UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended July 3, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____ to _____.
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 305-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. X Yes No
The number of shares outstanding of the registrant's
only class of Common Stock as of August 10, 1994 was
33,777,618.
A list of all exhibits contained in this Form 10-Q is
included on page 18.
<PAGE>
Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II OTHER INFORMATION 18
Signature Page 19
Exhibit 11 Computation of Loss Per Share 20
Exhibit 27 Financial Data Schedule 21
<PAGE>
<TABLE>
<S> <C>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- ------- ------- -------
Net sales:
Equipment $ 12,901 $ 9,014 $ 21,763 $ 23,827
Service 9,435 13,327 20,062 26,933
-------- ------- -------- --------
Total 22,336 22,341 41,825 50,760
------- ------- -------- -------
Costs and expenses:
Cost of equipment sales 9,716 7,198 15,136 14,223
Cost of service sales 6,384 9,707 13,233 20,720
Research and development 7,848 5,289 14,292 11,145
Sales, general and administrative 9,161 11,076 18,047 21,684
Amortization of goodwill - 276 - 691
Restructuring costs - 12,843 - 12,843
-------- ------- -------- --------
Total 33,109 46,389 60,708 81,306
------- ------- -------- --------
Operating loss (10,773) (24,048) (18,883) (30,546)
Interest expense (345) (1,505) (1,218) (2,718)
Interest income 22 27 34 38
Other (expense)/income, net 147 (336) 214 (681)
-------- ------- -------- --------
Loss before income taxes (10,949) (25,862) (19,853) (33,907)
Provision for income taxes - 120 - 420
-------- ------- -------- --------
Net loss $ (10,949) $ (25,982) $ (19,853) $ (34,327)
========== ========== ========== =========
Net loss attributable
to common shareholders $ (14,548) $ (28,261) $ (25,835) $(38,851)
========== ========== ========== =========
Net loss per common share $ (0.36) $ (0.73) $ (0.64) $(1.00)
========== ========== ========== =======
Weighted average shares of
of common stock 40,466 38,878 40,307 38,744
========== ========== ======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands except share data)
July 3, December 31,
1994 1993
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,898 $ 3,751
Accounts receivable, less allowances 20,719 16,555
Inventories (Note B) 13,615 17,764
Prepaid expenses and other current assets 2,372 3,047
-------- --------
Total current assets 38,604 41,117
Property and equipment, net 39,695 37,603
Capitalized software, net 5,041 4,403
Other assets 1,147 947
-------- --------
Total assets $ 84,487 $ 84,070
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY/
(CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term debt (Note D) $ 206 $ 197
Accounts payable and accrued
liabilities (Note C) 34,468 37,421
------ ------
Total current liabilities 34,674 37,618
Long term debt, related parties (Note D) 37,544 111,924
Long term debt (Note D) 912 995
Other liabilities - 93
-------- --------
Total liabilities 73,130 150,630
-------- -------
Shareholders' equity/
(capital deficiency)(Note E):
Preferred stock, $.01 par value;
authorized 10,000,000 shares:
Series A Convertible Participating
Preferred, issued 73,641
shares in 1994 and 1993 1 1
6% Cumulative Series B Convertible
Preferred, issued 646,902 and 591,625
in 1994 and 1993, respectively,
with an aggregate liquidation preference
of $64,690,200 and $59,162,500
in 1994 and 1993, respectively 6 6
6% Cumulative Series D Convertible
Preferred, issued 989,870 and 905,283
in 1994 and 1993, respectively,
with an aggregate liquidation preference
of $98,987,000 and $90,528,300
in 1994 and 1993, respectively 10 9
6% Cumulative Series E Convertible
Preferred, issued 1,011,800
in 1994 with with an aggregate liquidation
preference of $101,180,000 10 -
Common stock, $.01 par value;
authorized 150,000,000 shares;
issued 33,776,873 and 32,726,391 in
1994 and 1993, respectively 338 327
Additional paid-in capital 305,699 207,951
Accumulated deficit (294,707) (274,854)
-------- --------
Total shareholders' equity (capital deficiency) 11,357 (66,560)
-------- --------
Total liabilities and shareholders'
equity (capital deficiency) $ 84,487 $ 84,070
========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Six Months
Ended Ended
July 3, July 4,
1994 1993
