UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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:
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K [ ].
Aggregate market value, as of April 6, 1994 of Common Stock held by
non-affiliates of the registrant: $110,660,168.
The number of shares outstanding of the registrant's only class of
Common Stock as of April 6, 1994 was 32,788,198.
DOCUMENTS INCORPORATED BY REFERENCE: PART OF DOCUMENT IN WHICH INCORPORATED
Portions of the Registrant's Proxy
Statement for the 1994 Annual Meeting
of Shareholders PartIII
A list of all exhibits to this Form 10-K is on Page 59.
<PAGE>
PART I
Item 1 Business
(a) General Development of Business
Encore Computer Corporation ("Encore" or the "Company"), a
worldwide company headquartered in Fort Lauderdale, Florida, is a
supplier of open, scalable computer systems for data center and
mission-critical applications. The Company was founded in 1983
as a Delaware corporation. With sales offices and distributors
throughout the United States, Canada, Europe and the Far East,
the Company designs, manufactures, distributes and supports
mainframe class computer systems for on-line transaction
processing and real-time applications. Many of the company's
product lines employ Encore's patented MEMORY CHANNEL
technology. Encore's alternative mainframe product, known as the
Infinity 90 Series, exceeds proprietary mainframe computing
requirements through cost-effective, massively scalable computer
technology. The real-time product sets including the Infinity
R/T and ENCORE RSX, provide optimum solutions for complex, real-
time processing applications.
In 1989, Encore enhanced its worldwide marketing presence when it
acquired the assets and assumed the liabilities of the Gould
Electronics Inc. (formerly Gould Inc.) Computer Systems Division
(the "Computer Systems Business"), a business that was
significantly larger than the Company itself. Since the
acquisition, the Company has integrated the best of both
business' technologies into a single, high performance open
system architecture. However, as more fully discussed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations and in Notes G and J of the Notes to
Consolidated Financial Statements, since the acquisition of the
Computer Systems Business, the Company has been unable to achieve
a level of profitability and has sustained significant losses in
all years since the acquisition. Japan Energy Corporation
("Japan Energy"; formerly Nikko Kyodo Co., Ltd.) and its wholly
owned subsidiaries Gould Electronics Inc.("Gould") and EFI
International, Ltd. ("EFI") (or collectively the "Japan Energy
Group") have been the principal sources of the Company's
financing since the acquisition. The Japan Energy Group has
provided the Company with its revolving credit facility, provided
certain loan guarantees and entered into various exchanges of
indebtedness for preferred stock. The Company is and will remain
dependent on the continued financial support of the Japan Energy
Group until it achieves a state of continued profitability.
Should Encore be unsuccessful in securing additional future
financing from the Japan Energy Group as it is required, it is
likely the Company will be unable to settle its liabilities on a
timely basis.
Approximately 37% of 1993 revenues were derived through sales to
various U.S. government agencies. In certain cases, U.S.
government agencies, such as the Department of Defense, are
precluded from awarding contracts requiring access to classified
information to foreign owned or controlled companies. As
discussed above, the principal source of both debt and equity
financing for the Company has been through Japan Energy (a
Japanese corporation) and certain of its wholly owned
subsidiaries. In light of various U.S government limitations on
the ability of certain agencies to do business with foreign owned
or controlled companies, Encore and Japan Energy have worked
together to comply with all U.S. government requirements. In
this connection, as indicated by the terms of the Series A,
Series B, Series D, and Series E Preferred Stock, Japan Energy
has agreed to accept certain terms and conditions relating to its
equity security investments in the Company, including the
limitation of voting rights of its shares, limitations on the
number of seats it may have on the board of directors and
restrictions with regards to converting its Preferred shares into
Common Stock. Both the United States Defense Investigative
Service ("DIS") and the Committee on Foreign Investment in the
United States ("CFIUS") have reviewed the relationship between
the Company and the Japan Energy Group under the United States
Government requirements relating to foreign ownership, control or
influence. Neither organization has indicated they have any
objections.
Encore is committed to complying with all U.S. government
requirements regarding foreign ownership and control of U.S.
companies. At this time, the Company is unaware of any
circumstances that would adversely impact the determinations of
either DIS or CFIUS. However, should either DIS or CFIUS change
its opinion of the nature of the Japan Energy Group's influence
or control on the Company, a significant portion of its future
revenues realized through U.S. government agencies could be
jeopardized.
(b)(c) Industry Segments and Narrative Description of Business
GENERAL
The Company operates in a single industry segment, the
information technology industry, which includes the design,
manufacture, sale and service of computer hardware, software, and
related peripheral equipment and products on a worldwide
basis. Encore offers five principal families of computer
systems targeted at certain niches within the information
processing and real-time computing marketplaces. The product
families are: (i) the Infinity 90 Series, (ii) the Infinity
R/T Series, (iii) the Infinity SP (iv) the Encore 90 Series and
(v) the Encore RSX line of real-time computers. Additionally,
the Company continues to support its prior generation CONCEPT/32
product line.
The Infinity 90 Family offers a powerful range of air-cooled,
massively scalable, system solutions that exceed the
performance of traditional mainframes at a fraction of their
cost. Infinity 90 systems solve large or complex mainframe
computing challenges by offering an array of easily
expandable system and subsystem configurations for an
enterprise-wide computing solution. With essentially unlimited
configuration flexibility the Infinity 90 enables the connection
of multiple processors and I/O subsystems, which packaged
together in large or complex configurations, creates a powerful
solution for demanding on-line transaction processing
applications.
The Infinity R/T family is a family of high-performance real-time
computer systems. The term "real-time" defines an environment
in which a computer interfaces with a physical occurrence in such
a way that it can acquire and analyze data and then, on the basis
of that data, respond to the occurrence so rapidly that
virtually no time passes between acquisition of data and
response to the occurrence. These systems incorporate real-
time UNIX and an architecture based on second generation RISC
processors in a symmetric multiprocessor design featuring
deterministic performance with very large cache stores, extremely
high-speed buses and a large standard base memory. The systems
provide for integral multinode clustering capability and certain
models support software which allows a single system view of the
multiple compute and I/O elements of a large configured system.
The Infinity SP leverages the Infinity 90 series of systems by
combining its architectural elements with specialized software to
provide a comprehensive set of storage products for solving
mainframe storage requirements. Infinity SP products are
designed utilizing new technologies that meet or exceed those
used in existing mainframe storage solutions. These include the
use of commodity microprocessors, high-performance/high-density 3
1/2 inch disk drive technologies as well as high-availability and
fault-tolerant designs utilizing various levels of RAID
(Redundant Arrays of Inexpensive Disks). Existing Encore
Infinity SP storage subsystems are capable of delivering storage
solutions with available capacities from 100 gigabytes to
multiple terabytes and can provide direct attached storage
devices (DASD) for IBM compatible mainframes as well as being
concurrently capable of providing shared storage facilities to
open systems environments.
The Encore 90 Family consisting of the 91 Series and the 93
Series provides a range of computer technology with an open
systems architecture for time-critical applications. These
symmetric multiprocessor systems use industry-standard hardware
platforms, I/O interfaces, operating systems and application
software to achieve deterministic real-time capability. The
Encore 91 Series provides the computing power necessary to meet
the needs of applications from the low to midpoint of the
performance range while the Encore 93 Series satisfies the more
demanding application requirements at the high end of the
performance spectrum.
Encore RSX computer systems, based on the proprietary Mapped
Programming Executive (MPX-32) operating system, are object code
compatible throughout the product line and are designed to run
time critical, real-time applications. Encore RSX systems
provide capability for real-time event response, powerful
computation, high volume data input/output and easy expansion.
Because of its object code compatibility, the Encore RSX allows
customers to easily migrate their existing applications developed
on earlier generations of the Company's product offerings to
today's technology. This preserves the customer's investment in
its application software.
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NOTE: The following products are trademarks of Encore Computer Corporation:
Infinity R/T, MEMORY CHANNEL, Encore RSX, Infinity 90 Series, Encore 90
Series, Encore 91 Series, Encore 93 Series, MPX-32, and UMAX V R/T.
CONCEPT/32 is a registered trademark of the Company.
- ---------------------------------------------------------------------------
MARKETS AND CUSTOMERS
As discussed below, Encore participates in portions of both the
information processing and real-time computing marketplaces.
Information Processing
The Company has introduced its massively scalable, symmetric
multiprocessor-based open systems products into four new
information processing markets: (i) On-Line Transaction
Processing (OLTP) and Decision Support Systems (DSS), (ii)
Mainframe Replacement, (iii) Interactive Information Network
Servers and Switches and (iv) Data Storage. Encore's strategy is
to provide a system that can continue to support a user's
existing critical applications while allowing the user to re-
engineer some or all of those applications to run in an open
system environment at a much lower cost than traditional
mainframes.
During the 1960s, mainframe computers provided batch processing
solutions for its information system customers. In the 1970s,
minicomputers became the common computing paradigm. Then in the
1980s, the computing trend shifted towards PCs and workstations
with data base management software. Due to the proliferation of
data from workstations and PCs, many large commercial customers
now require the immediate interactive processing of available
data for enterprise-wide computing rather than the batch
processing approach of traditional mainframes. Accordingly,
today the market has begun to migrate to a client/server
processing model served by both (i) mainframes and mainframe
alternatives for on-line transaction processing and data base
applications, and (ii) massively parallel systems for numerically
intensive applications. The systems of the 90s will be
characterized by their ability to meet the user's increasing
computational power and I/O requirements as well as the ability
to move customers easily from a proprietary technology
environment into the open systems environment.
Encore serves the Information Systems market with the Infinity 90
Series of computer systems. These systems are well suited to a
wide range of applications including On-Line Transaction
Processing (OLTP), client/server system management, data base
management, decision support systems, and interactive information
networks as these computer systems offer the high computational
power, I/O bandwidth, and versatile communications required by
such applications. The products are most effectively targeted at
Fortune 500 and other large organizations such as U.S.
government agencies with a need for cost-effective computing
power to handle both existing and new centralized computing
applications.
Examples of successful market penetration of the Company's
products include the selection of the Infinity 90 as part of a
multi-million dollar contract issued to a government prime
contractor for consolidating multiple mainframe data processing
centers within the U.S. Air Force Materiel Command over the next
five years. Additionally, Encore has signed agreements with
several systems integrators in the United States, the Middle East
and the Pacific Rim.
Additionally, within the information processing market, Encore
provides IBM mainframe system-compatible data storage products
using high performance technologies leveraged from its Infinity
90 product line. Data storage demands within the information
processing market are expanding due to increased requirements of
capturing business data as well as storing new forms of
information (e.g. document images, sound and video storage).
Accordingly, the mainframe storage marketplace is undergoing
changes similar to those of the information processing
marketplace. These changes include the need for faster, denser
and more cost effective storage solutions to reduce demands on
existing facilities and shrinking mainframe data processing
budgets. Today's data processing environments have developed a
strong strategic requirement to leverage technology advances
being applied to the open systems environment.
The Company's Infinity Storage Product (Infinity SP) provides an
innovative new approach to solving the storage processing
requirements of today's increasingly complex mainframe
environments. Many of the same technologies that Encore uses
in its alternative mainframe products (Infinity 90) address these
changes and are directly applicable to both the existing and
emerging storage marketplace. These technologies have been
optimized to provide reliable high performance I/O subsystems
while being readily suited to addressing the needs of both
mainframe and open systems environments.
Real-Time
The Company's real-time computer systems, the Infinity R/T
Family, the Encore 90 Family and the Encore RSX, are used for
the acquisition, processing, and interpretation of data
primarily in four markets: (i) simulation, (ii) range and
telemetry, (iii) energy, and (iv) transportation.
Simulation is the Company's single largest real-time market
segment. Encore products are widely used in simulators that
duplicate complex situations in controlled environments. The
Company's installed simulation systems are used to safely and
economically train commercial and military personnel to operate
and maintain complex systems such as space vehicles, aircraft,
weapons systems, ships, ground-based vehicles, and nuclear power
plants.
In the range/telemetry market segment, the Company's real-
time systems are used for the acquisition and processing of
data by flight, space, sea, and ground ranges. These systems
are used in the test and evaluation of state-of-the-art
military and commercial aircraft, space vehicles, ground
equipment, and instrumentation systems.
Encore also competes in the power and electric utility market
segments of the energy marketplace where the Company's real-time
systems typically acquire, monitor and provide supervisory and
can provide closed loop control in energy management, power
plant monitoring and control, and power plant simulation
systems. This is done at both nuclear and fossil fuel plants.
The Company's systems monitor the transmission and distribution
of electrical power from generation to substation to end use and
facilitates the training of power plant operators by putting them
in simulated environments to prepare them for emergency
situations. Within the energy marketplace as a whole, Encore
systems provide the same real-time capability of data acquisition
and control to other market segments such as seismic, oil
exploration, and off-shore oil platforms.
Transportation is one of Encore's emerging markets. The
Company's products are currently installed in rapid transit/metro
rail and marine transportation applications. Strategically, the
Company is focusing on other developing niches within this
marketplace including intelligent vehicular highway systems
(IVHS).
The Company's real-time customers include original equipment
manufacturers (OEMs) and systems integrators who combine
Encore's products with other hardware and/or application
software for resale to end users. The Company also sells
its products to end users who require a compatible range of high
performance systems which are used as the basis for major
internal installations.
The real-time customer base is technology and life cycle cost
driven and constantly in need of increased performance at
lower costs. Encore sales efforts are concentrated on "program"
business where typically large contracts are awarded with
multiple systems scheduled for delivery over an extended
period of years, including continued demand for upgrades and
spare parts as well as ongoing maintenance. Often an initial
system is shipped to a systems integrator who may spend from six
to eighteen months developing software and connecting other
equipment to the system before final delivery to the end user.
PRODUCTS AND SERVICES
During 1993, net sales of the Company's Infinity 90, Infinity
R/T, Encore RSX and Encore 90 product lines represented
approximately 3%, 1%, 36%, and 7%, respectively of total net
sales. In 1992, Infinity 90, Infinity R/T, Encore RSX and Encore
90 product lines represented 0%, 0%, 38%, and 14%, respectively
of total net sales. Customer Service revenue represented 53% of
1993 net sales and 48% of 1992 net sales.
Infinity 90
The Infinity 90 Family of computer systems is a highly scalable,
open systems alternative mainframe computer that combines state
of the art RISC technology, symmetric multiprocessing, a UNIX-
based operating environment and a powerful open systems-based
direct MEMORY CHANNEL bus architecture. The backbone of the
architecture is Encore's patented MEMORY CHANNEL which
provides direct memory to memory connections between functional
nodes at bandwidths of up to 1.6 gigabytes per second. The
MEMORY CHANNEL technology solves a fundamental problem associated
with I/O bottlenecks by providing I/O bandwidth scaling from 26
megabytes per second to 1.6 gigabytes per second. The Infinity 90
Series can start with hundreds of users and can be expanded to
thousands of users as an enterprise's compute and I/O
requirements grow. This scalability can provide the user with
over 100 times the compute power, 20 times the bandwidth and over
75 times the I/O capacity of today's traditional mainframes at
significantly lower costs.
Entry level systems offer compute power of 35 MIPS and can be
scaled incrementally to 1000 MIPS. The I/O subsystems are
designed to enhance overall system performance and provide
unlimited capacity and throughput increases by nonintrusive
upgrades as well as provide storage control, communications and
data paths within the Infinity 90 architecture. The amount of
CPU and I/O capacity can be balanced and intermixed as necessary
to deliver significant price/performance advantages over
traditional mainframes. The Infinity 90's scalability is
achieved through a building block approach to system
configuration which allows every aspect of the system to scale
incrementally. Comprised of functionally specific standards-
based computational and I/O subsystem building blocks, the
Infinity 90 can be configured into many unique system
configurations.
The Infinity 90 provides a solution for companies with the need
to downcost their data processing operations. The system saves
up to 80% of the cost associated with traditional mainframes.
High density packaging provides a high degree of serviceability
and reduces the system's footprint significantly. Utilization of
state of the art low power consumption components provide for low
cost of operations. The Infinity 90 employs technologically
advanced components and peripherals that deliver mainframe
equivalent performance and capacity but require only one-tenth
the cooling and power. This minimizes the life cycle cost of
system ownership.
As a file server, the Infinity 90 has overcome the low I/O
bandwidth, small storage capacity and overall limited growth of
other solutions by separating file processing from communications
protocol processing. Intelligent storage and communication
subsystems are independently scalable as are the 53 megabyte per
second MEMORY CHANNEL buses that connect them. While partitioned
internally, the Infinity 90 is seen by the user as one large file
address space accessible from numerous communications ports.
Because a user's initial storage demands may be minimal, the
system is designed to provide incremental growth from gigabytes
to terabytes of disk storage.
All Infinity 90 systems provide a variety of communications
offerings such as NetWare, LAN Manager, AppleTalk, TCP/IP, SNA
and OSI which can grow incrementally with the hardware
configuration.
The list prices for entry level Infinity 90 systems begin at
about $200,000 and can exceed $3,000,000 for very large systems.
Infinity R/T
The Infinity R/T Family is a symmetric multiprocessor design
featuring deterministic performance, very large cache stores,
extremely high speed buses, a large, tightly coupled standard
base memory, as well as direct hardware connections to on-board
interrupts and timers.
The systems provide for integral multinode clustering
capability, and optional models support Encore's Distributed
Real-Time Extensions (DRTX) and Application Specific Embedded
Processing. These features accommodate a single system view of
multiple compute and I/O elements that can be configured
specifically to the attributes of the target environment.
