UNITED STATES
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 April 3, 1994
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 No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 305-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
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 90
days. X Yes No
The number of shares outstanding of the registrant's
only class of Common Stock as of April 29, 1994 was
32,798,905.
Exhibit 11 is located on page 20.
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Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidate Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II OTHER INFORMATION 18
Signature Page 19
Exhibit 11 Computation of Loss Per Share 20
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
------------------
April 3, April 4,
1994 1993
--------- ---------
Net sales:
Equipment $ 8,862 $ 14,813
Service 10,627 13,606
----------- -------------
Total 19,489 28,419
Costs and expenses:
Cost of equipment sales 5,420 7,025
Cost of service sales 6,849 11,013
Research and development 6,444 5,856
Sales, general and administrative 8,886 10,608
Amortization of goodwill - 415
------ ------
Total 27,599 34,917
------ ------
Operating loss (8,110) (6,498)
Interest expense (873) (1,213)
Interest income 12 11
Other (expense)/income, net 67 (345)
------ -------
Loss before income taxes (8,904) (8,045)
Provision for income taxes - 300
------ -------
Net loss $ (8,904) $ (8,345)
============ =============
Net loss attributable to
common shareholders $ (11,287) $ (10,590)
============ ===============
Net loss per common share $ (0.28) $ (0.27)
============ ===============
Weighted average shares
of common stock 40,120 38,615
=========== ==============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands except share data)
April 3, December 31,
1994 1993
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,639 $ 3,751
Accounts receivable, less allowances 19,209 16,555
Inventories (Note B) 17,086 17,764
Prepaid expenses and other current
assets 2,816 3,047
------ ------
Total current assets 40,750 41,117
Property and equipment, net 36,983 37,603
Capitalized software, net 4,859 4,403
Other assets 1,257 947
------------ -------------
Total assets $ 83,849 $ 84,070
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term
debt (Note D) $ 201 $ 197
Accounts payable and accrued
liabilities (Note C) 34,916 37,421
------ ------
Total current liabilities 35,117 37,618
Long term debt - related parties
(Note D) 26,872 111,924
Long term debt - other (Note D) 972 995
Other liabilities - 93
------ -------
Total liabilities 62,961 150,630
------ -------
Commitments and contingencies
Shareholders' equity (capital deficiency)
Preferred stock, $.01 par value;
authorized 10,000,000 shares:
Series A Convertible Participating
Preferred, issued 73,641 shares in
1994 and 1993 1 1
6% Cumulative Series B Convertible
Preferred, issued 637,343 and 591,625
in 1994 and 1993, respectively,
with an aggregate liquidation
preference of $63,734,300 and
$59,162,500 in 1994 and 1993,
respectively 6 6
6% Cumulative Series D Convertible
Preferred, issued 975,242 and 905,283
shares in 1994 and 1993, respectively,
with an aggregate liquidation
preference of $97,524,200 and
$90,528,300 in 1994 and 1993,
respectively 10 9
6% Cumulative Series E Convertible
Preferred, issued 1,000,000 shares
in 1994 with an aggregate liquidation
preference of $100,000,000 10 -
Common stock, $.01 par value; authorized
150,000,000 shares; issued 32,788,198
and 32,726,391 in 1994 and 1993,
respectively 328 327
Additional paid-in capital 304,291 207,951
Accumulated deficit (283,758) (274,854)
-------- ---------
Total shareholders' equity
(capital deficiency) 20,888 (66,560)
------------ -------------
Total liabilities and
shareholders' equity (capital
deficiency) $ 83,849 $ 84,070
============ =============
The accompanying notes are an integral part of
the condensed consolidated financial statements.