---------- ----------
Cash flows from operating activities:
Net loss $ (19,853) $ (34,327)
Adjustments to arrive at net cash
used in operating activities:
Depreciation and amortization 5,114 6,817
Writedown of equipment - 6,119
Writedown of intangible assets - 2,628
Net changes in operating assets and liabilities:
Accounts receivable (4,164) 4,752
Inventories 4,147 (1,158)
Other current assets 675 (97)
Other assets (200) 61
Accounts payable and accrued liabilities (5,026) (1,631)
Other liabilities (93) (285)
---------- ----------
Cash used in operating activities (19,400) (17,121)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (6,155) (5,042)
Capitalization of software costs (1,687) (1,070)
---------- ----------
Cash used in investing activities (7,842) (6,112)
---------- ----------
Cash flows from financing activities:
Net borrowings under revolving loan agreements 23,976 19,133
Principal payments of long term debt (74) (107)
Preferred stock dividends paid (3) -
Issuance of common stock 1,490 705
---------- ----------
Cash provided by financing activities 25,389 19,731
---------- ----------
Net decrease in cash and cash equivalents (1,853) (3,502)
Cash and cash equivalents, beginning 3,751 4,806
---------- ----------
Cash and cash equivalents, ending $ 1,898 $ 1,304
========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
Supplemental disclosure of cash flow information (in thousands):
Six Months Six Months
Ended Ended
July 3, July 4,
1994 1993
---------- ----------
Cash paid during the period for interest $ 2,953 $ 5,597
Cash paid during the period for taxes 9 429
Supplemental schedule of non-cash investing and financing activities:
On February 4, 1994, the Company exchanged $100,000,000 of indebtedness,
for preferred stock. Refer to Note E of Notes to Condensed Consolidated
Financial Statements.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
<S> <C> <S> <C>
ENCORE COMPUTER CORPORATION
Condensed Statement of Shareholders' Equity (Capital Deficiency)
Six Months Ended July 3, 1994
(in thousands except share data)
(Unaudited)
(continued below)
Preferred Stock
Series A Series B Series D Series E
Par Par Par Par
Shares Value Shares Value Shares Value Shares Value
------ --- ------- --- ------- --- --------- ----
Balance 12/31/93 73,641 $ 1 591,625 $ 6 905,283 $ 9 - $ -
Common stock options exercised,
$.625 to $2.00 per share
Issuance of Series E Convertible
Preferred Stock 1,000,000 10
Dividends issued to Preferred
Stockholders in shares of Series B 55,277 -
Dividends issued to Preferred
Stockholders in shares of Series E 11,800 -
Dividends issued to Preferred
Stockholders in shares of Series D 84,587 1
Shares issued through employee
stock purchase plan, at an average
price of $2.3375 per share
Net loss
------ --- ------- --- ------- --- --------- ----
Balance July 3, 1994 73,641 1 646,902 6 989,870 10 1,011,800 10
====== === ======= === ======= === ========= ====
</TABLE>
(continued below)
<TABLE>
<S> <C> <C> <S> <C>
ENCORE COMPUTER CORPORATION
Condensed Statement of Shareholders' Equity (Capital Deficiency)
Six Months Ended July 3, 1994
(in thousands except share data)
(Unaudited)
(Continued from above)
Common Stock Shareholders'
Additional Equity
Par Paid-in Accumulated (Capital
Shares Value Capital Deficit Deficiency)
---------- ----- --------- ----------- -----------
Balance 12/31/93 32,726,391 $ 327 $ 207,951 $ (274,854) $ (66,560)
Common stock options exercised,
$.625 to $2.00 per share 847,509 9 1,006 1,015
Issuance of Series E Convertible
Preferred Stock 96,273 96,283
Dividends issued to Preferred
Stockholders in shares of Series B - -
Dividends issued to Preferred
Stockholders in shares of Series E - -
Dividends issued to Preferred
Stockholders in shares of Series D (3) (2)
Shares issued through employee
stock purchase plan, at an average
price of $2.3375 per share 202,973 2 472 474
Net loss (19,853) (19,853)
---------- ----- --------- ----------- -----------
Balance July 3, 1994 33,776,873 338 305,699 (294,707) 11,357
========== ===== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements are
unaudited and have been prepared by Encore Computer Corporation
("Encore" or the "Company") in accordance with generally accepted
accounting principles. Certain information and footnote
disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted.