Versions of these products are also CONCEPT/32 compatible and
provide a seamless migration path for Encore legacy users.
As with the Company's mainframe alternative, the Infinity 90,
the Infinity R/T Family is based on the Motorola 88100 and 88110
RISC processors and is designed to grow to meet any mix of
computational and I/O requirements. This protects the customer's
software investment and significantly reduces the risk normally
associated with system expansion or rehosting to satisfy ever-
expanding requirements.
The Infinity R/T Family offers UMAX V R/T as its operating
system. UMAX V R/T is an enhanced symmetrical multiprocessing
version of AT&T's System V UNIX with real-time extensions. The
Infinity R/T architecture supports the standards of POSIX
1003.1, 1003.4 and 1003.4a, SVID and NFS as well as standard
interfaces such as VME 32/64, SCSI, Ethernet and FDDI. A full
complement of software including open system CASE tools,
"Parasight" an exclusive graphics-based parallel development
environment, parallel Fortran, C, Ada, and C++ is also available
to the user.
Pricing for Infinity R/T systems starts at $64,000 and
increases to over $375,000 for a fully configured system.
Infinity SP
The Infinity SP product line leverages the technology of the
Infinity 90 Series by combining its architectural elements with
the specialized software necessary to provide a comprehensive set
of storage products designed to meet mainframe storage
requirements. The Company believes these elements result in the
ability to deliver high performance storage solutions for IBM
mainframe environments. It is the Company's intent to deliver
performance and flexibility superior to existing mainframe disk
storage systems at a price that is competitive with competitors.
Infinity SP products are designed to utilize new technologies.
These include the use of commodity microprocessors, high-
performance/high-density 3 1/2 inch disk drive technologies as
well as high-availability and fault-tolerant designs utilizing
various levels of RAID (Redundant Arrays of Inexpensive Disks).
The floor space required by Infinity SP to house equal levels of
storage capacity is many times less than that of traditional
storage suppliers resulting in savings in facility and utility
costs. Additionally, while providing a lower cost solution,
Encore's Infinity SP provides much greater performance which
allows customers to defer their need to invest in costly
mainframe upgrades and enhancements.
Infinity SP storage subsystems are capable of delivering storage
solutions from 100 gigabytes to multiple terabytes. These
storage subsystems may be used as direct attached storage devices
(DASD) for IBM compatible mainframes as well as being
concurrently capable of providing shared storage facilities to
open systems environments. The Company believes this innovative
combination of functionality provides significant competitive
differentiation within the marketplace.
Encore 90
The Encore 90 Family consists of two principal classes of
computer systems: (i) the Encore 91 Series and (ii) the Encore
93 Series. At the low end of the computing range, the 91 Series
represents a true real-time system comprised of open system
components, bus structures and I/O. The system is implemented on
a symmetric RISC multiprocessor (the Motorola 88000) design with
a multiple bus architecture to maintain the deterministic
response to real-time applications that are both compute and I/O
sensitive.
Implementing the same RISC processing elements and system
software architecture, Encore's second member of the Encore 90
Family is the Encore 93 Series. With a processor expandable from
two (2) to thirty-two (32) symmetrical processors, the Encore 93
Series can satisfy computing needs at the higher end of the
performance range.
UMAX V, Encore's multiprocessing UNIX implementation, has been
enhanced to accommodate real-time features and serves as the
interactive environment to the Encore 90's Power Domain
Management software system. In this arena, the multiprocessing,
memory, and I/O resources can be dynamically tailored to become a
very high speed real-time system, while maintaining the
productivity of the UNIX development environment. This
facilitates an extremely high speed option to very high demand
real-time environments.
Entry level systems begin at $59,000 and can exceed $175,000 for
fully configured Encore 90 Family computer systems.
Encore RSX Systems
The Company's Encore RSX products provide the deterministic
performance, high aggregate computational power and high
system throughput required to process the demands associated
with today's real-time applications. These features are
achieved through a combination of a proven family of hardware
products, a proprietary Mapped Programming Executive (MPX-32)
operating system and innovative technology such as Encore's
patented REFLECTIVE MEMORY. Replacing the Company's prior
generation CONCEPT/32 Family, the Encore RSX can provide the
customer with a migration path from the CONCEPT/32 Family to the
open systems Encore 90 Family. The Encore RSX subscribes to the
option of IEEE 754 floating point formats. This allows a
seamless application mathematical interface to the UNIX-based
Encore 90 Family while maintaining CONCEPT/32 object code and
SelBUS compatibility. The Encore RSX can optionally run in RISC
mode by converting existing object code to the RISC instruction
set of the RSX. This significantly enhances system performance
without the need for the user to rewrite his applications.
The Encore RSX and the Encore 91 Series product offerings may be
combined into a single system via REFLECTIVE MEMORY. This new
combined system is a symmetric multiprocessor based on an open
systems host architecture using real-time UNIX to provide a
single point of control and management. All user interfaces to
the system are UNIX-based and provide open systems CASE tools to
increase development productivity.
Because all of the Company's real-time products are object
code compatible, a customer's original investment in software
and specialized hardware is preserved as he migrates his
installation to newer technology.
The Company also continues to offer support for the large
installed base of its prior generation CONCEPT/32 products.
These flexible products were designed for OEM system
integration, as embedded systems in customer supplied
cabinets or as complete distributed processing systems for
the most complex real-time tasks. Pricing for these systems
starts at $50,000 and increases to over $750,000 for a fully
configured system.
Customer Service
Service and support are critical elements in maintaining
customer satisfaction. The Company offers its customers a
variety of service and support programs for both hardware
and software products principally through its customer service
organization consisting of third party maintenance partners with
locations throughout the world. The Company also offers
maintenance service for selected third party equipment.
Specific service and support programs include preventive
maintenance, resident labor service, customer training and
education, logistics support programs, data facility management
and custom technical and consulting services. In addition,
the Company provides a dial-in hotline as well as remote
diagnostic capabilities to allow problem resolution from
Encore's home office.
The Company provides a standard warranty for parts and labor on
its products, generally for 90 days, and maintains and
services its products on a contractual basis after the initial
warranty period has expired.
SALES AND DISTRIBUTION
Encore uses multiple channels of distribution to sell its
products. The primary channel has been its direct sales
force, consisting of approximately 51 salespersons in 36 sales
offices located throughout the United States, Canada and
Western Europe. The Company also has joint venture operations
in Japan, Hong Kong and Malaysia and various arrangements with
distributors throughout the world. The Company has expanded
its utilization of systems integrators, value-added
resellers (VARs) and independent software vendors (ISVs) in
its distribution network. Strategically, the Company is
committed to continued expansion of its distribution channels
through the establishment of marketing alliances with other
industry leaders.
The Company's general policy is to sell rather than lease
its products. The Company generally has a policy of no
returns and does not typically extend payment terms beyond
those prevalent in the computer industry. A significant
portion of the Company's sales typically occur in the last
month of a fiscal quarter, a pattern that is not uncommon in
the computer industry. It is the Company's objective to
minimize the time from receipt of a purchase order for a computer
system to delivery of the system. Accordingly, the Company
does not believe backlog reported at any point in time aids
materially in the overall understanding of the business.
Encore's business is not subject to pronounced seasonal
fluctuations.
The Company is not dependent upon any one customer for a
material part of its business. However, in fiscal 1993,
approximately 37% of its sales were derived either directly or
indirectly from various United States government agencies. No
single customer accounted for as much as 10% of sales in fiscal
1993.
MANUFACTURING AND RAW MATERIALS
The Company is primarily an assembler and integrator, thus
reducing its capital requirements and increasing operating
leverage. The Company's manufacturing operation, which includes
the test and quality assurance of all parts, components, sub-
assemblies and final systems is ISO 9002 certified and located in
Melbourne, Florida.
Encore assembles its printed circuit boards using surface mount
technology and automatic placement equipment. Substantially all
peripherals are purchased from third party vendors. Extensive
testing and burn-in is performed at the board, component and sub-
assembly level and at final systems integration. The Company
believes that its manufacturing facilities are sufficient to
meet its requirements for at least three years.
Encore's manufacturing operations utilize a wide variety of
electronic and mechanical components, raw materials, and
other supplies and services. The Company relies heavily on
external sources of supply and has developed multiple
commercial sources for most components and raw materials, but it
does utilize single sources for a limited number of custom
components. While delays in delivery of such single-sourced
components could cause delay in shipments of certain products by
Encore, at this time, the Company has no reason to believe any of
its single source vendors present a serious business risk to the
Company.
RESEARCH AND DEVELOPMENT
In fiscal 1993, Encore spent $23,331,000 (24.9% of total
net sales), on research and development (R&D) activities. In
fiscal 1992 and 1991, research and development spending was
$22,333,000 (17.1% of net sales) and $30,543,000 (19.9% of net
sales), respectively. Fiscal 1993 expenses were $998,000 higher
than 1992 due principally to higher spending in the fourth fiscal
quarter on materials used in the new product development process.
Spending in future periods are not planned to decrease below 1993
levels.
Fiscal 1992 expenses were $8,210,000 lower than 1991 as efforts
to accelerate the introduction of the Infinity 90 and Encore
90 Families concluded and the benefits of prior cost reduction
programs were fully realized. During 1991, research and
development activities were consolidated in Ft. Lauderdale,
Florida and the scope of activities at the Marlborough,
Massachusetts facility were greatly reduced. Additionally, R&D
priorities were realigned focusing on those product offerings
necessary for the future growth of the business while
significantly reducing investment in areas outside the Company's
strategic focus.
The fiscal 1993, 1992, and 1991 amounts above do not include
certain capitalized software development costs totaling
$2,142,000, $2,365,000, and $2,640,000, respectively. The
Company also spent approximately $1,187,000, $70,000, and
$1,829,000 on customer-sponsored engineering activities in fiscal
1993, 1992, and 1991, respectively. These costs which are
classified as a deferred cost at December 31, 1993 have been
reimbursed by the customer in January, 1994. In 1992 and 1991
such costs are included in cost of goods sold.
Because of the rapid technological change which characterizes
the computer industry, the Company must continue to make
substantial investments in the development of new products
to enhance its competitive position. It is expected that
future annual R&D expenditures will remain at or above current
levels and, as a percent of sales, will remain high in
relation to industry norms.
Encore has established technical expertise in three critical
technologies: parallel processing, real-time and shared memory
distributed systems, and the UNIX environment. The Company's
primary emphasis has been to build upon these established
technologies and couple the best features of each into its
new generation of products, the Infinity 90, Infinity RT,
Infinity SP and Encore 90 Families.
COMPETITION
The computer industry is intensely competitive and is
characterized by rapid technological advances, decreasing
product life cycles, and price reductions. The principal
competitive factors in the Company's markets are total
system performance, product quality and reliability,
price, compatibility and connectivity to other vendors' systems,
and long term service and support.
The primary competitors in the Company's real-time markets are
established companies, such as Concurrent Computer Corporation,
Digital Equipment Corporation (DEC) and Harris Corporation.
Competitors in the information processing market include
established companies like DEC, International Business Machines
(IBM), NCR, Hewlett Packard Company (HP) and Sequent Computer
Systems. Within the storage products marketplace , the Company
competes with IBM, Hitachi Data Systems and EMC.
Many of Encore's competitors have greater financial, technical,
and marketing resources than Encore. In some cases, this places
the Company at a disadvantage. However, the Company considers
its level of experience and general understanding of real-time
applications and its current parallel processing and UNIX
technology position to be positive competitive factors.
PATENTS AND LICENSES
Encore owns a number of patents, copyrights and trademarks
relating to its products and business. Management believes that
because of the rapid technological advancements in the industry
such patents, copyrights and trademarks, while valuable to
Encore, are of less significance to its success than such
factors as innovation, technical skills and management ability
and experience.
From time to time, companies in the industry have claimed
that certain products and components manufactured by others are
covered by patents held by such companies. It may,
therefore, be necessary or desirable for Encore to obtain
additional patent licenses. Management believes that such
licenses could be obtained on terms which would not have a
material adverse effect on the Company's financial position
or the results of its operations. During 1992, the Company
settled the outstanding patent infringement claim made by IBM
against the Company with no financial impact to Encore.
Encore has entered into licensing agreements with several third
party software developers and suppliers. The licenses generally
allow for use and sublicense of certain software provided as
part of the computer systems marketed by the Company. Encore is
licensed by UNIX Systems Laboratories Inc. to use and
sublicense their UNIX operating system in the Company's computer
systems.
As part of a 1991 refinancing of the Company and as more fully
described in Note I of the Notes to Consolidated Financial
Statements, the Company granted a license to Gould for all of
Encore's intellectual property. The intellectual property
license is royalty free and contains certain covenants which do
not allow Gould to use the Company's intellectual property unless
certain sales revenue levels are not reached by the Company.
Additionally, Encore has the option to extend the initial
exclusivity period for up to 5 additional years by making cash
payments to Gould, and the period will be automatically extended
if Encore achieves certain operating income levels. Encore may
also terminate the license agreement if all borrowings under its
revolving credit agreement with Gould are repaid and either (i)
the outstanding shares of the Series B and Series D Convertible
Preferred Stock are converted or (ii) the outstanding shares of
the Series B and Series D Convertible Preferred Stock are
redeemed or (iii) Encore pays Gould the fair value of the
license.
The Company has not achieved the net sales or operating income
levels necessary under the agreement to maintain its exclusive
right to the use of its intellectual property and at December 31,
1993 was in default of covenants contained in the agreement.
Gould has, however, extended the Encore exclusive period until
December 31, 1994. In accordance with prior agreements made with
the DIS, Gould must provide ninety days notice to DIS in the
event it elects to take possession of the intellectual property.
If Gould should take possession of the intellectual property,
Encore would continue to have the right to use that property, but
such action by Gould could have a material adverse effect on the
Company's business.
EMPLOYEES
As of December 31, 1993, Encore had 952 full-time employees
engaged in the following activities:
Employees
Customer Service 240
Manufacturing 142
Research and Development/Custom Products 270
Sales and Marketing 221
General and Administrative 79
------
Total 952
The Company's future success will depend in large part on its
ability to attract and retain highly skilled and motivated
personnel, who are in great demand throughout the industry.
None of the Company's domestic employees are represented by a
labor union.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the Company's executive officers and certain information
about them are set forth below.
Name Age Position with Company
- ---------------- ---- ---------------------
Kenneth G. Fisher 63 Chairman of the Board
and Chief Executive Officer
Rowland H. Thomas, Jr. 58 President
and Chief Operating Officer
Charles S. Anderson 64 Vice President,
Corporate Relations
Ziya Aral 41 Vice President, Systems Engineering
and Chief Technology Officer
Robert A. DiNanno 47 Vice President and General Manager,
Real-Time Operations
T. Mark Morley 45 Vice President, Finance
and Chief Financial Officer
Thomas F. Perry 50 Vice President,
Worldwide Sales and Marketing
Information Systems
James C. Shaw 46 Vice President,
Manufacturing Operations
George S. Teixeira 37 Vice President,
Product Development
J. Thomas Zender 54 Vice President,
Corporate Program Management
Mr. Fisher is a founder of the Company and has served as a
Director, Chairman and Chief Executive Officer of the
Company since the Company's inception in May 1983. He was the
Company's President from its inception until December 1985 and
also served in that capacity from December 1987 to January
1991. From January 1982 until May 1983, Mr. Fisher was
engaged in private venture transactions. From 1975 to 1981, Mr.
Fisher was President and Chief Executive Officer of
Computervision (formerly Prime Computer, Inc.). Before joining
Computervision, Mr. Fisher was Vice President of Central
Operations for Honeywell Information Systems, Inc.
Mr. Thomas has been a member of the Board of Directors since
December 1987 and Chief Operating Officer since June 1989.
He presently serves as President of the Company, a position
to which he was elected in January 1991. From June 1989 to
January 1991, Mr. Thomas served as Executive Vice President
of the Company. In February 1988, he was named President
and Chief Executive Officer of Netlink Inc. Prior to joining
Netlink, Mr. Thomas was Senior Executive Vice President of
National Data Corporation ("NDC"), a transaction processing
company, a position he held from June 1985 to February 1988.
From May 1983 through June 1985, Mr. Thomas was Executive Vice
President and Senior Vice President at NDC.
Mr. Anderson, joined the Company in 1985. From 1984 until
joining the Company, Mr. Anderson served as Director of
Human Resource Operations at Data General Corporation. Before
joining Data General, Mr. Anderson was with Honeywell
Information Systems, Inc. serving in various management positions
since 1970, most recently as Director of Employee Relations.
Mr. Aral joined the Company in 1987 and was appointed to his
present position of Chief Technology Officer during 1993. Since
1987, he has held various positions of increasing responsibility
within the Company including Vice President of Systems
Engineering and Senior Technology Consultant. While with the
Company, Mr. Aral has been the key innovator and architect of
much of the Company's current technology including the Infinity
90 Series. Prior to joining Encore, Mr. Aral was employed by
the Reed-Prentice Division of PMCo. in a variety of software
engineering positions.
Robert A. DiNanno joined the Company in July 1986. Until June
1992, Mr. DiNanno served as Vice President and General Manager,
Operations. At that time, he was appointed Vice President and
General Manager, Real-Time Operations. Prior to joining the
Company, he served as Vice President, Manufacturing at Adage,
Inc. from November 1983 to June 1986. Mr. DiNanno also held
domestic and international management assignments with Honeywell
Information Systems, Inc. from June 1979 until November 1983.