</TABLE>
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<TABLE>
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
April 3, April 4,
1994 1993
--------- ---------
Cash flows from operating activities:
Net loss $ (8,904) $ (8,345)
Adjustments to arrive at net cash
used in operating activities:
Depreciation and amortization 2,564 3,642
Net changes in operating assets and
liabilities:
Accounts receivable (2,654) 1,977
Inventories 677 242
Other current assets 231 (572)
Other assets (310) (29)
Accounts payable and accrued
liabilities (4,578) (2,062)
Other liabilities (93) (143)
-------- -------
Cash used in operating activities (13,067) (5,290)
--------- --------
Cash flows from investing activities:
Additions to property and equipment (1,862) (2,767)
Capitalization of software costs (537) (533)
------- -------
Cash used in investing activities (2,399) (3,300)
------- ------
Cash flows from financing activities:
Net borrowings under revolving loan
agreements 13,304 6,726
Principal payments of long term debt (19) (53)
Issuance of common stock 69 49
------ ------
Cash provided by financing
activities 13,354 6,722
------ ------
Net decrease in cash and cash equivalents (2,112) (1,868)
Cash and cash equivalents, beginning 3,751 4,806
------ ------
Cash and cash equivalents, ending $ 1,639 $ 2,938
============ ==============
The accompanying notes are an integral part of
the condensed consolidated financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Three Months Ended
------------------
April 3, April 4,
1994 1993
--------- ---------
Cash paid during the period for
interest $ 1,535 $ 4,113
Cash paid during the period for
income taxes 3 314
Supplemental schedule of non-cash investing and financing activities:
A. On February 4, 1994, the Company exchanged $100,000,000
of indebtedness, for preferred stock. Refer to Note E of Notes to
Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of
the condensed consolidated financial statements.
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</TABLE>
<TABLE>
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ENCORE COMPUTER CORPORATION
Condensed Statement of Shareholders' Equity (Capital Deficiency)
Three Months Ended April 3, 1994
(in thousands except share data)
(Unaudited)
Preferred Stock
------------------------------------------------------------------------
Series A Series B Series D Series E
Par Par Par Par
Shares Value Shares Value Shares Value Shares Value
------ ------- ------- ---- ------- ---- ------- ------
Balance 12/31/93 73,641 $ 1 591,625 $ 6 905,283 $ 9 - $ -
Common stock options
exercised, $.625 to
$2.00 per share
Issuance of Series E
Convertible Preferred
Stock 1,000,000 10
Dividends issued to
Preferred Stockholders
in shares of Series B 45,718 -
Dividends issued to
Preferred Stockholders
in shares of Series D 69,959 1
Net loss
------ ------ ------- ---- ------ ----- --------- -----
Balance 4/3/94 73,641 $ 1 637,343 $ 6 975,242 $ 10 1,000,000 $ 10
====== ====== ======= ==== ======= ===== ========= =====
( This table is continued below)
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<TABLE>
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(Continued from above)
ENCORE COMPUTER CORPORATION
Condensed Statement of Shareholders' Equity (Capital Deficiency)
Three Months Ended April 3, 1994
(in thousands except share data)
(Unaudited)
Common Stock Shareholders'
Additional Equity
Par Paid-in Accumulated (Capital)
Shares Value Capital Deficit Deficiency
------ ----- ---------- ----------- ------------
Balance 12/31/93 32,726,391 $ 327 $ 207,951 $ (274,854) $ (66,560)
Common stock options
exercised, $.625 to
$2.00 per share 61,807 1 68 69
Issuance of Series E
Convertible Preferred
Stock 96,273 96,283
Dividends issued to
Preferred
Stockholders in shares of
Series B - -
Dividends issued to
Preferred
Stockholders in shares of
Series D (1) -
Net loss (8,904) (8,904)
--------- ------ ----------- ----------- ------------
Balance 4/3/94 32,788,198 328 304,291 (283,758) 20,888
========== ====== =========== ============ ============
The accompanying notes are an intergral part of
the condensed consolidated financial statements.
</TABLE>
<PAGE>
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements are
unaudited and have been prepared by Encore Computer Corporation
("Encore" or the "Company") in accordance with generally accepted
accounting principles. Certain information and footnote
disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted.
It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1993.
The condensed consolidated financial statements, in the opinion
of the Company, reflect all adjustments (including normal
recurring accruals) necessary for a fair statement of the results
for the interim periods. All adjustments made during the interim
period are normal recurring adjustments. The year-end condensed
balance sheet data was derived from audited financial statements
but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal years.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock equivalents
outstanding. In fiscal periods which report net losses, the
calculation does not include the effect of common stock
equivalents such as stock options since the effect on the amounts
reported would be antidilutive. Series A Convertible
Participating Preferred Stock has been considered common stock
(on an assumed converted basis) for purposes of income (loss) per
share calculations. The Series B Convertible Preferred Stock
("Series B"), Series D Convertible Preferred Stock ("Series D")
and Series E Convertible Preferred Stock ("Series E") have been
determined to be common stock equivalents but are not included in
the weighted average number of shares of common stock and
equivalents because the effect would be antidilutive for the
periods presented.