It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1993.
The condensed consolidated financial statements, in the opinion
of the Company, reflect all adjustments (including normal
recurring accruals) necessary for a fair statement of the results
for the interim periods. All adjustments made during the interim
period are normal recurring adjustments except for a one time
charge recorded in the three month period ended July 4, 1993
associated with the restructuring of operations. The nature of
the restructuring charge recorded is discussed in more detail in
Note C below. The year-end condensed balance sheet data is
derived from audited financial statements but does not include
all disclosures required by generally accepted accounting
principles.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal years.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock equivalents
outstanding. In fiscal periods which report net losses, the
calculation does not include the effect of common stock
equivalents such as stock options since the effect on the amounts
reported would be antidilutive. Series A Convertible
Participating Preferred Stock has been considered common stock
(on an assumed converted basis) for purposes of income (loss) per
share calculations. The Series B Convertible Preferred Stock
("Series B"), Series D Convertible Preferred Stock ("Series D")
and Series E Convertible Preferred Stock ("Series E") have been
determined to be common stock equivalents but are not included in
the weighted average number of shares of common stock and
equivalents or in the calculation of net loss per share for the
periods presented because the effect would be antidilutive.
For the three and six month periods ended July 3, 1994, the
Company paid dividends in additional shares of preferred stock on
the Series B, Series D and Series E of $3,598,700 and $5,981,700,
respectively. For the three and six month periods ended July 4,
1993, because it reported a capital deficiency, the Company
accumulated dividends on the Series B and Series D of $2,278,800
and $4,524,000, respectively. In computing the loss per common
share, these dividends increased the loss for the periods as
reported for the per common share calculation shown in Exhibit
11.
On July 15, 1994, dividends of $3,972,700 payable on the Series
B, Series D and Series E for the period of April 16, 1994 to July
15, 1994 were paid by the Company in additional shares of
preferred stock.
B. Inventories
Inventories consist of the following (in thousands):
July 3, December 31,
1994 1993
-------- ---------
Purchased parts $ 6,452 $ 4,660
Work in process 6,049 9,618
Finished goods 469 1,065
Loaned computer equipment
and consignment inventory 645 2,421
-------- ---------
$ 13,615 $ 17,764
======== =========
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
July 3, December 31,
1994 1993
-------- ---------
Accounts payable $ 10,193 $ 10,805
Accrued salaries and benefits 5,620 5,357
Accrued restructuring costs 6,767 10,974
Accrued interest 1,400 682
Accrued taxes 3,802 3,545
Deferred income,
principally maintenance contracts 2,130 1,563
Other accrued expenses 4,556 4,495
-------- ---------
$ 34,468 $ 37,421
======== =========
During the three months ended July 4, 1993, the Company incurred
restructuring costs of $12,843,000. In this connection, based
on sales volumes that were significantly less than expected, the
Company initiated plans to restructure operations and provided
for costs relating to: (i) the recognition of the permanent
impairment in value of certain fixed assets employed in the
support of real-time product sales; (ii) the write off of the
remaining carrying value of goodwill originally recorded in
connection with the 1989 acquisition of the Gould Electronics
Inc., Computer Systems Business (Gould Electronics Inc. was
formerly known as Gould Inc.); and (iii) severance, outplacement
and other costs to be incurred in connection with a 10% reduction
in workforce.