Mr. DiNanno has experience with military and commercial flight
simulations acquired during his tenure at Singer Link.
T. Mark Morley joined the Company in November 1986 as Chief
Financial Officer and Vice President, Finance. Prior to that
during 1986 he was Chief Financial Officer, Vice President,
Finance and Treasurer of Iomega Corporation. From 1977 through
1985, Mr. Morley was employed by Computervision (formerly Prime
Computer, Inc.), most recently as the Senior Director responsible
for the Treasury department. From 1973 to 1977, Mr.
Morley was associated with Deloitte and Touche and from 1971
to 1973 he was associated with the City of Boston Legal
Department. He is an attorney and a C.P.A.
Mr. Perry joined the Company in November 1992 as Vice President,
Worldwide Sales and Marketing Information Systems. From May 1990
to October 1992, he was President of the Systems Division and a
member of the Board of Directors for The Ultimate Corporation.
Mr. Perry joined The Ultimate Corporation in March 1989 as Senior
Vice President of Sales Operation. From March 1988 to March 1989
Mr. Perry served as Director, Alternative Channels for Stratus
Computer. Prior to that, Mr. Perry held Senior Vice President
positions with several high technology start-up companies
responsible for various sales and marketing functions. He has
also held sales management positions with Computervision
(formerly Prime Computer Corporation).
Mr. Shaw joined the Company in 1989 as Vice President,
Manufacturing Operations. In November 1992, he was appointed an
officer of the Company. From 1985 to 1989 he served as Senior
Director, Manufacturing for Modicon, Inc. Prior to that time, he
was Vice President, Manufacturing for Chomerics, Inc., a position
he held from 1980 to 1985.
Mr. Teixeira assumed his present position in August 1991.
Previously he held the positions of Vice President of Marketing
and Vice President of Product Management. Mr. Teixeira was
Director of Product Marketing and Management for the Computer
Systems Business of Gould which the Company acquired in 1989.
Prior to that he held several progressively more responsible
positions since joining Gould in 1981.
J. Thomas Zender joined the Company in August 1989 as Vice
President of Marketing. In January 1991, he was appointed
Vice President Program Management and in 1992 was appointed Vice
President, Corporate Program Management. From 1986 to August
1989, Mr. Zender was Vice President, Corporate Development at
MAI Basic Four, Inc. Before joining MAI Basic Four, he
was Vice President of Marketing of Calcomp/Terak Corporation.
Mr. Zender served as Vice President of Marketing for
Database Systems Corporation and Director of Marketing for
Genrad, Inc. He also served as Vice President of Field Support
for ITT Courier as well as holding various management
positions with Honeywell Information Systems, Inc. and General
Electric Company.
(d) International Operations
The Company maintains sales and service operations in Europe and
Canada through wholly-owned subsidiaries. In the Far East, sales
and service operations are performed through one or more joint
ventures in Japan, Hong Kong and Malaysia and distributor
agreements throughout the remainder of the Pacific Rim. In
fiscal 1993, approximately 44% of consolidated net sales were
derived from foreign operations. The Company believes that
its overall profit margins with respect to foreign sales are
not materially different from profit margins from domestic
sales. In view of the locations and diversification of its
foreign activities, the Company does not believe that there
are any unusual risks beyond the normal business risks
attendant to activities abroad. Encore uses a hedging
program to reduce its exposure to foreign currency
fluctuations. Additional information relating to the
Company's international operations, including financial
information segregated by major geographic area, is contained in
Note K of the Notes to Consolidated Financial Statements.
Item 2 Properties
Listed below are the Company's principal facilities as of
December 31, 1993.
Owned or Square Feet
Location Principal Use Leased Approximately
- ----------------- --------------- ------ --------------
Ft. Lauderdale, FL Administrative/ Owned 224,000
Development/
Marketing/
Ft. Lauderdale, FL Customer Service/ Leased 80,000
Development
Melbourne, FL Manufacturing Owned 124,000
Paris, France Sales/Service Leased 47,000
London, England Sales/Service Leased 35,000
In addition to the facilities listed above, Encore also leases
space in various other domestic and foreign locations for use as
sales and service offices. The Company's owned facilities are
encumbered by various mortgages, including mortgages which
collateralize the Gould loan agreements (See Note G of Notes to
the Consolidated Financial Statements).
Item 3 Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the registrant or any of its subsidiaries are party to or of
which any of their property is the subject.
Item 4 Submissions of Matters to a Vote of Security Holders
No items were submitted to a vote of the security holders during
the fiscal quarter ended December 31, 1993.
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
Prior to January 22, 1992, Encore' s common stock was quoted on
Nasdaq with daily statistics found under the National Market
Issues section of newspaper stock listings. Subsequent to that
time, the Company was excluded from participation in the Nasdaq
system because it was unable to meet the minimum capitalization
requirements for its continuation in the system. As of February
22, 1992, the Company's common stock began trading on the OTC
electronic bulletin board under the symbol ENCC. The high and
low closing sale prices of Encore's common stock are shown
for fiscal years 1993 and 1992 in the table below:
Fiscal 1993 prices Fiscal 1992 prices
High Low High Low
-------- ------- ------ ------
1st Quarter $ 1 15/16 $ 1 1/4 $ 2 $ 5/8
2nd Quarter 2 5/8 1 1/2 1 7/8 1
3rd Quarter 4 1/2 2 5/8 1 5/8 13/16
4th Quarter 4 1/4 2 3/4 2 1/8 1 1/4
Upon completion of its February 4, 1994 exchange of indebtedness
for preferred stock discussed in Note L of the Notes to the
Consolidated Financial Statements, the Company met the minimum
requirements for inclusion in the Nasdaq National Market System.
The Company was accepted for participation and began trading on
March 18, 1994 under the symbol ENCC. Daily statistics on the
Company's stock can be found in the Nasdaq National Market Issues
listing of the newspaper's stock listings.
The First National Bank of Boston is the stock transfer agent
and registrar, and maintains shareholder records. The agent will
respond to questions on change of ownership, lost stock
certificates, consolidation of accounts, and change of
address. Shareholder correspondence on these matters should
be addressed to The First National Bank of Boston, Shareholder
Services Division, P.O. Box 644, Boston, Massachusetts 02109.
As of April 6, 1994, there were approximately 2,703 holders of
record of the Company's common stock. The Company has never
paid cash dividends on its common stock and does not
anticipate the payment of cash dividends in the foreseeable
future. Under the terms of the Company's current financing
agreements, the Company is prohibited from paying dividends on
its common stock.
<PAGE>
<TABLE>
Item 6
Selected Financial Data
(in thousands except per share data)
Pro Forma for the year ended
December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1993(2) 1993 1992 1991 1990 1989
Net sales $93,532 $93,532 $130,893 $153,302 $ 215,206 $157,920
Operating loss (62,085) (62,085) (22,544) (54,938) (8,341) ( 20,150)
Loss before
extraordinary items (69,565) (69,565) (32,522) (65,388) (30,147) (31,965)
Net loss (69,565) (69,565) (32,522) (65,388) (29,646) (31,965)
Loss per common share
before extraordinary items (2.01) (2.01) (.98) (1.87) (.86) (1.03)
Net loss per common share (1) (2.01) (2.01) (.98) (1.87) (.84) (1.03)
Weighted average shares of
common stock outstanding (1) 39,273 39,273 37,899 36,466 35,249 30,913
Working capital 1,756 3,499 14,270 16,014 40,916 (13,277)
Total assets 84,070 84,070 105,686 121,186 162,180 185,475
Long term debt 12,919 112,919 66,413 106,588 140,666 62,555
Redeemable preferred stock - - - 4,246 - -
Shareholders' equity
(capital deficiency) 31,697 (66,560) 508 (42,137) (23,693) 5,391
</TABLE>
(1) See Notes A and J of the Notes to Consolidated Financial Statements for
information on the calculation of net loss per share. During 1993 preferred
stock dividends on the Series B payable in shares of Series B of $3,630,000
and dividends on the Series D payable in shares of Series D of $5,554,700
were accumulated by the Company. During 1992, preferred stock
dividends on the Series B of $3,943,100 were paid with additional shares of
Series B preferred stock. Additionally in 1992, preferred stock dividends
of $528,300 were paid in additional shares of Series D Preferred Stock.
(2) As discussed in Note L of the Notes to Consolidated Financial Statements,
the Company and Gould Electronics Inc. completed a recapitalization of the
Company subsequent to the Balance Sheet date. The column headed Pro Forma 1993
shows the Selected Financial Data on a Pro Forma basis as if the
recapitalization had been done at December 31, 1993.
<TABLE>
Selected Fiscal Year 1993 and 1992 Quarterly Financial Data
(in thousands except per share data; unaudited)
<S> <C> <S> <C> <S> <C> <S> <C> <S> <C> <C>
Fiscal Year 1993 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1993
Net Sales $28,419 $22,341 $21,431 $21,341 $93,532
Gross Profit 10,381 5,436 7,337 4,547 27,701
Net loss (a) (8,345) (25,982) (10,903) (24,335) (69,565)
Net loss per
common share (.27) (.73) (.33) (.68) (2.01)
Fiscal Year 1992 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1992
Net Sales $32,926 $32,504 $32,635 $32,828 $130,893
Gross Profit 12,191 12,468 12,769 14,425 51,853
Net loss (a) (7,943) (11,771) (7,869) (4,939) (32,522)
Net loss per
common share (.24) (.34) (.24) (.17) (.98)
</TABLE>
(a) Quarter 4, 1993, Quarter 2, 1993, Quarter 3, 1992 and Quarter 2, 1992
include restructuring charges of $10,422,000, $12,843,000, $1,000,000 and
$4,248,000, respectively.
<PAGE>
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Encore Computer Corporation ("Encore" or the "Company") was
founded in May 1983 and was in the development stage until
October 1986. During this period, the Company was primarily
involved in the research, development and marketing of its UNIX-
based Multimax computers and Annex terminal server. Initial
sales of the Multimax and Annex products as well as revenues
under certain U.S. government agency research contracts began in
1986. During 1989, Encore acquired substantially all of the
assets of the Computer Systems Division of Gould Electronics Inc.
(the "Computer Systems Business"). This was a significantly
larger business which for over twenty-five years, provided real-
time computer systems solutions to the simulation, range and
telemetry, and energy marketplaces.
Since the acquisition, the Company has fully integrated the
businesses blending the strengths of each into next generation
product offerings. This has resulted in the development of the
Infinity 90 and Encore 90 Families of open systems targeted
toward demanding, time critical applications in both the general
purpose computing and real-time marketplaces. Based on RISC
processors, a standard UNIX operating system and industry
standard connectivity and networking protocols, both the Infinity
90 and Encore 90 Families offer massive I/O throughput, a broad
I/O bandwidth, complete computational scalability and
price/performance advantages over traditional mainframe
solutions. The first members of the Encore 90 Family, the Encore
91 Series and the Encore 93 Series began shipments in 1991.
The Infinity 90, an open system mainframe alternative, was
available in the second half of 1992 and then during the second
half of 1993, the Infinity R/T, a real-time version of the
Infinity 90, was released for volume shipments.
During the late 1980s, product demand in the computer marketplace
began a migration away from more traditional proprietary
computing technologies and towards an open systems technology.
The Company anticipated this market trend and since the
acquisition of the Computer Systems Business focused its research
and development investments toward the development of a new
generation of computer system based on a state of the art open
system architecture. Since the beginning of 1991, the Company
has spent approximately $76,000,000 in research and development
activities with a significant portion of this directed toward
programs aimed at bringing new open system technology products,
such as the Infinity 90, Infinity SP and Encore 90 Families, to
market. The Company must continue to invest heavily in the areas
of research and development to remain competitive in the
marketplace. As a percentage of net sales, research and
development spending will remain high in comparison to industry
averages. The Company believes that this will allow it to
provide early availability of leading-edge computer technology
which could position the Company favorably as the marketplace
continues to migrate.
During 1993 the Company's products have been favorably reviewed
by certain market research firms and the Infinity 90 set a world
record in performance of the industry-standard AIM-II TPC
benchmarks. While the general opinion of industry analysts is
that future computer solutions will be based on open systems and
standards, this market is still in its infancy. Many data
processing users are only now beginning to define their
strategies for implementation of such technology. Accordingly,
demand for the Company's open systems products has been weak.
Over the three year reporting period, this has placed the Company
in an extended period of product transition. Older, established
products have reached the end of their competitive life cycle and
are now experiencing a significant decline in revenues while the
Company's newer technology product offerings have not yet
generated the level of customer demand anticipated by the
Company. Revenues have decreased from $153,302,000 in 1991 to
$93,532,000 in 1993 and as a result the Company has incurred
significant net losses. In response to the declining revenue
base and resultant lower gross margin dollars, management has
taken aggressive actions throughout this period to restructure
the organization to levels more consistent with the declining
size of the Company. These actions have included reducing the
workforce to levels required to support the business, eliminating
organizational redundancies and consolidating certain facilities
to eliminate unneeded capacity. In connection with the
restructuring activities, the Company has also recognized the non-
recoverability of certain capitalized software products and the
impairment in value of certain other long lived assets, including
goodwill. As a result of the actions taken, the Company has
recorded restructuring charges of $57,545,000 over the three year
period.
Because of the net losses incurred since the beginning of 1991,
the Company has not generated sufficient levels of cash flow to
fund its operations and cumulatively used cash in operating and
investing activities of $104,998,000. While a portion of the
losses incurred were funded by reductions in the working capital,
the principal source of financing has been provided by Japan
Energy Corporation ("Japan Energy"; formerly Nikko Kyodo Co.,
Ltd.) and certain of its wholly owned subsidiaries.
Should the Company continue to incur significant losses, it will
be difficult to operate as a going concern without the on-going
financial support of Japan Energy. Until the Company returns to
a sustained state of profitability, it will not be able to secure
financing from other sources. Accordingly, should Japan Energy
withdraw its financial support prior to the time the Company
returns to profitability, the Company will experience a severe
liquidity crisis and have difficulties settling its liabilities
in the normal course of business. However, management believes
the current availability of new technology products, such as the
Infinity 90 and Infinity SP, could improve the Company's revenue
stream and related profitability. Until such a time, the Company
will continue to adjust spending to levels consistent with
expected business conditions.
Comparison of Calendar 1993, 1992 and 1991.
Net sales for 1993 were $93,532,000 compared to net sales for
1992 and 1991 of $130,893,000 and $153,302,000, respectively.
The 1993 revenue decline is due to both lower product and service
sales. In 1993, equipment sales decreased to $43,622,000 from
$67,840,000 and $81,272,000 in 1992 and 1991, respectively.
Service revenues for fiscal 1993, 1992, and 1991 were
$49,910,000, $63,053,000, and $72,030,000, respectively. In
general as discussed below, the principal declines since 1990 are
due to lower sales volumes.
Despite the availability of new technology products such as the
Infinity 90 and Encore 90 Families of products and continued
enhancements to the Encore RSX product line, 1993 equipment
sales decreased from prior years. This decline is due to a
continued general softness in the computer industry as well as
the fact that certain of the Company's products have reached the
end of their life cycles. 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. During
1992, both the Infinity 90 and Encore 90 Families based on new
state of the art open systems technology, were available for
sale. However, the open systems computer market place is still
in its infancy and data processing users are now just beginning
to adopt this technology. As a result, demand for new products
based on an open systems architecture has not generated the
levels of sales necessary to offset the declines realized on
sales of the older, traditional product lines. It is possible
that the Company will continue to experience declining revenues
until such time as the overall market conditions improve and
customer demand for open system products increases.
Service revenues have declined from the prior year by 21% and 13%
in 1993 and 1992, respectively reflecting the continued price
competitiveness of the marketplace as well as the effect of the
Company's declining system sales. However, as a percentage of
total net sales, service revenues have increased from 47% in 1991
to 53% in 1993. 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 system while it is 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 in 1993, 1992 and 1991 were $41,371,000,
$65,209,000, and $71,167,000 and 44%, 50%, and 46%, respectively
of total net sales. The principal decreases in all years have
occurred in Western Europe. The European markets have been
adversely impacted 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. Additionally, during 1993 a major United
Kingdom distributor decided to delay the purchase of new computer
systems until an enhanced version of the Infinity 90 product line
becomes available for sale. This product offering is not
anticipated until the middle of 1994. During 1993 sales to this
distributor decreased by approximately 75% compared to 1992. In
light of the downturn in international operations, management has
taken actions as discussed below to reduce expenses to levels
more consistent with expected future business levels. However,
the decrease in international margins caused by the decline in
international revenue has not been fully offset by lower
international operating expenses. As displayed in Note K of the
Notes to Consolidated Financial Statements, international
operations have incurred operating losses in 1993 and 1992.
While no single customer has accounted for as much as 10% of
total net sales during the last three years, sales to various
U.S. government agencies have represented approximately 37% and
29% of net sales in 1993 and 1992. The Company recognizes that
reductions in current levels of U.S. government agency spending
on computers and computer related services could adversely affect
its traditional sources of revenue. To mitigate any potential
risk, plans are in place to strategically expand into non-
traditional, high growth markets with the Infinity 90 and
Infinity SP Family of products. The high speed processing
capabilities of these products combined with its architecture's
scalability, make the product well suited for applications
traditionally thought to be the sole domain of mainframe
computers. Among the markets being targeted by the Company are
Input-Output (I/O) intensive transaction processing data base
applications and data storage applications where high speed
performance is a critical factor.