Since January 1993, the Company has reported a capital deficiency
and has been precluded from paying dividends on its preferred
stock. Accordingly, the normal quarterly dividends payable
January 15, 1994 for the period of October 15, 1993 to
January 15, 1994 on the Series B and Series D in the amounts
of $941,800 and $1,441,200, respectively, were accumulated by
the Company. These dividends were included in the computation of
the loss per common share for the period ended April 3, 1994. For
the three month period ended April 4, 1993, the Company also
accumulated dividends on the Series B and Series D. In computing
the loss per common share, these dividends increased the 1993 loss
as reported for the per common share calculation by $2,245,200.
On February 4, 1994, the Company completed an exchange of Series
E Convertible Preferred Stock ("Series E") for indebtedness owed.
Following the exchange, the Company reported a capital surplus
and was able to pay all dividends previously accumulated which it
did in additional shares of preferred stock.
On April 15, 1994, dividends payable for the period of January
15, 1994 to April 15, 1994 on the Series B and Series D
of $955,900 and $1,462,800, respectively and dividends payable on
the Series E for the period of February 5, 1994 through April 15, 1994 of
$1,180,000 were paid in additional shares of preferred stock.
B. Inventories
Inventories consist of the following (in thousands):
April 3, December 31,
1994 1993
-------- --------
Purchased parts $ 7,390 $ 4,660
Work in process 6,134 9,618
Finished goods 1,277 1,065
Loaned computer equipment
and consignment inventory 2,285 2,421
-------- --------
$ 17,086 $ 17,764
======== ========
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
April 3, December 31,
1994 1993
--------- ----------
Accounts payable $ 9,669 $ 10,805
Accrued salaries and benefits 5,623 5,357
Accrued restructuring costs 7,885 10,974
Accrued interest 1,393 682
Accrued taxes 3,944 3,545
Deferred income,
principally maintenance contracts 2,417 1,563
Other accrued expenses 3,985 4,495
--------- ----------
$ 34,916 $ 37,421
========= =========
D. Debt
Debt consists of the following (in thousands):;
April 3, December 31,
1994 1993
------------ -----------
Debt to unrelated parties:
- -----------------------------
Mortgages payable and capital
lease obligations $ 1,173 $ 1,192
Less:
Current portion 201 197
----------- -----------
Total long term debt to unrelated parties $ 972 $ 995
=========== ===========
Long-term debt to related parties:
- -----------------------------------
Revolving loan agreement with
Gould Electronics Inc. 25,450 $ 61,924
Accrued interest on revolving loan agreement
with Gould Electronics Inc. 1,422 -
Term Loan with Gould Electronics Inc. - 50,000
------ -------
Total debt to related parties $ 26,872 $ 111,924
========== ===========
Related Party Transactions
The Company, Japan Energy Corporation ("Japan Energy") and its
subsidiaries Gould Electronics Inc. ("Gould") and EFI
International Limited ("EFI") are related parties due to the
significant financial interests of Gould and EFI in the Company.
As discussed in more detail in Note E of the Notes to Condensed
Consolidated Financial Statements, on February 4, 1994, the
Company and Gould completed an exchange of indebtedness for
preferred stock. Upon completion of the transaction assuming
full conversion of their holdings, Gould and EFI beneficially
owned 50.2% and 20.9%, respectively. Additionally as described
below, during 1994 and 1993, the Company has had various debt
agreements with Gould.
Total interest expense on indebtedness to Gould for the three
months ended April 3, 1994 and April 4, 1993 was $798,000 and
$1,225,000, respectively.
In addition to the loans described above, amounts currently due to Gould at
April 3, 1994 and December 31, 1993, included accrued interest of
$15,000 and $677,000, respectively.
Revolving Loan Agreements
Since 1989, Gould has provided the Company with its revolving
credit facility. Borrowings under the revolving loan agreement
are collateralized by substantially all of Encore's tangible and
intangible assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible net
worth ratios and limitations on capital expenditures, dividend
payments and additional indebtedness. Interest is equal to the
prime rate plus 1% (7.25% at April 3, 1994) and is payable
monthly in arrears.
Effective April 1, 1993, the Company and Gould agreed to increase
the amount available under the then existing revolving credit
facility from $15,000,000 to $35,000,000 and to extend its
maturity until April 16, 1994, under essentially the same terms
and conditions as the original agreement. Additionally, Gould
provided the Company with waivers of compliance with the
covenants contained in the agreement through the end of the first
fiscal quarter of 1994.