D. Debt
Debt consists of the following (in thousands):;
July 3, December 31,
1994 1993
-------- -----------
Debt to unrelated parties:
Mortgages payable and capital
lease obligations $ 1,118 $ 1,192
Less:
Current portion 206 197
-------- -----------
Total long term debt to unrelated parties $ 912 $ 995
======== ===========
Long-term debt to related parties:
Revolving loan agreement with
Gould Electronics Inc. $ 36,464 $ 61,924
Accrued interest on revolving loan
agreement with Gould Electronics Inc. 1,080 -
Term Loan with Gould Electronics Inc. - 50,000
-------- -----------
Total long-term debt to related parties $ 37,544 $111,924
======== ===========
Related Party Transactions
The Company, Japan Energy Corporation ("Japan Energy") and its
subsidiaries Gould Electronics Inc. ("Gould") and EFI
International Limited ("EFI") are related parties due to the
significant financial interests of Gould and EFI in the Company.
As discussed in more detail in Note E of the Notes to Condensed
Consolidated Financial Statements, on February 4, 1994, the
Company and Gould completed an exchange of indebtedness for
preferred stock. Upon completion of the transaction assuming
full conversion of their holdings into common stock, Gould and
EFI beneficially owned 50.2% and 20.9%, respectively.
Additionally as described below, during 1994 and 1993, the
Company has had various debt agreements with Gould.
Total interest expense on indebtedness to Gould for the three and
six month periods ended July 3, 1994 amounted to $298,000 and
$1,095,000, respectively. Interest expense on indebtedness to
Gould for the three and six month periods ended July 4, 1993
amounted to $1,389,000 and $2,614,000, respectively.
In addition to the loans described above, amounts currently due
to Gould at July 3, 1994 and December 31, 1993, consisted
principally of accrued interest and amounted to $25,000 and
$677,000 respectively. In connection with the February 4, 1994
exchange of indebtedness for preferred stock discussed below and
in Note E, the Company accrued interest on the then outstanding
balance of the revolving loan agreement. At July 3, 1994,
$1,373,000 remained accrued and classified as an accrued expense
at July 3, 1994.
Revolving Loan Agreement
Since 1989, Gould has provided the Company with its revolving
credit facility. Borrowings under the revolving loan agreement
are collateralized by substantially all of Encore's tangible and
intangible assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible net
worth ratios and limitations on capital expenditures, dividend
payments and additional indebtedness. Interest is equal to the
prime rate plus 1% (8.25% at July 3, 1994) and is payable monthly
in arrears.
Due to the operating losses incurred during 1993 the Company
exceeded the $35,000,000 then maximum borrowing amount of its
revolving line of credit. Gould, however, 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.
On February 4, 1994, the Company and Gould agreed to exchange
$100,000,000 of indebtedness owed to Gould by the Company for
Series E convertible preferred stock with a liquidation
preference of $100,000,000. $50,000,000 of the debt exchanged
was indebtedness under the revolving loan agreement. Upon
completion of the exchange, borrowings under the revolving loan
agreement on February 4, 1994 were $19,134,000. Then, on April
11, 1994, the Company and Gould agreed to increase the maximum
borrowing limit of the revolving credit facility from $35,000,000
to $50,000,000 and to extend its maturity date to April 16, 1996.
All other terms and conditions of the revolving loan agreement
were essentially unchanged except certain financial covenants
contained in the agreement were modified to more closely reflect
the Company's current financial position. Because of the 1994
refinancing, the revolving loan agreement is classified as a long-
term obligation at both July 3, 1994 and December 31, 1993.
As of August 16, 1994, borrowings under the revolving loan
agreement were $47,200,000 or $2,800,000 below the maximum
allowed under the terms of the credit facility. Given recent
demand for the Company's Infinity SP(TRADEMARK) and product delivery
schedules requested by Amdahl under its distribution agreement
with the Company, Encore will have to increase its current
investment in working capital, particularly in the areas of
inventory and accounts receivable. While some of this increase
may be offset by increased accounts payable, on a short term
basis, it is likely that a significant portion of the investment
will need to be provided through financing activities. Amounts
remaining under the revolving loan agreement are not sufficient
to meet this need. Accordingly, the Company has begun
discussions with the Japan Energy Group regarding its need for
additional financing.
Over the short term, and until the time the Company returns to a
state of continued profitability, Encore will be unable to
generate the levels of cash through operations necessary to meet
the on-going needs of the business. It is unlikely the Company
will be able to secure sufficient financing from sources other
than the Japan Energy Group. Should the Japan Energy Group be
unwilling to provide the Company with additional financing as it
is required, the Company could experience a severe liquidity
crisis and its ability to meet its customers ordering
requirements on a timely basis may be jeopardized.