In certain cases, U.S. government agencies, such as the
Department of Defense, are precluded from awarding contracts
requiring access to classified information to foreign owned or
controlled companies. The principal source of both debt and
equity financing for the Company has been through Japan Energy (a
Japanese corporation) and certain of its wholly owned
subsidiaries. Aware of U.S. government limitations on the
ability of certain agencies to do classified business with
foreign owned or controlled companies, Encore and Japan Energy
have proactively worked to comply with all U.S. government
requirements. In this connection, Japan Energy has agreed to
accept certain terms and conditions relating to its equity
securities in the Company, including the limitation of voting
rights of its shares, limitations on the number of seats it may
have on the board of directors and certain restrictions on the
conversion of its preferred shares into common stock. In
connection with the recapitalizations discussed in more detail
below and in Notes G, J, and L of the Notes to Consolidated
Financial Statements, the Company requested the United States
Defense Investigative Service ("DIS") to review the relationship
between the Company, Japan Energy, and Japan Energy's wholly
owned subsidiaries, Gould Electronics Inc. ("Gould") and EFI
International Ltd. ("EFI"), under the United States Government
requirements relating to foreign ownership, control or influence.
DIS has indicated that it has no objection.
Encore is committed to complying with all U.S. government
requirements regarding foreign ownership and control of U.S.
companies. At this time, the Company is unaware of any
circumstances that would adversely affect the opinions previously
issued by DIS. However, should DIS change its opinion of the
nature of Japan Energy's influence or control on the Company, a
significant portion of the Company's future revenues realized
through U.S. government agencies could be jeopardized.
Total cost of sales decreased in 1993 to $65,831,000 from
$79,040,000 in 1992 and $98,163,000 in 1991. The decrease in
1993 was due generally to lower sales volumes when compared to
1992 and lower spending resulting from the restructuring of
manufacturing and customer service operations during the three
year period. Since the beginning of 1991, manufacturing and
customer service headcount have been reduced by 54%, certain
customer service field operations have been closed or scaled
back, and all manufacturing operations have been consolidated in
Melbourne, Florida.
Gross margins on equipment sales in 1993 were $14,041,000 (32.2%)
compared to 1992 gross margins of $33,557,000 (49.5%) and
$30,182,000 (37.1%) in 1991.
The decrease in 1993 equipment gross margins of $19,516,000 is
due principally to: (i) lower margins of $12,500,000 on lower
equipment sales, (ii) lower margins of $2,200,000 due to price
erosion, (iii) increased obsolescence charges of $3,280,000 in
connection with the Company's continued migration to its newer
open systems product offerings and (iv) non-recurring engineering
charges and other miscellaneous cost increases of $1,536,000.
The 1992 gross margin improvement of $3,375,000 from 1991 on
lower equipment sales is attributable primarily to lower
manufacturing costs of $2,450,000 resulting from lower spending
and improved operational efficiencies when compared to the prior
year as well as lower inventory obsolescence costs of $6,437,000.
These improvements more than offset the gross margin reduction
from the year's lower revenue. In response to the reduced
production volumes, expenditures have been reduced throughout the
three year period to minimize the further deterioration of
equipment gross margins. Among the actions taken since 1991 have
been a 45% reduction in manufacturing personnel and the
consolidation of all manufacturing activities in Melbourne,
Florida.
1993 service gross margin was $13,660,000 (27.4%), a decrease of
$4,636,000 from 1992. The lower margin is due to lower revenues
of $13,143,000 which were only partially offset by lower
operating costs achieved through restructuring actions taken
during both 1992 and 1993. Among the principal cost reductions
during 1993 were lower employee costs of approximately $5,500,000
due to reduced headcount, lower field office rental costs of
approximately $1,200,000 as marginally profitable field locations
have been consolidated or closed and other miscellaneous cost
reductions of $1,807,000. Service gross margins also decreased
in 1992 by $6,661,000 to $18,296,000 (29.0%) compared to prior
year's gross margin of $24,957,000 (34.6%). The 1992 reduction
was due to a decline of $8,977,000 in 1992 annual service
revenues which were only partially offset by lower operating
costs. Since 1990, the service business has been unfavorably
affected by the Company's declining computer equipment sales,
competitive pricing pressures, declining defense spending which
has resulted in some maintenance program cancellations, and the
termination of certain other service contracts as older installed
systems are being decommissioned by their users. Since 1990
approximately 25% of each year's existing service contracts have
not been renewed with the Company. Management will continue
efforts to minimize the effect of declining service sales on the
service gross margins by taking actions to maintain spending at
levels consistent with expected future business levels. In the
past, these actions have included reductions in workforce, the
closing and consolidation of unprofitable field operations and
the outsourcing of certain business functions. In the fourth
quarter of 1993 the Company took further action to minimize the
fixed cost associated with its domestic service business when it
agreed to subcontract its equipment maintenance business to
Halifax Corporation ("Halifax"). Under the terms of the
agreement which takes full effect in 1994, Halifax will provide
the manpower required to service equipment under maintenance
contract with the Company. The agreement allows the Company to
reduce the fixed cost base associated with its field maintenance
operation while continuing to provide the same level of service
to its customers.
1993 research and development expenses were $23,331,000 (24.9% of
net sales) or an increase of $998,000 from 1992. The increase in
the current year's spending is due to efforts in the fourth
quarter to accelerate the availability of new products scheduled
for release in the first half of 1994. For the first three
quarters of 1993, spending was essentially unchanged from 1992
levels. Research and development expense increased only 4% in
1993, however, as a percentage of net sales it increased by 7.8%
from 17.1% to 24.9% of net sales as a direct result of the year's
net sales decline. During 1992, research and development
expenses were $22,333,000 (17.1% of net sales) compared to
expenses of $30,543,000 (19.9% of net sales) in 1991. In total
and as a percentage of net sales, 1992 expenses decreased from
1991 levels as efforts to accelerate the introduction of the
Encore 90 and Infinity 90 Family of computers concluded during
1992 and the benefit of cost reduction actions taken in 1991 were
fully realized. During 1991 priorities were realigned to focus
future expenditures toward those strategically aligned product
offerings necessary to the future growth of the business. This
significantly reduced the level of investment in areas outside
the Company's strategic focus and has allowed the development
organization to reduce its headcount by 30% since 1991.
Activities at the Marlborough, Massachusetts facility were
significantly reduced with on-going activities consolidated in
Ft. Lauderdale, Florida, thereby eliminating the on-going fixed
expenses associated with that facility. The reductions made in
research and development spending since 1991 generally reflect
operational efficiencies realized through the elimination of
efforts not targeted toward the core business and are not
expected to impact the Company's future competitiveness in the
marketplace. To effectively compete in its market niches, the
Company must continue to invest aggressively in research and
development activities.
Sales, general and administrative (SG&A) expenses in 1993 were
$42,499,000 compared to $45,156,000 and $48,732,000 in 1992 and
1991, respectively. SG&A expenses decreased by $2,657,000 in
1993 when compared to 1992 due primarily to (i) the effect of
prior restructuring actions taken by the Company, including lower
labor on a reduced 1993 workforce and (ii) lower sales
commissions due to lower 1993 revenues. These savings were
partially offset by a non-recurring charge to compensation
expense of $788,000 made in connection with the extension of the
expiration date of certain stock options made during the
Company's fourth fiscal quarter. A more complete discussion of
this transaction is included in Note J of Notes to the
Consolidated Financial Statements. The 1992 SG&A expense
reduction of $3,576,000 from 1991 was due primarily to reductions
in staff made in 1991 and worldwide facility consolidation
programs implemented as part of earlier restructuring programs.
As a percentage of net sales, sales, general and administrative
expenses were 45.4%, 34.5%, and 31.8% in 1993, 1992, and 1991,
respectively. The increase as a percentage of sales reflects the
fact that reductions in sales, general and administrative
spending have been more than offset by declines in net sales.
This is partially due to the time delay in reducing certain fixed
costs. In the future, sales, general and administrative costs
should begin to return toward 1991 levels.
The Company employs a multi-level distribution system to market
its products, consisting of direct sales, OEMs, systems
integrators and value added resellers (VARs). The Company is
committed to expanding its distribution channels for its new
products by aggressively seeking strategic alliances with other
industry leaders in the marketplace. In this connection, during
the first quarter of 1994, the Company and Amdahl Corporation
entered into a non-exclusive multi-year agreement whereby Amdahl
Corporation will remarket the Company's Infinity SP under the
Amdahl brand.
In each of the three years reported, the Company has taken
actions to restructure its operations to levels consistent with
the expected levels of future revenues. As discussed in Note F
to Consolidated Financial Statements, 1993 operating expenses
include restructuring charges of $23,265,000 compared to
$5,248,000 and $29,032,000 for 1992 and 1991, respectively.
In connection with the 1993 charges, during the second and fourth
quarters management evaluated the latest financial projections of
the business and based upon its evaluation concluded: (i) the
rate of decline in real-time equipment and service revenues had
exceeded its previous estimates, (ii) the rate of worldwide sales
growth anticipated in newer product lines remained significantly
below projected levels and (iii) overall business conditions in
Western Europe had continued to deteriorate during the year. In
light of these conclusions, management initiated the following
actions to restructure its operations to levels required to meet
expected future business conditions including: (i) reductions
in the workforce to levels consistent with planned future sales
(ii) the closure or consolidation of marginally profitable field
offices and (iii) the reassessment of carrying values of certain
long lived assets including property and equipment and goodwill.
In June 1993, the Company reduced its workforce by approximately
10% with significant reductions made in manufacturing, customer
services and international sales operations. In December 1993,
plans were approved to further reduce the European workforce by
20% and U.S. headcount by approximately 8%. Because of the
reduced field sales and service workforce, actions were also
taken to eliminate the resulting excess field office space by
closing those offices which were considered underutilized. Due
to the decline in traditional real-time product line profits, the
Company re-evaluated its investment in the property and equipment
employed to support future real-time product sales. As a result
of the analysis, management wrote down the carrying value of
certain of these assets by $5,700,000 during the year. Finally,
as discussed below, during June 1993 the Company wrote off the
remaining carrying value of the goodwill originally recorded in
connection with the 1989 acquisition of the Computer Systems
Business. Of the total 1993 restructuring charges,
approximately $12,000,000 reflects the write-off of long lived
assets, resulting in a non-cash charge to the business. The
actions taken during 1993 are intended to reduce the Company's
future annual operating costs by approximately $12,000,000.
Management will continue to assess its cost structure and the
carrying value of its assets in light of expected future
business. While there are no existing plans to take any
additional actions, should future conditions necessitate it,
management could approve additional plans to further reduce its
cost base or recognize the additional impairment of certain long
lived assets.
The 1992 restructure charge includes severance and outplacement
costs associated with a 9% reduction in the workforce, the write-
off of certain capitalized software assets relating to the on-
going transition of the Company's UNIX-based product lines, and
certain costs to be incurred related to the closure of certain
sales and service offices. $1,250,000 of this charge reflects
non-cash charges to operation and as a result of the 1992
restructuring, annual operating expenses were reduced by
approximately $6,000,000.
The 1991 restructuring charge included: (i) severance and
outplacement costs associated with a 24% reduction in the
workforce, (ii) the write-down of goodwill related to the
acquisition of the Computer Systems Business, (iii) costs
incurred during the scale back of operations in Marlborough,
Massachusetts, (iv) the write-off of certain capitalized software
assets relating to the transition of the Company's UNIX-based
product lines, and (v) costs incurred related to a facilities
consolidation program including certain Ft. Lauderdale, Florida
properties. $14,000,000 of the 1991 restructuring expense
involved non-cash charges to operations. As a result of the 1991
restructuring actions, the Company lowered annual operating
expenses by approximately $15,000,000.
With regard to the write-off of goodwill, in 1989 the Company
acquired the Computer Systems Business of Gould. In recording
the acquisition, the Company recognized goodwill which
represented the excess of acquisition cost over the fair value of
assets acquired. During 1991 management determined the future
earnings power associated with the certain portions of the
acquired Computer Systems Business had diminished. However, the
customer service business which represented in excess of 45% of
the acquired Computer Systems Business revenues, continued to
yield gross margins in excess of those of its direct competitors.
The analysis indicated this earnings premium could result in
additional future profits over the next seven years.
Furthermore, at that time in management's judgment, the
infrastructure acquired by the Company was still largely intact
and continued to provide the potential for higher earnings in
other portions of the business. In conjunction with this review,
management assessed the carrying value assigned to goodwill and
determined the future earnings potential of the Computer Systems
Business was now less than the current carrying value of
goodwill. Accordingly, in the fourth quarter of 1991, the
Company wrote down the carrying value of goodwill from
$12,979,000 to $4,979,000 by charging operations. The carrying
value of goodwill after the write-down was equivalent to the
estimated remaining earnings premium associated with the Computer
Systems Business. During 1992 the Company's customer service
operations came under increasing competitive pressure and some
customers began to decommission installed systems canceling
service contracts with the Company. In light of the declining
base of acquired customer service business, management increased
the rate of amortization of goodwill so that by the end of 1994
any excess value associated with the Computer Systems Business
customer service base would be fully amortized. However, the
continued decline in the earnings base during 1993 resulted in
the write off of the remaining carrying value of goodwill
($2,628,000) by charging operations.
Interest expense decreased to $6,380,000 in 1993 from $7,425,000
in 1992 and $9,175,000 in 1991 due primarily to lower average
debt in 1993 when compared to the prior years. During 1992 and
1991, Encore completed a series of refinancing agreements with
Japan Energy, Gould and EFI as discussed in more detail below and
in Notes G and J of the Notes to Consolidated Financial
Statements. As a result of the various refinancings, the
Company's annual interest expense was reduced by approximately
$12,000,000 through the conversion of debt with a face value of
$140,000,000 into the Company's preferred stock.
Interest income decreased in 1993 by $129,000 to $134,000
compared to $263,000 and $561,000 in 1992 and 1991, respectively
due primarily to lower interest rates.
Other expense was $780,000 in 1993, a decrease of $1,297,000 from
1992's $2,077,000, due principally to lower foreign exchange
losses. In 1991, other expense was $1,259,000.
Income taxes provided in 1992, 1991, and 1990 relate to taxes
payable by foreign subsidiaries (see Note H of the Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
Because of operating losses incurred for the three years ending
December 31, 1993, the Company has been unable to generate cash
from operating activities. In 1993, 1992, and 1991, the Company
used cash in operating activities of $36,415,000, $15,307,000,
and $8,817,000, respectively. During these years, losses
incurred due to declining net sales were partially funded by
reductions in current assets, principally accounts receivable.
In 1993, 1992, and 1991 accounts receivable decreased by
$11,857,000, $4,787,000, and $14,207,000, respectively. Further
benefit of cash generated through the reduction in the Company's
investment in accounts receivable is unlikely. During 1993 some
of the benefit received from lower accounts receivable was offset
as the Company used cash of $2,649,000 to increase its investment
in new product inventories. The increase was due principally to
acquisition of materials in the second half of 1993 to support
forecasted deliveries of new products including the Infinity 90.
Expenditures for property and equipment during 1993, 1992, and
1991 are $11,780,000, $10,119,000 and $17,025,000, respectively.
Expenditures for capitalized software during 1993, 1992, and 1991
are $2,142,000, $2,365,000, and $2,640,000, respectively. As of
December 31, 1993, there were no material commitments for capital
expenditures.
Total cash used in operating and investing activities during
1993, 1992 and 1991 of $50,277,000, $27,441,000 and $27,280,000,
respectively. These cash outflows were principally offset by
cash provided through financing activities of $49,007,000,
$24,327,000, and $24,392,000 in 1993, 1992, and 1991,
respectively. As discussed below, the principal source of
financing has been through various agreements provided by Japan
Energy and its wholly owned subsidiaries Gould and EFI (the
"Japan Energy Group"). Most recently, on February 4, 1994, Gould
exchanged $100,000,000 of indebtedness owed to it by the Company
for Series E Convertible Preferred Stock ("Series E"). Also on
April 11, 1994, the Company and Gould agreed to amend and restate
its existing revolving loan agreement with the Company to
increase the amount available under the agreement to $50,000,000
and extend the maturity date of the agreement to April 16, 1996.
The other terms and conditions of the agreement are essentially
unchanged from those of the prior agreement except certain
financial covenants which were modified to more closely reflect
the Company's financial position. The Company believes this
credit agreement should be sufficient to meet the needs of the
business through December 31, 1994.
Since 1990, the Company and the Japan Energy Group have entered
into the following financing transactions:
On January 28, 1991, the Company exchanged Series B Convertible
Preferred Stock ("Series B") and Series C Redeemable Preferred
Stock ("Series C") for $60,000,000 of indebtedness owed to Gould
and concurrently entered into a revolving loan agreement with
Gould which, as amended, provided for borrowings of up to
$50,000,000. Terms of the Series B are discussed in detail in
Note J of the Notes to Consolidated Financial Statements.
Effective March 31, 1992, the Company, Gould and Japan Energy
completed an agreement whereby Gould converted the Company's
existing revolving credit facility with a balance of $50,000,000
into a two year term loan and made available to Encore a new
$10,000,000 revolving loan facility with a maturity date of March
31, 1993. Concurrently, Japan Energy through EFI agreed to
refinance through its existing term an existing $80,000,000
subordinated loan the Company had with the Industrial Bank of
Japan.
On September 10, 1992, Gould exchanged 100,000 shares of the
Series C with a liquidation preference of $10,000,000 which it
held for 100,000 shares of Series D Convertible Preferred Stock
("Series D") also with a liquidation preference of $10,000,000.