Due to the operating losses incurred during 1993, the Company had
exceeded the maximum borrowing amount of its revolving line of
credit. Gould allowed the Company to borrow
funds in excess of the agreement's maximum limit to fund its
daily operations. At December 31, 1993 and April 3, 1994 borrowings
under the agreement were $61,924,000 and $69,134,000, respectively.
On February 4, 1994, the Company and Gould agreed to exchange
$100,000,000 of indebtedness owed to Gould by the Company for
Series E convertible preferred stock with a liquidation
preference of $100,000,000. $50,000,000 of the debt exchanged
was indebtedness under the revolving loan agreement. Upon
completion of the exchange, borrowings under the revolving loan
agreement on February 4, 1994 were $19,134,000. Then,
on April 11, 1994, the Company and Gould agreed to increase the
maximum borrowing limit of the revolving credit facility to
$50,000,000 and to extend its maturity date to April 16, 1996.
All other terms and conditions of the revolving loan agreement
were essentially unchanged except certain financial covenants
contained in the agreement were modified to more closely reflect
the Company's current financial position. Because of the 1994
refinancing, the revolving credit facility was classified as a
long-term obligation at both April 3, 1994 and December 31, 1993.
It is unlikely that prior to the time the Company returns to a
state of continued profitability it will be able to generate the
levels of cash through operations necessary to meet the on-going
needs of the business. Since 1989, Japan Energy and Gould has
been the exclusive source of financing for the Company through
various loans and loan guarantees and, substantially all assets
of the Company collateralize these loans. Until business
conditions improve, it is not anticipated the Company will be
able to secure additional funding from unrelated parties.
Accordingly, Encore is dependent on the continued financial
support of Japan Energy and Gould.
Term Loan
In 1992, the Company and Gould agreed to convert $50,000,000 of
indebtedness incurred under the revolving loan agreement into a
two year Term Loan with a maturity date of March 31, 1994. The
Term Loan due to Gould provided for interest at a rate equal to
the prime lending rate plus 1% (7.0% at December 31, 1993). The
terms and conditions of the loan were similar to those of the
revolving loan agreement described above. The loan was
collateralized by substantially all of Encore's tangible and
intangible assets and contains various covenants, including
maintenance of cash flow, leverage, and tangible net worth ratios
and limitations on capital expenditures, dividend payments and
additional indebtedness.
On April 12, 1993, the Company and Gould agreed to extend the
maturity date of the loan to April 2, 1995. Additionally, Gould
agreed to provide the Company with waivers of compliance with the
covenants contained in the agreement through the end of the first
fiscal quarter of 1994.
On February 4, 1994, the Company and Gould agreed to cancel the
indebtedness owed by the Company to Gould under the Term Loan
agreement in exchange for Series E convertible preferred stock.
In light of the 1994 recapitalization and refinancing, the term
loan was classified as a long term obligation at December 31,
1993.
E. Shareholders Equity
On February 4, 1994, Gould exchanged its $50,000,000 term loan
and $50,000,000 of its revolving credit loan for 1,000,000
shares of the Company's Series E Convertible Preferred Stock
with a liquidation preference of $100,000,000 (See Note D).
The principal terms of the Series E are:
(i) The Series E is senior in liquidation priority to all other
classes of the Company's preferred and common stock.
(ii) 6% cumulative annual dividend which the Company can elect
to (a) pay in additional shares of Series E valued at its
liquidation preference until shareholders' equity exceeds
$50,000,000; or (b) accumulate and pay in cash when shareholders'
equity exceeds $50,000,000.
(iii) a liquidation preference of $100 per share.
(iv) convertible, at the holder's option, into the Company's
common stock at the liquidation preference divided by $3.25 per
share (subject to potential adjustments for splits, etc.) only
(a) if the shareholder is a United States citizen or corporation
or other entity owned in the majority by United States citizens
or; (b) in connection with an underwritten public offering.
(v) convertible, at the Company's option in accordance with the
conversion methodology described in (iv) above if the price of
the common stock exceeds $3.90 per share for twenty consecutive
days and (a) a buyer is contractually committed to purchase for
at least $3.90 per share at least 50% of the shares into which
all outstanding Series E would be converted or; (b) a buyer is
contractually committed to purchase for at least $3.50 per share
at least 75% of the shares into which all outstanding Series E
would be converted.
(vi) non-voting, except for the right to approve actions
adversely affecting the Series E.
