will be converted into the right to receive that fraction
of a share (the "Conversion Fraction") of common stock, $1.00 par value, of
Hewlett-Packard ("HP Common Stock") as is determined by dividing $4.83 by the
average closing price of HP Common Stock for the ten trading day period ending
two trading days prior to the effectiveness of the Merger (the "Effective
Time"), and (ii) each outstanding option to purchase Convex Common Stock will
thereafter constitute an option to acquire that number of whole shares of HP
Common Stock equal to the number of shares of Convex Common Stock issuable
with respect to such option multiplied by the Conversion Fraction, at a price
equal to the exercise price per share of Convex Common Stock divided by the
Conversion Fraction. Subject to the consummation of the Merger, Convex will
apply the funds credited as of the last payday on or prior to the Effective
Time in each participant's payroll withholdings account under the Convex 1995
Employee Stock Purchase Plan to the purchase of whole shares of Convex Common
Stock. No fractional shares of HP Common Stock will be issued in the Merger.
Cash will be paid in lieu of issuing fractional shares.
After the Effective Time, the 6% Convertible Subordinated Debentures due March
1, 2012 (the "Debentures") issued by Convex will be convertible, at the option
of the holders, into whole shares of HP Common Stock at a conversion price
determined by dividing $21.75, the current price at which the Debentures are
convertible into Convex Common Stock, by the Conversion Fraction.
Hewlett-Packard will not succeed to the rights and obligations of Convex under
the Indenture dated as of March 1, 1987 relating to the Debentures (the
"Indenture") at the Effective Time.
Upon completion of the transaction, which is anticipated by early 1996, Convex
will become a wholly-owned subsidiary of Hewlett-Packard.
Nothing in the Merger Agreement prevents the Board of Directors of Convex (the
"Convex Board") from soliciting or encouraging, or from considering or
negotiating, another proposal for a merger or similar transaction (an
"Acquisition Proposal"). Convex, through its financial advisors, PaineWebber
Incorporated, has commenced efforts to solicit alternative proposals from
potential acquirors. In addition, nothing in the Merger Agreement prevents
the Convex Board from approving or recommending an Acquisition Proposal if the
Convex Board determines that such Acquisition Proposal would result in a
transaction more favorable to Convex's stockholders from a financial point of
view that the transaction contemplated by the Merger Agreement (a "Superior
Proposal"). If Convex accepts or recommends to its stockholders a Superior
Proposal, Convex will be required to pay Hewlett-Packard the sum of
$3,750,000, plus Hewlett-Packard's expenses.
Hewlett-Packard has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form S-4 under the Securities and
Exchange Act of 1933, as amended, with respect to the HP Common Stock to be
issued in the Merger. The Proxy Statement/Prospectus forming part of that
Registration Statement will be mailed to the record holders of Convex Common
Stock after the Registration Statement is declared effective by the
Commission, which is expected to occur before the end of 1995.
Legal Proceedings
On September 22, 1995, an action titled Joanne Hoffman v. Robert J. Paluck,
Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith,
Howard D. Wolfe, Convex and Hewlett-Packard (the "Hoffman Action") was filed
in the State of Delaware against Convex, Hewlett-Packard and the Convex Board.
The Hoffman Action alleges, among other things, that the proposed price per
share for the Convex Common Stock is unfairly low and does not accurately
reflect the intrinsic value of the Convex Common Stock. The Hoffman Action
further alleges that the members of the Convex Board breached their fiduciary
duties to Convex by failing to conduct an auction of Convex before signing the
Merger Agreement and that the Convex Board failed to exercise independent
judgment in agreeing to the Merger. The Hoffman Action alleges that HP owes a
fiduciary duty to the stockholders of Convex. The Hoffman Action requests,
among other things, that the court enjoin the consummation of the Merger, as
well as unspecified damages, and certification as a class action.
On October 2, 1995, a second action titled Gail Gomberg v. Robert J. Paluck,
Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith,
Howard D. Wolfe, Convex and Hewlett-Packard (the "Gomberg Action") was filed
in the State of Delaware against Convex, Hewlett-Packard and the Convex Board.
The Gomberg Action alleges, among other things, that the Merger is unfair to
Convex and its stockholders for the following reasons: (i) the Convex Board
did not conduct an auction before entering into the Merger Agreement, (ii) the
price offered for shares of Convex Common Stock in the Merger was below the
market price on the date that the Merger Agreement was signed, (iii) the
Merger will deny the Convex stockholders the right to maximize the value of
their securities through the loss of a premium that could be available from
other suitors, and (iv) by conducting the foregoing acts, the Convex Board
breached their fiduciary duties to Convex and its stockholders. The Gomberg
Action also alleges that HP aided and abetted the members of the Convex Board
in breaching their fiduciary duties. The Gomberg Action seeks an injunction
against the Merger, as well as unspecified damages, certification as a class
and other forms of relief.
On October 3, 1995, a third action titled Glenn Faegenburg v. Robert J.
Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K.
Smith, Howard D. Wolfe and Convex (the "Faegenburg Action") was filed in the
State of Delaware against Convex and the individual members of the Convex
Board. The Faegenburg Action alleges, among other things, that the proposed
price per share is unfairly low and that the members of the Convex Board
breached their fiduciary duties to the Convex stockholders. The Faegenburg
Action seeks an injunction against the Merger, as well as unspecified damages,
certification as a class action as well as other forms of relief.
While no assurance can be given as to the results of the above described
actions, HP and Convex believe that each of the above actions lacks merit and
intend to defend these actions vigorously.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger dated as of September 21, 1995,
among Hewlett-Packard Company, Convex Computer Corporation
and Gemini Project Corporation. Incorporated by reference
from Exhibit 2.1 to Hewlett-Packard Company's Registration
Statement on Form S-4 (No. 33-63643).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended September 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVEX COMPUTER CORPORATION
Registrant
BY: DAVID W. CRAIG
----------------------
David W. Craig
Chief Financial Officer and
Vice President, Finance
(Principal Finance and
Accounting Officer)
Dated: November 2, 1995
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