In connection with the transaction, the Company released Gould
from any liability associated with certain outstanding claims
related to or arising from the sale by Gould of its Computer
System Business to the Company in 1989. Concurrently, EFI
exchanged $80,000,000 ($65.5 million net of debt discount) of
indebtedness owed to EFI by the Company for 800,000 shares of the
Series D with an aggregate liquidation preference of $80,000,000.
Completion of the exchange of Series D for the EFI subordinated
loan lowered the Company's interest expense by approximately
$6,000,000 per year. Terms of the Series D are discussed in
detail in Note J of the Notes to Consolidated Financial
Statements.
On October 5, 1992, Gould agreed to increase the borrowing limit
of the revolving loan agreement by $5,000,000 to $15,000,000
under essentially the same terms and conditions as the original
agreement. However, as a result of fourth quarter operating
losses, the Company exceeded the maximum amount available under
the credit facility at December 31, 1992. Effective April 1,
1993, the Company and Gould agreed to: (i) increase the amount
available under the revolving credit facility to $35,000,000
under essentially the same terms and conditions as the original
agreement, (ii) extend the maturity date of the revolving credit
facility to April 16, 1994, (iii) extend the maturity date of the
Gould term loan to April 2, 1995 and (iv) waive the covenants
contained in the revolving credit facility and the term loan
through the end of the first quarter of 1994.
Because of operating losses incurred during 1993, the Company
reported a capital deficiency throughout the year and exceeded
the maximum borrowing limit of the revolving loan agreement
during its third fiscal quarter. At December 31, 1993 the
Company had borrowed $61,924,000 under the agreement. During the
fourth quarter, the Company initiated discussions with Gould to
significantly recapitalize the Company. As discussed above and
in Note G of Notes to the 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 L of the Notes to Consolidated Financial Statements. 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.
The Company is dependent on the continued long-term financial
support of the Japan Energy Group. Should the Japan Energy Group
withdraw its financial support at any time prior to the time the
Company returns to profitability by either (i) enforcement of its
rights under the terms of its revolving credit agreement in the
event of possible future defaults by the Company related to
covenants contained therein, (ii) failing to renew existing debt
agreements as they expire or (iii) failing to provide additional
credit as needed, the Company anticipates it will not be able to
secure financing from other sources. In such a case, the Company
will suffer a severe liquidity crisis and it will have
difficulties settling its liabilities in the normal course of
business.
The majority of the year end cash on hand of $3,751,000 was at
various international subsidiaries. With minor exceptions, all
cash is freely remittable to the United States.
On January 22, 1992, the Company's stock was excluded from
further participation in the Nasdaq National Market system
because it was unable to meet minimum capitalization
requirements for continuation. Effective February 22, 1992, the
Company's common stock began trading on the OTC electronic
bulletin board. Upon completion of the $100,000,000 exchange of
preferred stock for indebtedness on February 4, 1994, the Company
met the minimum requirements for participation in the Nasdaq
National Market system and was accepted into the system on March
18, 1994. The Company's common stock trades under the symbol
ENCC.
<PAGE>
ITEM 8 Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
of Encore Computer Corporation
We have audited the consolidated financial statements and the
financial statement schedules of Encore Computer Corporation and
Subsidiaries listed in Item 14 (a) of this Form 10-K. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note L to the consolidated financial statements,
Japan Energy Corporation and Gould Electronics Inc., a wholly
owned subsidiary of Japan Energy Corporation (collectively, the
"Japan Energy Group") has refinanced approximately $100 million
of the Company's outstanding indebtedness and has committed to provide
a working capital facility amounting to $50 million. The Company
is dependent upon the support of the Japan Energy Group for its
financing requirements.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Encore Computer Corporation and
Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information required to be included
therein.
COOPERS & LYBRAND
Coopers & Lybrand
Miami, Florida
February 25, 1994, except for Note L as to
which the date is April 11, 1994.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Operations
(in thousands except per share data)
Year Ended:
December 31 , December 31, December 31,
1993 1992 1991
----------- ---------- --------
Net sales:
Equipment $ 43,622 $ 67,840 $ 81,272
Service 49,910 63,053 72,030
------ ------ ------
Total 93,532 130,893 153,302
Costs and expenses:
Cost of equipment sales 29,581 34,283 51,090
Cost of service sales 36,250 44,757 47,073
Research and development 23,331 22,333 30,543
Sales, general and administrative 42,499 45,156 48,732
Amortization of goodwill 691 1,660 1,770
Restructuring costs 23,265 5,248 29,032
------- ------- -------
Total 155,617 153,437 208,240
------- ------- -------
Operating loss (62,085) (22,544) (54,938)
Interest expense, principally
related parties (6,380) (7,425) (9,175)
Interest income 134 263 561
Other expense, net (780) (2,077) (1,259)
------- ------ -------
Loss before income taxes (69,111) (31,783) (64,811)
Provision for income taxes (Note H) 454 739 577
-------- -------- --------
Net loss $ (69,565) $ (32,522) $(65,388)
========== ========== =========
Net loss per common share (Note A):
Net loss attributable to common
shareholders $ (78,750) $ (36,993) $(68,107)
Loss per common share $ (2.01) $ (0.98) $ (1.87)
========== ========== =========
Weighted average shares
of common stock 39,273 37,899 36,466
========== ========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
ENCORE COMPUTER CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
<S> <C> <S> <C> <C>
(Unaudited)
Proforma
December 31, December 31, December 31,
1993 1993 1992
------------ ------------ -----------
ASSETS (See Note L)
Current assets:
Cash and cash equivalents (Note A) $ 3,751 $ 3,751 $ 4,806
Accounts receivable, less allowances of $2,150
in 1993 and $2,441 in 1992 16,555 16,555 28,822
Inventories (Notes A and B) 17,764 17,764 15,813
Prepaid expenses and other current assets 3,047 3,047 1,515
(Note C) ---------- ---------- ----------
Total current assets 41,117 41,117 50,956
Property and equipment, net (Notes A and D) 37,603 37,603 46,315
Goodwill, net (Note A) -- -- 3,319
Capitalized software, net (Notes A and E) 4,403 4,403 3,957
Other assets 947 947 1,139
----------- ---------- ----------
Total assets $ 84,070 $ 84,070 $ 105,686
LIABILITIES AND SHAREHOLDERS' EQUITY/
(CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term debt-other $ 197 $ 197 $ 193
(Note G)
Accounts payable and accrued liabilites 39,164 37,421 36,493
(Notes F and G)
----------- ---------- ----------
Total current liabilities 39,361 37,618 36,686
Long term debt - related parties (Note G) 11,924 111,924 65,200
Long term debt - other (Note G) 995 995 1,213
Other liabilities (Note G) 93 93 2,079
----------- ---------- ----------
Total liabilities 52,373 150,630 105,178
----------- ---------- ----------
Commitments and contingencies (Note I)
Shareholders' equity (capital deficiency)
(Note J and L) :
Preferred stock, $.01 par value; authorized
10,000,000 shares:
Series A Convertible Participating Preferred,
issued 73,641 shares in 1993 and 1992 1 1 1
6% Cumulative Series B Convertible Preferred,
issued 591,625 in 1993 and 1992, respectively
with an aggregate liquidation preference
of $59,162,500 in 1993 and 1992, respectively 6 6 6
6% Cumulative Series D Convertible Preferred,
issued 905,283 shares in 1993 and 1992,
respectively with an aggregate liquidation
preference of $90,528,300 9 9 9
6% Cumulative Series E Convertible Preferred,
issued 1,000,000 shares in 1993, with an
aggregate liquidation preference
of $100,000,000 10 - -
Common stock, $.01 par value; authorized
150,000,000 shares; issued 32,726,391 and
31,232,215 in 1993 and 1992, respectively 327 327 312
Additional paid-in capital 306,198 207,951 205,469
Accumulated deficit (274,854) (274,854) (205,289)
----------- -------- ---------
Total shareholders' equity (capital deficiency) 31,697 (66,560) 508
----------- -------- ---------
Total liabilities and shareholders'
equity (capital deficiency) $ 84,070 $ 84,070 $ 105,686
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <S> <C>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Year Ended:
December 31, December 31, December 31,
1993 1992 1991
------------ ------------ ----------
Cash flows used in operating activities:
Net Loss $ (69,565) $ (32,522) $ (65,388)
Adjustments to arrive at net cash used in
operating activities:
Depreciation and amortization 12,320 16,092 18,371
Write off of property and equipment 10,543 1,004 1,508
Write off of intangible assets 2,628 1,248 9,271
Loss on sale of fixed assets 36 451 527
Amortization of debt discount - 1,566 2,207
Net changes in operating assets and liabilites
Accounts receivable 11,857 4,787 14,207
Inventories (2,031) (1,172) 11,170
Other current assets (1,575) 1,613 1,157
Other assets 176 144 610
Accounts payable and accrued liabilities 1,182 (6,941) (1,290)
Other liabilities (1,986) (1,577) (1,167)
------- ------- ------
Cash used in operating activities (36,415) (15,307) (8,817)
------- ------- ------
Cash flows used in investing activities:
Additions to property and equipment (11,780) (10,119) (17,025)
Cash proceeds from sale of
property and equipment 60 350 1,202
Capitalization of software costs (2,142) (2,365) (2,640)
---------- ----------- ---------
Cash used in investing activities (13,862) (12,134) (18,463)
--------- ----------- ---------
Cash flows from financing activities:
Net borrowings (payments) under revolving loan
agreements 46,724 23,930 23,224
Principal payments of long term debt (214) (631) (515)
Issuance of preferred stock - - 250
Issuance of common stock 2,497 1,028 1,433
---------- ----------- ---------
Cash provided by financing activities 49,007 24,327 24,392
---------- ----------- ---------
Effect of exchange rate changes on cash 215 1,843 850
---------- ---------- --------
Decrease in cash and cash equivalents (1,055) (1,271) (2,038)
Cash and cash equivalents, beginning 4,806 6,077 8,115
---------- ----------- --------
Cash and cash equivalents, ending $ 3,751 $ 4,806 $ 6,077
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
<S> <C> <C> <C> <C>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
1993 1992 1991
----------- ------ ------ ---------
Cash paid during the period for Interest $ 8,648 $ 5,233 $ 7,326
Cash paid during the period for income taxes 912 365 655
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
A. On January 28, 1991, the Company exchanged $60,000,000 of
indebtedness, for among other things, preferred stock. Refer to
Note G of Notes to Consolidated Financial Statements.
B. On September 10, 1992, the Company exchanged indebtedness and
redeemable preferred stock for, among other things, preferred stock.
Refer to Note G of Notes to Consolidated Financial Statements.
C. Accretion of the discount on Series C redeemable preferred stock
for the years ended December 31, 1992 and 1991 was $721,000 and
$746,000, respectively.
D. Effective March 31, 1992, the Company's existing $50,000,000
revolving credit facility was converted to a term loan. Refer
to Note G of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
<S> <C> <C> <S> <C> <S> <C>
Share-
Addi- holders'
-----------Preferred Stock---------- tional Accum- Equity
Series A Series B Series D --Common Stock-- Paid-in ulated Capital
Shares Value Shares Value Shares Value Shares Value Capital Deficit Deficiency
------ ----- ------- ----- ------- ----- ---------- ----- -------- --------- ----------
Balance December 31 1990 73,641 $ 1 - $ - - $ - 28,337,799 $283 $83,402 $(107,379) $(23,693)
Common stock options
exercised, $.81 to
$2.31 per share 567,253 6 683 689
Shares issued through the
employee stock purchase
plan, $.64 per share 1,159,504 12 731 743
Issuance of Series B
Convertible Preferred
Stock 525,000 6 45,506 45,512
Dividends issued to
Preferred Stockholders
in shares of Series B 27,194 - -
Net loss (65,388) (65,388)
------ ----- ------ ----- ------- ---- ---------- ---- - ----- --------- --------
Balance December 31, 1991 73,641 $ 1 552,194 $ 6 - $ - 30,064,556 301 130,322 (172,767) (42,137)
Common stock options
exercised, $.63 to
$1.63 per share 352,248 3 323 326
Shares issued through
employee stock purchase
plan, $.86 per share 815,411 8 694 702
Dividends issued to
Preferred Stockholders
in shares of Series B 39,431 - -
Adjustment of estimated
transaction costs relating
to Gould 1991 capital
transaction 900 900
Issuance of Series D
Convertible Preferred
Stock (Note G) 900,000 9 73,230 73,239
Dividend issued to
Preferred Stockholders
in shares of Series D 5,283 - -
Net loss (32,522) (32,522)
------ --- -------- ----- -------- ---- --------- -- ------ -------- -------
Balance,
December 31, 1992 73,641 $ 1 591,625 $ 6 905,283 $ 9 31,232,215 312 205,469 (205,289) 508
Common stock options
exercised, $.63 to
$2.00 per share 1,016,597 10 955 965
Shares issued through
employee stock purchase
plan $1.56 per share 477,579 5 739 744
Extension of expiration
date on outstanding grant
of common stock options 788 788
Net loss (69,565) (69,565)
------ --- ------ ----- ------- ---- ---------- ---- -------- ------- ---------
Balance,
December 31, 1993 73,641 $ 1 591,625 6 905,283 $ 9 32,726,391 $327 $207,951 $(274,854) $(66,560)
====== ==== ======= ===== ======= ===== ========== ==== ======== ========== =========
</TABLE>
The accompanying notes are an intergral part of the consolidated
financial statements.
<PAGE>
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of
Encore Computer Corporation and its wholly owned subsidiaries
("Encore" or the "Company"). All material intercompany
transactions have been eliminated.
Revenue Recognition
Revenue related to equipment and software sales is recognized
upon shipment. Service revenue is recognized over the term of the
related maintenance agreements. Revenue related to contract
research under U. S. government contracts is recognized as
reimbursable costs are incurred. Such reimbursable costs include
engineering and development costs incurred, outside procurements
related to contract performance, and general and administrative
costs.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with
maturities at the date of purchase of three months or less. The
Company maintains its cash in bank deposit accounts which, at
times, may exceed insured limits. The Company has not
experienced any losses related to these accounts.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Loaned equipment
which consists primarily of finished computer systems that are
loaned to customers for test and evaluation is classified as
inventory only if the equipment is intended for resale and
anticipated to be in service for a period of less than 12 months
prior to sale. Loaned equipment in service for more than 12
months is presented as property and equipment.
Property and Equipment
Property and equipment is stated at cost. Property and equipment
includes customer service inventory which consists principally of
spare parts utilized to support repairs at customer installations
and is generally not available for resale. Additions, renewals
and improvements are capitalized, and repair and maintenance
costs are expensed. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
reflected in the results of operations. Depreciation is provided
on a straight line basis over the estimated lives of the assets,
generally three years for loaned equipment, five years for
equipment and customer service inventory, ten years for furniture
and fixtures, and 25 to 30 years for buildings. Leasehold
improvements are amortized over their expected useful lives or
the lease term, whichever is shorter.
Goodwill
Goodwill originated from the 1989 acquisition of the Computer
Systems Business of Gould Electronics Inc. (the "Computer Systems
Business") and represented the excess of the acquisition cost
over the estimated fair value of the net assets acquired. From
1989 until 1991, goodwill was being amortized on a straight line
basis over a 10 year period. However in 1991, based on the
operating losses incurred since the acquisition of the Computer
Systems Business, the Company determined goodwill had been
permanently impaired. Accordingly, the Company reduced its
carrying value from $12,979,000 to $4,979,000 resulting in a
charge of $8,000,000. In 1992, due to continuing operating
losses, the Company reduced the amortization period for the
remaining carrying value of goodwill to December 31, 1994.
During 1993, due to the continued inability to achieve
profitability, the remaining carrying value of goodwill of
$2,628,000 was charged to operations.
At December 31, 1992, accumulated amortization amounted to
$6,379,000. Amortization of goodwill is presented as a component
of operating expense.
Capitalized Software
The Company capitalizes certain internal costs associated with
software development after the development projects reach
technological feasibility. Such costs as well as capitalized
costs for purchased software, are amortized to cost of sales at
the greater of straight line amortization over the expected
commercial life of each product, or the proportion of the current
period's product revenues to total expected product revenues. The
amortization periods range from 3 to 5 years. Software
development costs incurred prior to reaching the point of
technological feasibility are considered research and development
costs and are expensed as incurred.
Income Taxes
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes", effective January 1,
1993, which requires the use of the liability method of accounting
for deferred income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. The adoption of SFAS No. 109 had no
cumulative effect on income for the year ended December 31, 1993.
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") and Series D Convertible Preferred Stock ("Series
D") 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 years presented.
During the year ended December 31, 1993, the Company reported a
capital deficiency and as such under Delaware law was precluded
from paying dividends. During 1993, the Company accumulated
dividends of $3,630,000 and $5,554,700 on shares of its Series B
and Series D, respectively. This increased the 1993 net loss
attributable to common shareholders by $9,184,700. During the
years ended December 31, 1992 and 1991, dividends were paid to
holders of the Series B and the then outstanding Series C
Redeemable Preferred Stock with shares of Series B. In computing
the loss per share, these dividends increased the 1992 and 1991
loss as reported for the per share calculation by $3,943,100 and
$2,719,400, respectively. Additionally, during the year ended
December 31, 1992, dividends were paid to holders of the Series D
with shares of Series D. In computing the loss per share, these
dividends increased the 1992 loss as reported for the per share
calculation by $528,300.
Foreign Currency Translation and Transactions
Management has determined that the functional currency of each of
the Company's subsidiaries is the United States dollar.