Because of the related party nature of the transaction, the
difference between the carrying amount of the indebtedness
exchanged and the fair value of the securities issued and other
consideration granted has been credited to additional paid-in
capital. A summary of the financial effects of the transaction
are as follows (in thousands):
Reduction of debt $100,000
Less:
Par value of shares issued
(1,000,000 shares at $.01 par value) (10)
Accrued transaction costs (700)
Accrued interest on the remaining indebtedness
under the revolving loan agreement for the
remaining term of the agreement (3,017)
---------
Increase in additional paid-in capital $ 96,273
=========
Upon completion of the refinancing, the Company reported a
capital surplus and was able to pay all dividends accumulated
since January 15, 1993 which it did immediately in additional
shares of preferred stock.
Prior to the transaction, Japan Energy and its wholly owned
subsidiaries beneficially owned 62.0% of the Company's
outstanding common stock assuming the full conversion of all
outstanding shares of its preferred stock. Upon completion of
the transaction, their beneficial ownership increased to 71.1%.
F. Subsequent Events
On April 11, 1994, the Company and Gould agreed to amend and
restate the existing revolving loan agreement by increasing the
maximum borrowing limit of the agreement to $50,000,000 and
extending its maturity date to April 16, 1996. Other terms and
conditions of the agreement are essentially unchanged except
certain financial covenants contained in the agreement were
modified to more closely reflect the Company's current financial
position.
<PAGE>
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three Months Ended April 3, 1994
Compared to
Three Months Ended April 4, 1993
RESULTS OF OPERATIONS:
Total net sales for the three month period of 1994 decreased by
$8,930,000 or 31% compared to the same period of 1993. Declines
from the 1993 three month period occurred in both equipment and
service sales with equipment sales declining $5,951,000 or 40%
and service sales declining $2,979,000 or 22%. During the first
three months of 1994 as a percentage of total sales, equipment
and service sales were 46% and 54%, respectively. In the
comparable period of 1993, equipment and service sales as a
percentage of total sales were 52% and 48%, respectively.
Despite the availability of Encore's new products such as the
Infinity 90 (TM) and Encore 90 (TM) Families of products and continued
enhancements to the Encore RSX (TM) product line, equipment sales
decreased from prior years. This decline is due to the fact that
certain of the Company's older products have reached the end of
their life cycles and demand for new products based on an open
systems architecture has not yet generated the levels of sales
necessary to offset the declines realized in sales of older
product lines.
The computer industry is strongly influenced by changes in
microchip technology. Customers tend to purchase those products
offering leading-edge implementations of the most currently
available technology. In recent years, product demand has begun
a migration from proprietary to open system architectures. Prior
to 1992, the Company's principal product offerings were
proprietary architectures whose core technology was developed in
the early 1980s. While product enhancements have been made, the
Company's older products lost some of their technological edge.
Accordingly, the Company was increasingly less competitive
selling into new, long-term programs in its traditional real-time
markets. This has contributed to the continuing decline in net
sales. Both the Infinity 90 and Encore 90 Families, based on new
state of the art open systems technology, have been available for
sale since 1992. However, the open systems computer market place
is still in its infancy and data processing users are now just
beginning to adopt this technology.
During the first quarter of 1994, the Company announced the
Infinity SP (TM) product family. The Infinity SP leverages the
technology of the Infinity 90 Series by combining its
architectural elements with the specialized software necessary to
provide a comprehensive set of data storage products designed to
meet mainframe storage requirements. In connection with the
product announcement, the Company reported it entered into a
multi-year agreement with Amdahl Corporation ("Amdahl") in which
Amdahl will distribute the Infinity SP under its private brand.
As Amdahl sales efforts ramp up in the second half of the year,
the Company should begin to realize significantly increased
levels of equipment sales.
1994 service revenues have also declined from the prior year
reflecting the effect of the Company's prolonged decline in
system sales on the service business as well as the continued
price competitiveness of the marketplace. Because most of the
Company's installed equipment base remains in use for several
years after installation and customers generally elect to
purchase maintenance contracts for their systems while they are in
service, the rate of decline in service revenues has lagged that
of equipment revenues. Accordingly, since 1991 service revenues
have become an increasingly larger portion on the Company's sales
mix.