Term Loan
In 1992, the Company and Gould agreed to convert $50,000,000 of
indebtedness incurred under the revolving loan agreement into a
two year Term Loan with a maturity date of March 31, 1994. The
Term Loan due to Gould provided for interest at a rate equal to
the prime lending rate plus 1% (7.0% at December 31, 1993). The
terms and conditions of the loan were similar to those of the
revolving loan agreement described above. The loan was
collateralized by substantially all of Encore's tangible and
intangible assets and contains various covenants, including
maintenance of cash flow, leverage, and tangible net worth ratios
and limitations on capital expenditures, dividend payments and
additional indebtedness.
On April 12, 1993, the Company and Gould agreed to extend the
maturity date of the loan to April 2, 1995. Additionally, Gould
agreed to provide the Company with waivers of compliance with the
covenants contained in the agreement through the end of the first
fiscal quarter of 1994.
On February 4, 1994, the Company and Gould agreed to cancel the
indebtedness owed by the Company to Gould under the Term Loan
agreement in exchange for Series E convertible preferred stock.
In light of this transaction, the term loan was classified as a
long term obligation at December 31, 1993.
E. Shareholders Equity
On February 4, 1994, Gould exchanged its $50,000,000 term loan
and $50,000,000 of its revolving credit loan for 1,000,000
shares of the Company's Series E Convertible Preferred Stock
with a liquidation preference of $100,000,000 (See Note D).
The principal terms of the Series E are:
(i) The Series E is senior in liquidation priority to all other
classes of the Company's preferred and common stock.
(ii) 6% cumulative annual dividend which the Company can elect
to (a) pay in additional shares of Series E valued at its
liquidation preference until shareholders' equity exceeds
$50,000,000; or (b) accumulate and pay in cash when shareholders'
equity exceeds $50,000,000.
(iii) a liquidation preference of $100 per share.
(iv) convertible, at the holder's option, into the Company's
common stock at the liquidation preference divided by $3.25 per
share (subject to potential adjustments for splits, etc.) only
(a) if the shareholder is a United States citizen or corporation
or other entity owned in the majority by United States citizens
or (b) in connection with an underwritten public offering.
(v) convertible, at the Company's option in accordance with the
conversion methodology described in (iv) above if the price of
the common stock exceeds $3.90 per share for twenty consecutive
days and (a) a buyer is contractually committed to purchase for
at least $3.90 per share at least 50% of the shares into which
all outstanding Series E would be converted; or (b) a buyer is
contractually committed to purchase for at least $3.50 per share
at least 75% of the shares into which all outstanding Series E
would be converted.
(vi) non-voting, except for the right to approve actions
adversely affecting the Series E.
Because of the related party nature of the transaction, the
difference between the carrying amount of the indebtedness
exchanged and the fair value of the securities issued and other
consideration granted has been credited to additional paid-in
capital. A summary of the financial effects of the transaction
are as follows (in thousands):
Reduction of debt $100,000
Less:
Par value of shares issued
(1,000,000 shares at $.01 par value) (10)
Accrued transaction costs (700)
Accrued interest on the remaining indebtedness
under the revolving loan agreement for the
remaining term of the agreement (3,017)
---------
Increase in additional paid-in capital $ 96,273
========
Upon completion of the refinancing, the Company reported a
capital surplus and was able to pay all dividends accumulated
since January 15, 1993 which it did immediately in additional
shares of the appropriate classes 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%.
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
Three and Six months ended July 3, 1994
Compared to
Three and Six Months ended July 4, 1993
Total net sales for the three and six month periods of 1994 were
$22,336,000 and $41,825,000, respectively compared to those for
the three and six month periods of 1993 of $22,341,000 and
$50,760,000, respectively. For the six month period ended July
3, 1994, domestic and international sales have declined 12% and
26%, respectively from the prior year. For this same period,
domestic sales represent 62% of total sales compared to 58% for
the comparable period of 1993.