Consequently, assets and liabilities of foreign operations are
translated into U.S. dollars at period end exchange rates, except
that, inventory and property and equipment are translated at
historical exchange rates. Income and expenses are translated at
the average rates prevailing during the year, except that cost of
sales and depreciation are translated at historical exchange
rates. All gains and losses arising from changes in exchange
rates are included in operating results in the period incurred.
The Company, at times, enters into forward exchange contracts to
reduce the effect of foreign currency fluctuations on operations
and the asset and liability positions of foreign subsidiaries.
Resultant gains and losses on these contracts are included in
operating results when the operating revenues and expenses are
recognized and for assets and liabilities in the period in which
the exchange rates change. At December 31, 1993 and December
31,1992, however, the Company had no forward exchange contracts.
Foreign exchange losses amounted to $744,000, $1,576,000, and
$732,000 in 1993, 1992, and 1991, respectively.
Warranties
The Company provides a standard product warranty for parts and
labor which generally extends ninety days from the date of
installation, but on certain contracts for up to one year. The
estimated cost of providing such warranty on products sold is
included in cost of sales at the time revenue is recognized.
Other
Certain reclassifications have been made to conform prior year data
to current year presentation.
B. Inventories
Inventories consist of the following (in thousands):
December 31, December 31,
1993 1992
----------- -----------
Purchased parts $ 4,660 $ 2,139
Work in process 9,618 11,913
Finished goods 1,065 601
Loaned computer equipment
and consignment inventory 2,421 1,160
-------- --------
$ 17,764 $ 15,813
======== =========
C. Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the following
(in thousands):
December 31, December 31,
1993 1992
----------- ------------
Deferred customer sponsored
engineering costs $ 1,187 $ -
Prepaid rent 266 365
Prepaid expenses 1,477 743
Other current assets 117 407
-------- -------
$ 3,047 $ 1,515
======== =======
D. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31, December 31,
1993 1992
------------ -----------
Land $ 5,100 $ 7,510
Buildings 14,874 14,849
Equipment 38,110 34,478
Customer service inventory 15,245 23,541
Furniture and fixtures 3,503 4,082
Leasehold improvements 1,872 2,100
Loaned equipment 2,735 4,488
Construction in progress 496 1,060
----------- -----------
81,935 92,108
Less: accumulated depreciation
and amortization (44,332) (45,793)
------------ -----------
$ 37,603 $ 46,315
============= ===========
Depreciation expense in 1993, 1992 and 1991 amounted to
$9,853,000, $12,297,000, and $13,683,000, respectively.
E. Capitalized Software
Capitalized software consists of the following (in thousands):
December 31, December 31,
1993 1992
----------- -----------
Capitalized software $ 8,878 $ 6,735
Accumulated amortization (4,475) (2,778)
-------- --------
$ 4,403 $ 3,957
======= =======
Software costs capitalized in 1993, 1992, and 1991 amounted to
$2,142,000, $2,365,000, and $2,640,000, respectively.
Amortization of capitalized software costs charged to expense
amounted to $1,696,000, $2,043,000, and $2,870,000 in 1993, 1992,
and 1991, respectively. The Company wrote down the carrying
value of several of its software products by $1,248,000 and
$1,271,000 in 1992 and 1991, respectively as part of its
transitioning of the UNIX-based product line (See Note F).
F. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
December 31, December 31,
1993 1992
----------- ------------
Accounts payable $ 10,805 $ 10,476
Accrued salaries and benefits 5,357 6,290
Accrued restructuring costs 10,974 6,429
Accrued interest 682 2,950
Accrued taxes 3,545 2,083
Deferred income,
principally maintenance contracts 1,563 1,306
Other accrued expenses 4,495 6,959
--------- ----------
$ 37,421 $ 36,493
========= =========
During 1993, 1992, and 1991, the Company recognized restructuring
expenses of $23,265,000 $5,248,000, and $29,032,000,
respectively.
In 1993, restructuring expenses related to (i) the recognition of
the permanent impairment in value of certain long lived assets
including fixed assets and goodwill, (ii) severance and
outplacement costs associated with a 12% reduction in workforce,
(iii) the accrual of costs to be incurred for field offices which
have been or will be abandoned due to the reduced sales and
service workforce. The 1993 charge includes approximately
$12,000,000 of non-cash charges related to the write down of the
carrying value of assets deemed permanently impaired. It is
expected a significant portion of the accrued restructuring
costs at December 31, 1993 will be paid during the first half of
1994.
In 1992, the Company recognized restructuring costs relating to
severance and outplacement costs associated with a reduction in
workforce as well as the write-off of capitalized software and
certain other assets as part of the Company's continued
transition of its product line. Restructuring charges in 1991
relate to severance and outplacement costs associated with a
reduction in workforce, the reduction in the carrying value of
goodwill, costs associated with the consolidation of operations
at the Marlborough, Massachusetts facility as well as other
excess facilities, and the write-off of certain capitalized
software products due to the transitioning of UNIX-based product
lines. Of the total 1992 and 1991 charges, approximately
$1,250,000 and $14,000,000, respectively were non-cash charges to
operations.
G. Debt
Debt consists of the following (in thousands):
Unaudited
(See Note L)
Pro Forma
December 31, December 31, December 31,
1993 1993 1992
------------ ----------- -----------
Debt to unrelated parties:
Mortgages payable and capital
lease obligations $ 1,192 $ 1,192 $ 1,406
Less:
Current portion 197 197 193
----------- ----------- ------------
Total long term debt to
unrelated parties $ 995 $ 995 $ 1,213
=========== =========== ===========
Debt to related parties:
Revolving loan agreements
with Gould Electronics Inc. $ 11,924 $ 61,924 $ 15,200
Term Loan with Gould
Electronics Inc. - 50,000 50,000
----------- ----------- ------------
Total debt to related parties 11,924 111,924 65,200
Less:
Current portion of debt - - -
---------- ----------- ------------
Total long term debt to
related parties $ 11,924 $ 111,924 $ 65,200
========== =========== ===========
Related Party Transactions
The Company, Japan Energy Corporation ("Japan Energy"; formerly
Nikko Kyodo Co., Ltd.) and its subsidiaries Gould Electronics
Inc. (formerly Gould Inc.; "Gould") and EFI International Limited
("EFI") are related parties due to the significant financial
interests of Gould and EFI of the Company. As of December 31,
1993, assuming full conversion of their holdings in the Company's
preferred stock, Gould and EFI beneficially owned 34.4% and
27.6%, respectively of the Company's common stock. As discussed
in more detail in Note L of the Notes to 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.
As described below, during 1993 and 1992, the Company had
various debt agreements with both Gould and EFI.
Total interest expense on indebtedness to Gould for 1993, 1992
and 1991 was $6,082,000, $3,040,000 and $1,299,000, respectively.
Interest expense on then outstanding indebtedness to EFI during
1992 was $1,726,000.
In addition to the loans described above, amounts due to Gould at
December 31, 1993 and 1992, included accrued interest of $677,000
and $2,822,000, respectively.
Revolving Loan Agreements
Since 1989, Gould has provided the Company with its revolving
credit facility. Effective March 31, 1992, Gould converted the
then existing revolving loan agreement with an outstanding
balance of $50,000,000 to a term loan ("Term Loan") with a
maturity date of March 31, 1994. Concurrently, Gould made
available to the Company a new $10,000,000 revolving loan
facility with a maturity date of March 31, 1993. Borrowings
under the revolving loan agreement were 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. In connection with the conversion, compliance with
financial covenants contained in the revolving loan agreement was
waived through the loan's maturity.
As a result of operating losses incurred during 1992, Company
borrowings exceeded the maximum allowed under the loan agreement.
Accordingly, the Company initiated discussions with Gould to
increase the amount available under the revolving credit
facility. On October 5, 1992, Gould agreed to increase the
borrowing limit by $5,000,000 to $15,000,000 under essentially
the same terms and conditions as the original agreement. On
April 12, 1993, the Company and Gould agreed to further increase
the amount available under the revolving credit facility to
$35,000,000 effective April 1, 1993 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. In light of the 1993 refinancing, the
revolving credit facility was classified as a long-term
obligation at December 31, 1992.
Due to the operating losses incurred during 1993, as of the end
of its third fiscal quarter the Company had exceeded the
$35,000,000 maximum borrowing amount of its revolving line of
credit by $14,415,000. Gould allowed the Company to borrow
funds in excess of the agreement's maximum limit to fund its
daily operations. At December 31, 1993 borrowings under the
agreement were $61,924,000. Interest is equal to the prime rate
plus 1% (7.0% at December 31, 1993) and is payable monthly in
arrears.
As discussed in more detail in Note L, 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 credit
agreement. Upon completion of the exchange, borrowings under the
revolving loan agreement on February 4, 1994 were $19,134,000 or
$15,866,000 below the maximum borrowing limit of the credit
facility. Further, on April 11, 1994, the Company and Gould
agreed to increase the amount available under 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 for certain financial
covenants contained in the agreement which 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 December 31, 1993.
Until the Company returns to a state of continued profitability
it is unlikely that it will be able to secure additional funding
from unrelated parties or be able to generate the levels of cash
through operations necessary to meet the on-going needs of the
business. Accordingly, the Company is and will remain dependent
on the continued financial support of Japan Energy and Gould.
Should the Company be unsuccessful in securing additional future
financing from Gould or Japan Energy as it is required, it is
likely that the Company will have difficulty settling its
liabilities on a timely basis.
Term Loan
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 is
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.
As discussed in more detail in Note L, on February 4, 1994, the
Company and Gould cancelled 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.
1992 Exchange of Indebtedness and Redeemable Preferred Stock for
Preferred Stock
On September 10, 1992, Encore and EFI entered into an agreement
whereby EFI exchanged $80,000,000 ($65,451,000 net of debt
discount) of indebtedness owed to EFI under the then existing
subordinated loan agreement for 800,000 shares of the Company's
Convertible Preferred Series D Stock ("Series D") with an
aggregate liquidation preference of $80,000,000. In addition,
Gould exchanged all of its outstanding 100,000 shares of Series C
Redeemable Preferred Stock ("Series C") with a liquidation
preference of $10,000,000 for 100,000 shares of the Series D also
with a liquidation preference of $10,000,000. The Company had
originally issued the 100,000 shares of Series C as part of a
1991 exchange of indebtedness for preferred stock. The Series C
was redeemable at its liquidation preference plus accumulated
dividends on January 28, 1996 and entitled to 6% cumulative
annual dividends, payable quarterly. The Series C was recorded
at its fair value at the date of issuance and the difference
between the fair value and the redemption amount was recorded as
a deferred credit in "Other Liabilities". The carrying amount
of the Series C was increased by periodic accretions using the
interest method so that the carrying amount would equal the
mandatory redemption amount at the redemption date. Accretion
recognized for year ended December 31, 1992 was $721,000.
In connection with this transaction, the Company released Gould
from any liability associated with certain outstanding claims
related to or arising from the 1989 sale by Gould of its Computer
Systems Business to the Company, including: (i) reimbursement
to the Company of certain foreign income tax payments made by the
Company on Gould's behalf and (ii) release of any liability
arising from certain potential environmental clean-up matters
associated with former Gould facilities acquired by the Company.
The scope of the clean-up matters has been reviewed by an
independent environmental engineering firm and, in their opinion,
present no significant liability to the Company.
Because of the related party nature of this transaction, the
difference between the carrying amount of the indebtedness
exchanged and the fair value of the securities issued, other
considerations granted and accrued professional fees associated
with the transaction, the amount of $73,230,000 was credited to
additional paid-in capital as follows (in thousands):
Total indebtedness exchanged (net of
unamortized debt discount) $ 65,451
Total Series C exchanged at redemption
value (equivalent to carrying value
plus deferred credit) 10,000
Estimated value of claims against Gould
forgiven by the Company (1,120)
Estimated transaction costs (500)
Write-off of debt issue costs related to
indebtedness exchanged (592)
Par value of Series D exchanged (9)
--------
Addition to paid-in capital $ 73,230
========
H. Income Taxes
As discussed in Note A the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes", effective January 1, 1993. The Company has recorded a
provision of $454,000, $739,000 and $577,000 for the years ended
1993, 1992 and 1991 respectively. The provision relates to the
profitable operations of foreign subsidiaries.
Income tax benefits have not been recorded since the Company has
fully reserved the tax benefit of temporary differences,
operating losses, capital losses and tax credit carryforwards due
to the fact that the likelihood of realization of the tax
benefits cannot be established.
The significant components of the deferred tax account as of
December 31, 1993 were as follows:
Deferred tax assets:
Net Operating Losses $ 57,775,000
Research & ExperimentaL Credits 1,750,000
Capital Losses 3,622,000
Inventory Reserves 3,535,000
Accrued Vacation 847,000
Various Reserves/Other 1,266,000
Accrued Restructuring 2,372,000
------------
71,167,000
Valuation Allowance 69,924,000
----------
1,243,000
Deferred tax liabilities:
Capitalized Software $ (1,243,000)
--------------
Net $ -
==============
For income tax purposes the Company had a change in ownership, as
defined by Internal Revenue Code Section 382, in connection with
the Gould debt exchange on January 28, 1991. The change in
ownership resulted in an annual limitation of approximately
$2,000,000 on the amount of net operating losses incurred prior
to January 28, 1991 that can be utilized to offset the Company's
future taxable income.
At December 31, 1993, the Company has available approximately
$30,000,000 of pre change net operating losses which are
allowable after application of the Section 382 limitation, as
well as post change net operating losses of $132,767,000. These
net operating losses expire in the years 2005 through 2008. The
Company also has a net capital loss carryforward of $12,937,000
related to the Gould debt exchange on January 28, 1991, which
expires in 1996.
I. Commitments and Contingencies
Contract Research
The Company has performed services under U.S. Government
contracts to develop and deliver prototype multiprocessor systems
and a workstation which utilize parallel processing architecture.
The contracts, issued by the Department of Navy and the
Department of the Army for the Defense Advanced Research Project
Agency ("DARPA"), included fixed price and cost plus fixed fee
elements. While the Company retains certain commercial rights to
the technology developed under the contract, the government has
been granted rights to technical data developed.
In 1991, the Company assigned to Worcester Polytechnic Institute
("WPI") all proposals and advance agreements proposed by the
Company to DARPA related to certain potential project awards.
Additionally, the Company agreed to subcontract to WPI completion
of certain other contracts previously awarded to the Company by
DARPA. The Government has reimbursed the Company for pre-award
costs incurred in connection with the assigned proposals. WPI
will make available to the Company any technological developments
which may result from any of the assigned projects. While the
novations and/or subcontract agreements are subject to the
approval of the affected U.S. government agencies, the Company
does not believe this transaction will have an adverse effect on
the Company's future financial performance.
There were no contract research revenues in 1993. In 1992 and
1991, contract research revenues amounted to $42,000 and
$2,719,000, respectively.
Leases
The Company leases office, research facilities, sales offices and
equipment under operating leases. Certain land and building
leases have renewal options generally for periods ranging from
one to five years. Rental expenses, net of sublease income, were
approximately $4,127,000, $5,768,000 and, $7,923,000 for the
years ended 1993, 1992, and 1991, respectively. Future minimum
lease payments under capital lease obligations and minimum rental
payments under operating leases for the next five years are
approximately as follows:
(in thousands) Capital Operating
Year Leases Leases
1994 $ 62 4,180
1995 42 2,453
1996 - 1,548
1997 - 951
1998 - 792
------- -------
Total Minimum Lease Payments 104 $ 9,924
=======
Less: Amounts representing
interest 7
-------
Present value of net minimum
lease payments $ 97
======
Future minimum rental income under noncancelable subleases
extending through 1998 amounts to $888,000.
Litigation
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries are party to or of which
any of their property is the subject. The unfavorable settlement
of any existing matter would not have an adverse impact on the
financial results of the Company.
Employer's Postemployment Benefits
The Company has provided employee's with certain Company-paid
postemployment benefits including salary continuation and job
counseling services. The Company recognizes such costs on a
terminal accrual basis recognizing the estimated cost of
postemployment benefits at the date of the event giving rise to
the liability to pay those benefits.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations
of credit risk are limited to trade receivables. The Company
grants credit terms in the normal course of business to its
customers which are consistent with industry practices.
Generally, the Company's customers are United States government
agencies or substantial international corporations often included
among the Fortune 500. Additionally, as part of its ongoing
control procedures, the Company monitors the credit worthiness of
its major customers and establishes individual customer credit
limits accordingly. Bad debts realized by the Company have
historically not been excessive and doubtful accounts are
adequately reserved when identified. Because of these facts, the
concentration of credit risk in trade receivables is not
considered to be material.
Intellectual Property License
As part of the 1991 exchange of preferred stock for indebtedness
described in Note G, the Company and Gould entered into an
intellectual property licensing agreement whereby the Company has
agreed to license substantially all of its intellectual property
to Gould under certain conditions. The intellectual property
license is royalty free and provided that the Company achieved
certain revenue levels, would not have allowed Gould to use the
intellectual property until January, 1994. The Company has the
option to extend its exclusivity period for up to five additional
years by making certain cash payments to Gould. However, the
period will be automatically extended if certain operating income
levels are achieved by the Company. The intellectual property
license can be terminated by the Company if all Gould borrowings
are repaid and (i) the Series B and Series D are converted into
common stock or (ii) the Series B and the Series D are redeemed
or (iii) the Company pays Gould the fair value of the license.