International sales for the period ended April 3, 1994 were
$8,511,000 or 44% of total sales compared to sales of $10,634,000
or 37% of total net sales in the comparable period of 1993. The
principal decreases have occurred in Western Europe. The
European markets have been adversely affected by the same factors
as the overall business, i.e. the effect of a prolonged product
line transition combined with an overall general weakness in both
the economy and the computer marketplace.
Cost of equipment sales for the three month period of 1994
decreased by $1,605,000 or 23% compared to the same period of
1993. Lower costs of equipment sales realized in the current
period are due principally to the current period's lower sales
volumes ($1,900,000), lower bad debt and warranty costs
($340,000) and certain lower fixed costs ($240,000) partially
offset by price erosion experienced in certain product lines
($450,000) and increased costs of certain materials including
memory chips ($425,000). Because of the price erosion and
higher material costs as well as the inability to reduce fixed
costs at the same rate as the decline in equipment sales, the
cost of equipment sales increased as a percentage of equipment
sales from 47% in the three month period of 1993 to 61% for the
same period of 1994.
Cost of service sales for the three month period of 1994
decreased by $4,164,000 or 38% when compared to the same period
of 1993. The 1994 decrease is due principally to actions taken
during 1993 to reduce costs to levels more consistent with the
projected business. Among the most significant reductions
realized are: (i) lower labor and employee related costs of
$3,200,000 due to significantly lower 1994 headcount levels, (ii)
lower office rent of $300,000 as unprofitable field locations
were closed or consolidated and, (iii) lower materials and
supplies as a result of the lower 1994 revenue levels. In
connection with the 1994 labor and employee related cost
reductions, the worldwide service workforce has been
significantly reduced since the quarter ended April 4, 1993
resulting in the lower 1994 expense levels. Throughout 1993,
international service operations headcount was reduced due to the
revenue declines experienced in the real-time business.
Domestically, during the fourth quarter of 1993, the Company
entered into an agreement with Halifax Corporation ("Halifax") in
which the Company agreed to subcontract its equipment service
business to Halifax. The agreement, which took full effect
during the three month period ended April 3, 1994, provides that
Halifax will supply a large portion of the manpower necessary to
service equipment under maintenance contract with the Company.
Accordingly, domestic service operations was able to
significantly reduce its workforce during the fourth quarter of
1993 and the first quarter of 1994. As a partial result of these actions
service gross margins increased in 1994 to 36% from 19% in 1993.
Research and development expenses increased $588,000 in the first
quarter of 1994 versus the same period of 1993. The increase in
research and development spending during the 1994 period is due
to the acceleration of efforts to finalize the development of
certain new product offerings including the Infinity SP product
line. As a percentage of net sales, research and development
expenses were 33% in 1994 compared to 21% for the corresponding
period of 1993. Both the increase in 1994 spending and the
decline in net sales contributed to this increase. To remain
competitive in the marketplace, the Company must continue high
levels of research and development expenditures. While second
quarter 1994 research and development spending as a percentage of
net sales will exceed that of the three month period ended April 3, 1994,
it is expected that as sales increase this percentage should return
to lower levels.
For the three months ended April 3, 1994, sales, general and
administrative expenses decreased by $1,722,000 from the same
period of 1993, due principally to lower headcount levels in
1994. During 1993, actions were taken to reduce the workforce to
levels more consistent with planned business conditions. As a
result, labor and employee related expenses were approximately
$1,600,000 lower during the 1994 period. However, as a
percentage of total net sales, sales, general and administrative
expenses increased to 46% in the three months ended April 3, 1994
from 37% in the comparable period of 1993 due to lower sales
volumes. The benefits realized through lower expenses were more
than offset by the decline in net sales.
Interest expense for the first quarter of 1994 decreased $340,000
from the first quarter of 1993 due principally to lower debt
levels resulting from the February 4, 1994 exchange of
indebtedness for preferred stock with Gould. Other expense
decreased $412,000 in the 1994 period due primarily to decreased
foreign exchange losses incurred.
The Company recorded a provision for income taxes for the three
months ended April 3, 1994 and April 4, 1993 of $0 and $300,000,
respectively. The 1993 provision relates to profitable
operations of certain foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES:
Since 1989, the primary source of financing for the Company has
been provided by Japan Energy and its wholly owned subsidiaries,
Gould and EFI (the "Japan Energy Group"). The Japan Energy Group
has provided the Company with its revolving credit facility,
provided the Company with loan guarantees, refinanced
subordinated debentures and entered into various exchanges of
indebtedness for the Company's preferred stock. As discussed in
more detail in Note D of Notes to Condensed Consolidated
Financial Statements, as of February 4, 1994, assuming full
conversion of their holdings in the Company's preferred stock,
Gould and EFI beneficially own 50.2% and 20.9%, respectively of
the Company's common stock.