The Company has not achieved the net revenue or operating income
levels necessary under the agreement to maintain its exclusive
right to the use of the intellectual property. However, as part
of the refinancing discussed in Note L, Gould has agreed to
extend the Encore exclusivity period through December 31, 1994.
Should the Company be unable to negotiate further extensions to
its exclusivity period, Encore will lose its exclusive right to
use the intellectual property and Gould may at its option begin
to exercise its rights under the agreement. Such action by Gould
could have a material adverse effect on the Company's business.
J. Capital Stock
Series A Convertible Participating Preferred Stock
Certain of the Company's operations relate to classified U.S.
Government contracts. Accordingly, the government expressed
concern regarding the extent of Gould's ownership of the
Company's common stock, since Gould, the Company's largest
shareholder, is owned and controlled by Japan Energy, a foreign
corporation. In this connection, the Company has issued to Gould
73,641 shares of Series A Convertible Participating Preferred
Stock ("Series A") in lieu of common stock. The Company has
agreed to reserve 7,364,100 shares of common stock for issuance
to Gould upon exercise of the conversion option.
The holder of Series A and the Company each have the option at
any time, with 30 days prior notice, to convert or require to be
converted, all or any portion of the Series A preferred shares to
common at a ratio of 1 to 100. Dividend rights are equal to those
of the common shares (on an assumed converted basis); however,
there are significant restrictions on the voting rights of the
Series A. The Series A is entitled to elect two members of the
Board of Directors but is not entitled to participate in the
election of other members of the Board. Based upon the
characteristics and rights of the Series A, the Company has
deemed these shares to be common stock (on an assumed converted
basis) for purposes of loss per share calculations for the fiscal
periods presented herein.
Cumulative Series B Convertible Preferred Stock
The Cumulative Series B Convertible Preferred ("Series B") has a
6% cumulative annual dividend payable quarterly, which the
Company can accumulate or pay in additional shares of Series B
(valued at its liquidation preference) until the Company's
shareholders' equity exceeds $50,000,000. The Series B is
convertible into the Company's common stock at $3.25 per share at
the holder's option at any time and at the Company's option upon
satisfaction of certain conditions. The shares are non-voting,
except for the right to elect one director of the Company upon
certain dividend payment defaults, the right to elect a majority
of the directors of the Company if certain operating income
levels are not achieved by the Company and the right to approve
actions adversely affecting the Series B. The Series B may be
redeemed by the Company at any time for cash equal to the
liquidation preference plus accumulated dividends. The Company
has reserved shares of common stock sufficient for issuance upon
conversion of the Series B and additional shares of Series B
which may be issued as a dividend. As of December 31, 1993, the
number of common shares reserved for this purpose amounts to
19,320,769.
During 1993, the Company reported a capital deficiency and under
Delaware law was precluded from issuing dividends. Accordingly,
the Company accumulated dividends during 1993 of $3,630,000.
During 1992 the Company paid dividends of $3,943,100 in
additional shares of Series B. A quarterly dividend on the
Series B of $941,800 is payable on January 15, 1994. The Company
has elected to accumulate this dividend. As discussed in more
detail in Note L of the Notes to Consolidated Financial
Statements, upon completion to the exchange of preferred stock
for indebtedness, the Company eliminated its capital deficiency
and paid all accumulated dividends in shares of Series B.
Cumulative Series D Convertible Preferred Stock
The Series D has a liquidation preference of $100 per share and
carries a 6% cumulative annual dividend which the Company can
elect to accumulate or pay currently. The Company may (i) pay
the dividend in cash or additional shares of Series D valued at
its liquidation preference until shareholders' equity exceeds
$50,000,000, or (ii) pay the dividend in cash when shareholders'
equity exceeds $50,000,000. The Series D is convertible, at the
holder's option, into the Company's common stock at $3.25 per
share only (a) if the shareholder is a United States citizen or a
corporation or other entity owned in the majority by United
States citizens or (b) in connection with an underwritten public
offering. The stock is convertible, at the Company's option, 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 D 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 D would be converted. The shares are non-voting, except
for the right to approve actions adversely affecting the Series
D. The Company has reserved shares of common stock sufficient
for issuance upon conversion of the Series D and additional
shares of Series D which may be used for future stock dividends.
As of December 31, 1993, the number of shares reserved for this
purpose was 29,564,000.
During 1993, the Company reported a capital deficiency and under
Delaware law was precluded from issuing dividends. Accordingly,
the Company accumulated dividends during 1993 of $5,554,700.
Dividends of $528,300 were paid on the Series D for the year
ended December 31, 1992. A quarterly dividend on the Series D of
$1,441,200 is payable on January 15, 1994. The Company has
elected to accumulate this dividend. As discussed in more detail
in Note L of the Notes to Consolidated Financial Statements, upon
completion of the exchange of preferred stock for indebtedness,
the Company eliminated its capital deficiency and paid all
accumulated dividends in shares of Series D.
Impact of Foreign Ownership
In connection with both the 1994 exchange of indebtedness for
preferred stock discussed in Note L of the Notes to Consolidated
Financial Statements and the 1993 and 1992 exchanges of
indebtedness for preferred stock discussed in Note G of the Notes
to Consolidated Financial Statements, the United States Defense
Investigative Service ("DIS") has indicated that it has no
objection to the relationships under the United States government
requirements relating to foreign ownership, control or influence
between Japan Energy Corporation (a Japanese corporation) and its
wholly owned subsidiaries (EFI and Gould) and the Company.
Shareholders' Agreement
In conjunction with the 1994 exchange of Series E for
indebtedness discussed in Note L of the Notes to Consolidated
Financial Statements and the 1992 exchange of Series D for Series
C and indebtedness discussed in Note G, the Company, Kenneth G.
Fisher, the Company's Chairman, and Gould amended and restated an
existing stockholders agreement. The agreement provides that as
long as any shares of Series A are outstanding, Gould, in all
elections of directors, will vote all of its common stock pro
rata in accordance with the votes of the other shareholders of
the Company. In addition, so long as the revolving credit
facility with Gould is in effect, should Gould request it, Mr.
Fisher has agreed to vote his common shares in favor of expanding
the Board of Directors and electing an additional Gould
representative to the Board.
Adjustment of Accrued Transaction Costs
In 1991, the Company exchanged preferred stock for indebtedness
owed to Gould. In recording the exchange, the Company accrued
estimated transaction costs of $1,812,000 to be incurred as part
of the exchange. Actual costs incurred in connection with the
exchange were less than those initially estimated and accrued.
Accordingly, during 1992, the Company reduced the remaining
accrued liability by $900,000 and increased additional paid-in
capital.
Stock Option and Stock Purchase Plans
The Company has had two stock option plans, the 1983 Incentive
Stock Option Plan (which expired in 1993) and the 1985 Non-
Qualified Stock Option Plan. Under the terms of the plans a
total of 12,000,000 shares of the Company's common stock were
reserved for issuance to officers, directors and employees. On
September 9, 1993, the shareholders voted to increase the number
of shares reserved for issuance under the plan by 12,000,000 to a
total of 24,000,000 shares.
Stock option activity for the 1983 Incentive Stock Option Plan is
as follows:
Shares Under Option
Shares Price
Outstanding at December 31, 1990 176,380 $1.13
Fiscal 1991:
Canceled (87,500) $1.13
-------- -----
Outstanding at December 31, 1991 88,880 $1.13
Fiscal 1992:
No activity - $1.13
-------- -----
Outstanding at December 31, 1992 88,880 $1.13
Fiscal 1993:
Exercised (88,880) $1.13
-------- -----
Outstanding at December 31, 1993 0
========
Options granted under the Incentive Stock Option Plan were
granted at exercise prices at least equal to the then current
fair market value of the Company's common stock, and were
immediately exercisable. Shares issued upon exercise of such
options are subject to the Company's repurchase rights which
expire ratably over three to five year periods from the date of
grant, or automatically upon death or disability. Shares subject
to such repurchase rights at the time of termination of
employment may be purchased by the Company at the optionee's
exercise price.
At December 31, 1993, there were no incentive stock options
outstanding under the plan.
Stock Option activity for the 1985 Non-Qualified Stock Option
Plan ("the 1985 Plan") is as follows:
Shares Under Option
Shares Price
Outstanding at December 31, 1990 6,962,427 $0.63 to $3.13
Fiscal 1991:
Granted 4,068,366 $0.69 to $1.88
Exercised (567,253) $0.81 to $2.31
Canceled (5,230,717) $0.63 to $3.13
----------- --------------
Outstanding at December 31, 1991 5,232,823 $0.63 to $3.13
Fiscal 1992:
Granted 6,181,530 $0.94 to $1.00
Exercised (352,248) $0.63 to $1.63
Canceled (227,122) $0.63 to $3.13
----------- --------------
Outstanding at December 31, 1992 10,834,983 $0.63 to $2.31
Fiscal 1993:
Granted 592,500 $1.50 to $4.00
Exercised (927,717) $0.63 to $2.00
Canceled (473,437) $0.63 to $2.31
----------- --------------
Outstanding at December 31, 1993 10,026,329 $0.63 to $4.00
========== ==============
Exercise rights for options granted under the 1985 Plan vest over
varying periods up to four years and options to purchase
6,138,280 shares were exercisable at December 31, 1993. Options
granted under the 1985 Plan may be granted at an exercise price
of not less than 50% of the current fair market value of the
common stock. All options granted to date have been at the then
current fair market value.
During 1993, options granted in 1986 to Mr. Morley, an officer of
the Company, were scheduled to expire if not exercised. However,
at the time the options were scheduled to expire the Company's
policy on insider trading effectively prevented Mr. Morley from
exercising the options. Accordingly, the Board of Directors
approved an extension of the expiration date until the options
could be exercised and the underlying shares sold in accordance
with Company policy, which is expected to occur during 1994. The
extension has been treated as a cancellation of the old options
and a grant of new options in the same amount at the same
exercise price. A non-cash non-recurring charge of $788,000 was
incurred in connection with the extension of the expiration date
of such stock options.
On January 31, 1991, the Board of Directors approved a program
that permitted holders of certain stock options exercisable for
shares of common stock, including the options granted during 1990
at a price of $2.00 per share, to exchange said options for new
options (the "Exchange"). Under the terms of the Exchange, an
individual was permitted to surrender his original option in
exchange for a new option to purchase a number of shares equal to
80% of the number of shares subject to the original option at a
new exercise price of $0.81 per share, such exercise price being
equal to the closing price per share of the Company's common
stock as reported on the National Market System of Nasdaq on
February 1, 1991. The effective date of any new options granted
pursuant to the Exchange was February 1, 1991; however, new
options could not be exercised until June 1, 1991. Except as
described above, the terms of the new options were substantially
the same as those of the surrendered options. The amount of
shares eligible for reissue under the exchange program was
5,306,340 of which 4,101,707 were canceled in exchange for new,
repriced grants.
In 1990, the shareholders approved the Employee Stock Purchase
Plan and reserved 4,000,000 shares for issuance pursuant to
rights granted under the Plan. On September 9, 1993, the
shareholders voted to increase the number of shares reserved for
issuance under the plan from 4,000,000 to 8,000,000.
Substantially all employees are eligible to participate in the
Employee Stock Purchase Plan. The purchase price per share of
common stock in any offering under the Plan is the lower of (i)
85% of the closing price per share of common stock on the
commencement of the offering or (ii) 85% of the closing price of
a share of common stock on the termination of the offering. Each
offering is for a period of approximately six months. Under the
Plan, the Company issued 477,579 shares at a weighted average
price of $1.56 in 1993, 815,411 shares at a weighted average
price per share of $.86 in 1992 and 1,159,504 shares at a
weighted average price of $0.64 per share in 1991.
K. Segment Information
The Company operates in a single industry segment which includes
developing, manufacturing, marketing, installing and servicing
business information processing systems, principally in the
United States, Europe, the Far East, and Canada. In 1993, 1992,
and 1991, no single customer accounted for as much as 10% of
revenues. During 1993, 1992 and 1991 approximately 37%, 29%, and
33%, respectively, of its revenues were directly or indirectly
derived from U.S. Government agencies.
The Company maintains operations in Europe and Canada principally
through consolidated subsidiaries. Far East operations are
through joint ventures in Japan, Hong Kong and Malaysia and
distributors throughout the remainder of the region. Information
about the Company's operations for 1993, 1992, and 1991 is
presented below (in thousands). Inter-geographic net sales,
operating income and assets have been eliminated to arrive at the
consolidated amounts.
Net Sales to Inter- Identi-
Unrelated Geographic Total Operating fiable
Entities Net Sales Net Sales Income (loss) Assets
1993:
United States $ 56,553 $ 11,664 $ 68,217 $ (55,443) $67,928
Europe 34,769 - 34,769 (7,554) 16,409
Other 2,210 - 2,210 (724) 686
-------- ------- ------- ------- -------
Geographic Total 93,532 11,664 105,196 (63,721) 85,023
Inter-Geographic - (11,664) (11,664) 1,636 (953)
------------ --------- -------- --------- --------
Total $ 93,532 $ - $ 93,532 $ (62,085) $84,070
1992
United States $ 69,925 $ 24,232 $ 94,157 $ (19,658) $84,931
Europe 58,311 - 58,311 (4,316) 23,186
Other 2,657 728 3,385 ( 527) 918
------ ------ ------- -------- -------
Geographic Total 130,893 24,960 155,853 (24,501) 109,035
Inter-Geographic - (24,960) (24,960) 1,957 (3,349)
------------ --------- -------- --------- --------
Total $ 130,893 $ - $130,893 $ (22,544) $105,686
1991:
United States $ 86,984 $ 27,204 $114,188 $ (56,605) $ 90,125
Europe 61,291 - 61,291 1,039 35,053
Other 5,027 435 5,462 (899) 1,959
------- ------ ------- ------- -------
Geographic Total 153,302 27,639 180,941 (56,465) 127,137
Inter-Geographic - (27,639) (27,639) 1,527 (5,951)
------------ --------- -------- --------- ----------
Total $ 153,302 $ - $153,302 $ (54,938) $ 121,186
Inter-geographic net sales are recorded principally at 60% of
list price. Identifiable assets are all assets, including
corporate assets, identified with operations in each region.
L. Subsequent Events
On February 4, 1994, Gould exchanged its term loan and a portion
of its revolving credit loan totaling $100,000,000 for 1,000,000
shares of the Company's Series E Convertible Preferred Stock
("Series E") with a liquidation preference of $100,000,000 (See
Note G).
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.
The accompanying unaudited Pro Forma Consolidated Balance Sheet
as of December 31, 1993 is presented as if the transactions
described above had been consummated as of that date. 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 (1,043)
---------
Increase in additional paid in capital $ 98,247
========
Upon completion of the refinancing, the Company reported a
capital surplus and was able to pay all dividends accumulated
since January 15, 1993 and immediately did so 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%.
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.
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10 Directors and Executive Officers of the Registrant
Information regarding directors of the Company is included in the
Company's Proxy Statement for the 1994 Annual Meeting of
Shareholders under the caption "Election of Directors" and is
incorporated herein by reference. Information regarding
executive officers of the Company is included in Part I under the
caption "Executive Officers of the Registrant" and is
incorporated herein by reference.
ITEM 11 Executive Compensation
Information regarding Executive Compensation is included in
the Company's Proxy Statement for the 1994 Annual Meeting of
Shareholders under the caption "Executive Compensation" and is
incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial
Owners and Management is included in the Company's Proxy
Statement for the 1994 Annual Meeting of Shareholders under
the caption "Principal Stockholders" and is incorporated
herein by reference.
Item 13 Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related
Transactions is included in the Company's Proxy Statement for
the 1994 Annual Meeting of Shareholders under the caption
"Certain Transactions" and is incorporated herein by
reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. and (a)2. Index to Financial Statements and Financial
Statement Schedules
Form 10-K Page Number
Report of independent public accountants relating to
consolidated financial statements and financial
statement schedules 28
Consolidated statements of operations for the years
ended December 31, 1993, 1992 and 1991 29
Consolidated balance sheets at December 31, 1993 and 1992 30
Consolidated statements of cash flows for the years
ended December 31, 1993, 1992 and 1991 31
Consolidated statements of shareholders' equity
(capital deficiency) for the years ended
December 31, 1993, 1992, and 1991 33
Notes to consolidated financial statements 34-51
The following consolidated financial statement schedules
are submitted herewith:
Form 10-K Page Number
Schedule V Property, plant and equipment 54
Schedule VI Accumulated depreciation, depletion and
amortization of property, plant and equipment 55
Schedule VIII Valuation and qualifying accounts 56
Schedule X Supplementary income statement information 57
The consolidated financial statement schedules should be read
in conjunction with the consolidated financial statements
included herein. All other schedules have been omitted since
the required information is not present or is not present in
amounts sufficient to require submission of the schedule, or
because the information required is included in the
consolidated financial statements and notes thereto.
(a)3. Index to Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the consolidated financial statement
schedules are filed as part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the year ended December 31, 1993.
For purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into the
registrant's Registration Statements on Form S-8 Nos. 33-34171
and 33-33907.
Insofar as indemnification of liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by as director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by the appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
<TABLE>
ENCORE COMPUTER CORPORATION
Schedule V
Property, Plant and Equipment
(in thousands)
<S> <C> <S> <C> <S> <C> <S> <C>
Balance at Other Balance at
Beginning of Additions Changes Add/ End of
Classification Period at Cost Retirements (Deduct)(1) Period
- ------------------- ---------- ---------- ------ --------- --------
Year ended
December 31, 1991:
Land $ 7,510 $ - $ - $ - $ 7,510
Buildings 14,489 239 - - 14,728
Equipment 29,166 8,389 (6,505) - 31,050
Customer service
inventory 18,860 5,569 - (2,975) 21,454
Furniture and
fixtures 4,746 118 (744) - 4,120
Leasehold
improvements 2,872 154 (1,032) - 1,994
Loaned equipment 4,785 1,473 (1,036) - 5,222
Construction in
progress - 1,083 - - 1,083
---------- -------- ---------- --------- --------
Total $ 82,428 $ 17,025 $ (9,317) $ (2,975) $ 87,161
========== ======== ========== ========= =========
Year ended
December 31, 1992:
Land $ 7,510 $ - $ - $ - $ 7,510
Buildings 14,728 121 - - 14,849
Equipment 31,050 5,229 (2,003) 202 34,478
Customer service
inventory 21,454 3,815 (1,728) - 23,541
Furniture and
fixtures 4,120 145 (183) - 4,082
Leasehold
improvements 1,994 159 (53) - 2,100
Loaned equipment 5,222 534 (962) (306) 4,488
Construction in
progress 1,083 116 (139) - 1,060
---------- --------- ----------- --------- --------
Total $ 87,161 $ 10,119 $ (5,068) $ (104) $ 92,108
========== ========= =========== ========= =========
Year ended
December 31, 1993:
Land $ 7,510 $ - $ - $ (2,410) $ 5,100
Buildings 14,849 8 - 17 14,874
Equipment 34,478 6,299 (1,224) (1,443) 38,110
Customer service
inventory 23,541 3,508 (11,536) (268) 15,245
Furniture and
fixtures 4,082 38 (429) (188) 3,503
Leasehold
improvements 2,100 35 (98) (165) 1,872
Loaned equipment 4,488 1,509 (1,939) (1,323) 2,735
Construction in
progress 1,060 383 - (947) 496
---------- --------- ----------- --------- -------
Total $ 92,108 $ 11,780 $ (15,226) $ (6,727) $ 81,935
========== ========= =========== ========= =========
</TABLE>
(1) Other changes for the year ended December 31, 1991 represent
obsolete inventory charged to customer service cost of sales.
Other changes for the year ended December 31, 1992 represent
reclassifications from and to inventory.
Other changes for the year ended December 31, 1993 consist
principally of assets written off as part of restructuring actions
taken during 1993 (See Note F of the Notes to Consolidated
Financial Statements).
<PAGE>
<TABLE>
ENCORE COMPUTER CORPORATION
Schedule VI Accumulated Depreciation, Depletion and Amortization of Property,
Plant and Equipment
(in thousands)
<S> <C> <C> <C> <S> <C> <C>
Balance at Other Balance at
Beginning of Additions Changes/Add End of
Classification Period at Cost Retirements (Deduct)(1) Period
- ------------------- ---------- ---------- --------- ------ ---------- --------
Year ended
December 31, 1991:
Land $ - $ - $ - $ - $ -
Buildings 926 619 - - 1,545
Equipment 15,031 6,315 (4,563) - 16,783
Customer service
inventory 7,659 4,494 - - 12,153
Furniture and
fixtures 1,873 708 (609) - 1,972
Leasehold
improvements 1,023 360 (473) - 910
Loaned equipment 2,747 1,187 (435) - 3,499
---------- --------- ---------- --------- --------
Total $ 29,259 $ 13,683 $ (6,080) $ - $ 36,862
========== ========= ========== ========= =========
Year ended
December 31, 1992:
Land $ - $ - $ - $ - $ -
Buildings 1,545 628 - - 2,173
Equipment 16,783 5,403 (1,031) (14) 21,141
Customer service
inventory 12,153 4,521 (1,263) - 15,411
Furniture and
fixtures 1,972 581 (133) - 2,420
Leasehold
improvements 910 312 (42) - 1,180
Loaned equipment 3,499 852 (756) (127) 3,468
---------- --------- ---------- --------- --------
Total $ 36,862 $ 12,297 $ (3,225) $ (141) $ 45,793
========== ========= ========== ========= ==========
Year ended
December 31, 1993:
Land $ - $ - $ - $ - $ -
Buildings 2,173 631 - 30 2,834
Equipment 21,141 3,984 (1,296) 3,089 26,918
Customer service
inventory 15,411 3,691 (11,626) 1,882 9,358
Furniture and
fixtures 2,420 443 (291) (117) 2,455
Leasehold
improvements 1,180 250 (74) (83) 1,273
Loaned equipment 3,468 854 (1,843) (985) 1,494
--------- --------- ---------- --------- ---------
Total $ 45,793 $ 9,853 $ (15,130) $ 3,816 $ 44,332
========= ========= ========== ========= ==========
</TABLE>
(1) Other changes for the year ended December 31, 1992 represent
reclassifications to inventory.
Other changes for the year ended December 31, 1993 consist
principally of assets written off as part of restructuring actions taken
during 1993 (See Note F of the Notes to Consolidated Financial
Statements).
<PAGE>
<TABLE>
ENCORE COMPUTER CORPORATION
Schedule VIII
Valuation and qualifying accounts
(in thousands)
<S> <C> <S> <C>
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and other End of
Description Period Expenses Accounts Deductions Period
- ------------------- ---------- ---------- ------ --------- --------
Year ended
December 31, 1991:
Allowance for doubtful
accounts: $ 3,808 $ 1,114 $ - $ (1,118) $ 3,804
========= ======== ========= ========== ==========
Year ended
December 31, 1992:
Allowance for doubtful
accounts: $ 3,804 $ 283 $ - $ (1,646) $ 2,441
========= ======== ========= ========= ==========
Year ended
December 31, 1993:
Allowance for doubtful
accounts: $ 2,441 $ 203 $ - $ (494) $ 2,150
========= ======== ========= ========== =========
</TABLE>
(1) Includes amounts deemed uncollectible.
<PAGE>
ENCORE COMPUTER CORPORATION
Schedule X
Supplementary income statement information
(in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Item 1993 1992 1991
- ---------------------- ---------- ---------- --------
Maintenance and repairs $ 2,553 $ 2,172 $ 2,705
Advertising costs 4,132 1,828 2,950
Taxes other than payroll taxes 2,011 2,076 2,256
<PAGE>
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
(Registrant)
By: T. MARK MORLEY
T. Mark Morley
Vice President, Finance
and Chief Financial Officer
April 11, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
- ----------------- --------------------- -------------
KENNETH G. FISHER Chairman of the Board
Kenneth G. Fisher Chief Executive Officer April 11, 1994
ROWLAND H. THOMAS, JR. President and Chief
Rowland H. Thomas, Jr. Operating Officer and
Director April 11, 1994
C. DAVID FERGUSON
C. David Ferguson Director April 11, 1994
ROBERT J FEDOR
Robert J. Fedor Director April 11, 1994
DANIEL 0. ANDERSON
Daniel O. Anderson Director April 11, 1994
T. MARK MORLEY Vice President, Finance
T. Mark Morley and Chief Financial Officer April 11, 1994
KENNETH S. SILVESTEIN
Kenneth S. Silverstein Corporate Controller April 11, 1994
<PAGE>
(a)3. Index to Exhibits.
The exhibit numbers in the following index correspond to the
numbers assigned to such exhibits in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company, as
amended (incorporated herein by reference to the
Company's Form 10-K for the year ended December
31, 1990)
3.1a Amendment to the Certificate of Incorporation
filed with the Delaware Secretary of State on
March 26, 1992 (incorporated herein by reference
to Exhibit 3.1a to the Company's Form 10-K for the
year ended December 31, 1991).
3.2 By-laws of the Company, as amended (incorporated
herein by reference to Exhibit 3.2 to the
Company's Form l0-K for the year ended December
31, 1989).
*3.3 Amendment to the Certificate of Incorporation
dated September 30, 1993 increasing the number of
authorized common shares from 120,000,000 to
150,000,000.
4.1 Articles NINTH and TENTH of the Certificate of
Incorporation of the Company, as amended, and
Certificates of Stock Designation relating,
respectively, to the Company's Series A
Convertible Participating Preferred Stock, Series
B Convertible Preferred Stock and Series C
Redeemable Preferred Stock (see Exhibit 3.1).
Incorporated herein by reference to the Company's
Form 10-K for the year ended December 31,1990.
4.2 Article 1 of the By-laws of the Company, as
amended (incorporated herein by reference to
Exhibit 3.2 to the Company's Form 10-K for the
year ended December 31,1989).
4.3 Certificate of Stock Designation relating to the
Company's Series D Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.3
to the Company's Form 10-K for the year ended
December 31,1992).
*4.4 Certificate of Stock Designation relating to the
Company's Series E Convertible Preferred Stock.
10.1 The Company's 1983 Incentive Stock Option Plan, as
amended (incorporated herein by reference to
Exhibit 28.1 to the Company's Form S-8/Form S-3
Registration Statement No. 33-34171).
10.2 The Company's 1985 Non-Qualified Stock Option
Plan, as amended (incorporated herein by reference
to Exhibit 28.2 to the Company's Form S-8/Form S-3
Registration Statement No. 33-34171).
10.3 The Company's 1990 Employee Stock Purchase Plan
as amended (incorporated herein by reference to
the Company's Form S-8/Form S-3 Registration
Statement No. 33-72458).
10.4 Form of Promissory Note and Pledge and Escrow
Agreement between the Company and Mr. DiNanno
(incorporated herein by reference to Exhibit 10.9
to the Company's Form 10-K for the year ended
October 25, 1986).
10.5 Form of Indemnification Agreement between the
Company and its executive officers (incorporated
herein by reference to Exhibit 10.4 to the
Company's Form 10-K for the year ended December
31, 1989).
10.6 Purchase Agreement dated as of March 20, 1989,
among the Company, Gould Inc. and certain
subsidiaries of Gould Inc. (incorporated herein by
reference to Exhibit 2.1 to the Company's Form 8-K
filed with the Commission on May 12, 1989, as
amended by Form 8-S filed July 11, 1989 and
February 7, 1990), as amended by an Agreement
dated August 1, 1989, among the Company, Gould
Inc. and Kenneth G. Fisher (incorporated herein by
reference to Exhibit 10.8b to the Company's Form
10-K for the year ended December 31, 1989).
10.7a Master Purchase Agreement dated as of September
10, 1992, between the Company, Gould Inc. and EFI
International Inc. (incorporated herein by
reference to Exhibit 10.7a to the Company's Form
10-K for the year ended December 31,1992).
*10.7b Master Purchase Agreement dated as of February 3,
1994 between the Company and Gould Electronics
Inc.
10.8 Intellectual Property License Agreement dated as
of January 28, 1991, among the Company, Encore
Computer U.S., Inc. ("Encore U.S.") and Gould Inc.
(incorporated herein by reference to Exhibit 10.9
of the Company's Form 10-K for the year ended
December 31, 1990.
10.9a First Amendment to Amended and Restated Stockholder's
Agreement among the Company, Gould Inc. and Kenneth G.
Fisher dated March 31, 1992 (incorporated herein by
reference to the Company's Form 10-K for the year ended
December 31, 1991).
*10.9.b Third Amendment to Amended and Restated Stockholders
Agreement among the Company, Gould Electronics Inc. as
assignee of Gould Inc. and Indian Creek Capital, Ltd as
assignee of Kenneth G. Fisher dated February 3, 1994.
10.9c Amended and Restated Registration Agreement dated September
10, 1992, among Kenneth G. Fisher and his permitted
transferees, the Company and Gould Inc. (incorporated herein
by reference to Exhibit 10.9b to the Company's Form 10-K
for the year ended December 31, 1992).
10.9d Second Amendment to Amended and Restated Stockholders
Agreement among the Company, Gould Inc. and Kenneth G.
Fisher dated September 10, 1992 (incorporated herein
by reference to Exhibit 10.9c to the Company's Form 10-K
for the year ended December 31, 1992).
10.9e Amended Agreement to the Revolving Loan Agreement among
the Company and Gould Inc. and the Term Loan Agreement
among the company and Gould Inc. dated April 12, 1993
(incorporated herein by reference to Exhibit 10.9d to
the Company's Form 10-K for the year ended December
31, 1992).
*10.9f Third Amended and Restated Registration Agreement dated
February 3, 1994, among the Company, Gould Electronics
Inc. as assignee of Gould Inc. and Indian Creek Capital,
Ltd. as assignee of Kenneth G. Fisher.
10.11 Series B Convertible Stock Purchase Agreement dated
January 28, 1991, between the Company and the Purchasers
named therein (incorporated herein by reference to the
Company's Form 10-K Exhibit 10.12 for the year ended
December 31, 1990).
10.12 Acknowledgement of Cancellantion of Debt between the
Company and EFI International Inc. dated September
10, 1992 (incorporated herein by reference to Exhibit
10.12 to the Company's Form 10-K for the year ended
December 31, 1992).
*10.12a Acknowledgement of Cancellation of Debt between the
Company and Gould Electronics Inc. dated February 3, 1994.
10.13 Revolving Loan Agreement dated as of January 28, 1991,
between the Company and Gould Inc. (incorporated herein
by reference to the Company's Form 10-K Exhibit 10.13 for
the year ended December 31, 1990).
10.13b Agreement to amend the Loan Agreement dated March 31, 1992
between the Company and Gould Inc. (incorporated herein
by reference to the Company's Form 10-K Exhibit 10.13b
for the year ended December 31, 1991).
10.13c The Amended and Restated Revolving Loan Agreement dated
March 31, 1992 between Encore Computer Corporation and
Gould Inc. (incorporated herein by reference to the
Company's Form 10-K Exhibit 10.13c for the year ended
December 31, 1991).
10.13d The Second Amended and Restated Revolving Loan Note
dated March 31, 1992 between Encore Computer Corporation
and Gould Inc. (incorporated herein by reference to the
Company's Form 10-K Exhibit 10.13d for the year ended
December 31, 1991).
10.13e The Renewal Term Notes dated March 31, 1992 between Encore
Computer Corporation and Gould Inc. (incorporated herein
by reference to the Company's Form 10-K Exhibit 10.13e for
the year ended December 31, 1991).
10.13f Agreement to amend the Loan Agreement dated October 5, 1992
between the Company and Gould Inc. (incorporated herein by
reference to Exhibit 10.13f to the Company's Form 10-K for
the year ended December 31, 1992).
*10.13g Amended Loan Agreement and related letter agreement dated
April 11, 1994 between the Company and Gould Electronics Inc.
10.14 Amended and Restated General Security Agreement dated as
of January 28, 1991, among the Company, Encore U.S. and
Gould Inc. (incorporated herein by reference to the
Company's Form 10-K Exhibit 10.14 for the year ended
December 31, 1990).
10.15a Agreement of Encore Computer Corporation to Assign The
Industrial Bank of Japan, Limited subordinated loan
agreement to EFI International Inc. dated March 27, 1992
(incorporated herein by reference to the Company's
Form 10-K Exhibit 10.15a for the year ended December
31, 1991).
10.15b Letter Agreement between Encore Computer Corporation and
EFI International Inc. concerning the subordinated loan
agreement dated March 31, 1992 (incorporated herein by
reference to the Company's Form 10-K Exhibit 10.15b for
the year ended December 31, 1991).
10.16 Memorandum of Agreement dated November 8, 1991 between
Encore Computer Corporation and Worchester Polytechnic
Institute to assign certain sales proposals to
Worchester Polytechnic Institute (incorporated herein
by reference to the company's Form 10-K Exhibit 10.16 for
the year ended December 31, 1991).
*10.17 Support Services Provider Agreement dated December 9, 1993
between Encore Computer Corporation and Halifax Corporation
to subcontract certain customer service field maintenance
activities to Halifax Corporation.
*10.18 Amendment No. 1 to Nonqualified Stock Option Agreement
between Encore Computer Corporation and T. Mark Morley
dated November 10, 1993.
*10.19 Description of the Company's Corporate Executive
Compensation Plan
*11.0 Calculation of Earnings per Share
*22.0 Subsidiaries of the Company.
*24.1 Consent of Independent Public Accountants.
*Filed herewith.
ENCORE COMPUTER CORPORATION
Computation of Loss per Share Exhibit 11
(in thousands except per share data)
Primary:
1993 1992 1991
---------- ---------- ---------
Net loss $ (69,565) $ (32,522) $(65,388)
Accumulated Series B and
D Preferred Stock Dividends (9,185)
Series B and D Preferred
Stock Dividends - (4,471) (2,719)
--------- ---------- ---------
Net loss attributable to
common shareholders $ (78,750) $ (36,993) $(68,107)
Weighted average common
shares outstanding 31,909 30,535 29,102
Series A assumed converted 7,364 7,364 7,364
------ ------ ------
Weighted average shares
outstanding 39,273 37,899 36,466
======= ======= ======
Loss per common share:
Net loss $ (2.01) $ (0.98) $ (1.87)
======== ======== ========
Assuming Full Dilution:
Net loss $ (69,565) $ (32,522) $(65,388)
Weighted average common
shares outstanding 31,909 30,535 29,102
Series A assumed converted 7,364 7,364 7,364
Series B assumed converted 19,321 17,706 15,289
Series D assumed converted 29,564 8,532 -
Exercise of options reduced
by the number of shares
purchased with proceeds 7,412 1,109 1,622
------ ------ ------
Weighted average shares
outstanding 95,570 65,246 53,377
Loss per common share:
Net loss $ (0.73) $ (0.50) $ (1.22)
======== ======== ========