Because of operating losses incurred, the Company reported a
capital deficiency throughout 1993 and exceeded the maximum
borrowing limit of the revolving loan agreement during the three
month period ended October 3, 1993. At December 31, 1993 the
Company had borrowed $61,924,000 under the agreement. During the
fourth quarter of 1993, the Company initiated discussions with
Gould to significantly recapitalize the Company. As discussed in
Note D and E of Notes to the Condensed Consolidated Financial
Statements, on February 4, 1994, the Company and Gould agreed to
exchange the existing $50,000,000 term loan and $50,000,000 of
borrowings under the revolving loan agreement for Series E
Convertible Preferred Stock. Terms of the Series E are discussed
in detail in Note E of the Notes to Condensed Consolidated
Financial Statements. Additionally, on April 11, 1994, the terms
of the revolving loan agreement were amended and restated to
increase the amount available under the agreement to $50,000,000
and to extend the agreement's maturity date to April 16, 1996.
All other terms and conditions of the agreement were essentially
unchanged except certain financial covenants contained in the
agreement were modified to more closely reflect the Company's
current financial position.
It is unlikely that prior to the time the Company returns to a
state of continued profitability it will be able to generate the
levels of cash through operations necessary to meet the on-going
needs of the business. Since 1989, Japan Energy and Gould have
been the exclusive source of financing for the Company through
various loans and loan guarantees with substantially all assets
of the Company collateralizing these loans. Until business
conditions improve, it is not anticipated the Company will be
able to secure additional funding from unrelated parties.
Accordingly, Encore is dependent on the continued financial
support of Japan Energy and Gould.
During the three month periods ended April 3, 1994 and April 4,
1993, the Company used cash in operating activities of
$13,067,000 and $5,290,000, respectively. Among the significant
uses of cash in the period ended April 3, 1994 were: (i) the net
loss for the quarter (net of amortization and depreciation) of
$6,340,000, (ii) the settlement of $3,089,000 of restructuring
costs accrued at December 31, 1993 as well as a general decrease
in accounts payable of $1,136,000 from December 31, 1993 and,
(iii) an increase in accounts receivable of $2,654,000. These
uses of cash were partially offset by other improvements in
working capital.
During the three month periods ended April 3, 1994 and April 4,
1993 expenditures for property and equipment were $1,862,000 and
$2,767,000 respectively. For the same periods, expenditures for
capitalized software were $537,000 and $533,000, respectively.
Cash provided through financing activities for the periods ended
April 3, 1994 and April 4, 1993 was $13,354,000 and $6,722,000,
respectively. The principal source of financing has been through
various loan agreements provided or guaranteed by Gould or Japan
Energy. As discussed above, Gould has recently increased the
amount available under the revolving loan agreement and the
Company believes this should be sufficient to meet the needs of
the business for the next twelve months.
The majority of the cash on hand was at various international
subsidiaries. With minor exceptions, all cash is freely
remittable to the United States.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per share earnings.
See page 20.
(b) Reports on Form 8-K
During the quarter ended April 3, 1994, the Company filed
a report on Form 8-K in connection with the exchange of
Series E Convertible Preferred Stock for Indebtedness
owed on February 4, 1994.
<PAGE>
Encore Computer Corporation
Signatures
----------------------
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 as the chief
accounting officer and an officer of the registrant
thereunto duly authorized.
Encore Computer Corporation
Date: May 9, 1994 T. MARK MORLEY
T. Mark Morley
Vice President Finance
Chief Financial Officer
Exhibit No. 11
ENCORE COMPUTER CORPORATION
Computation of Loss Per Share
(Unaudited)
Three Months Ended
------------------
April 3, April 4,
1994 1993
-----------------------------------
Net loss $ (8,904) $ (8,345)
Series B and D Preferred Stock
Dividend (2,383) (2,245)
------------ ------------
Net loss after effect of dividend
payment $ (11,287) $ (10,590)
============ ============
Weighted average common shares
outstanding 32,756 31,251
Series A assumed converted 7,364 7,364
------------- ------------
Weighted average
shares outstanding 40,120 38,615
============= ============
Net loss per share $ (0.28) $ (0.27)
============= ============