During the six month period ended July 3, 1994 equipment sales
have declined by $2,064,000 or 9% and service sales have declined
$6,871,000 or 26% from the same period of 1993. However, for the
three months ended July 3, 1994, equipment sales increased from
the comparable 1993 period by $3,887,000 or 43% to $12,901,000
due primarily to increased levels of new product sales. Service
sales, however, decreased by $3,892,000 or 29% to $9,435,000.
With regard to the increase in equipment sales for the three
month period of 1994, the improvement is due principally to
increased deliveries of the Company's new products, the Infinity
SP(TRADEMARK) and the Infinity 90(TRADEMARK). During the quarter
the Company shipped
its first Infinity SP(TRADEMARK) storage product systems to Amdahl
Corporation ("Amdahl") under a multi-year agreement with Amdahl
in which they will distribute the Infinity SP(TRADEMARK) under their
private brand. Additionally, the Company made additional
deliveries of the Infinity 90(TRADEMARK) to the Department of Defense as
part of a program to consolidate and upgrade certain large data
processing centers. As Amdahl sales efforts ramp up in the
second half of the year, the Company should begin to realize
significantly increased levels of equipment sales.
Although the sale of new product offerings have increased in the
six month period of 1994, such improvements have been offset by
declines in traditional real-time product sales. Declining real-
time product line sales reflect the fact that certain products
have reached the end of their life cycles. The computer industry
is very competitive and strongly influenced by changes in
technology. Customers tend to purchase those products offering
leading edge implementations of the most currently available
technology. In recent years, product demand has begun to migrate
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
1980's. While product enhancements have been made, the Company's
older products have 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. Today, new real-time products based on a state of the
art open systems architecture are available for volume shipments.
However, during the first six months of 1994, increases in the
sale of such new real-time products were insufficient to offset
the declines experienced in other, older real-time product
offerings. Current availability of these new products could
enable the Company to benefit from the industry's continued
migration from proprietary to open system architectures. Encore
has years of experience with advanced parallel processing and
UNIX-based multiprocessing which should give the Company a
strengthened position in its target markets. The real-time
marketplace is extremely competitive, however, as overall market
conditions improve and demand for these products grow, the
Company could realize improved revenues.
The decline in service revenues reflects the continued
competitiveness in the service marketplace as well as the effect
of declining system sales since 1990. Since 1990, equipment
sales have declined at a compounded annual rate of 28% limiting
the new service business potential. This decrease in equipment
sales combined with the cancellation of certain other service
contracts as older installed systems are decommissioned by the
user has resulted in the overall service sales decline. It is
expected that service sales will continue to decline until such
time as equipment sales begin to trend upward generating new
business opportunities for the Company's service business.
Cost of equipment sales for the three and six month periods of
1994 increased from the comparable periods of 1993 by $2,518,000
or 35.0% and $913,000 or 6%, respectively. As a percentage of
net sales, 1994 cost of equipment sales in the three and six
month periods was 75.3% and 69.5% compared to 79.9% and 59.7% in
the three and six month periods of 1993, respectively. For the
three month period of 1994 the increase in cost of equipment
sales is due to the increase in the period's equipment sales
($2,200,000) and a shift in sales mix to lower margin products
($1,000,000) which were partially offset by lower current period
charges for obsolescence and other manufacturing costs. For the
six months ended July 3, 1994, the increase in cost of equipment
sales is due to a shift in sales mix to lower margin products
($2,513,000) which was partially offset by lower costs incurred
due to lower equipment sales volumes ($500,000) and lower
obsolescence costs ($1,100,000).
Cost of service sales for the three and six month periods ended
July 3, 1994 decreased from the comparable periods of 1993 by
$3,323,000 or 34% and $7,487,000 or 36%, respectively. The 1994
decrease in both the three and six month periods is due
principally to actions taken during 1993 to reduce costs to
levels more consistent with the projected business. Among the
most significant reductions realized for the six month period
ended July 3, 1994 are: (i) lower labor and employee related
costs of $4,700,000 due to significantly lower 1994 headcount
levels, (ii) lower materials and supplies of $1,000,000 as a
result of the lower 1994 revenue levels and, (iii) lower office
rent and depreciation as under utilized field locations were
closed or consolidated and excess capital equipment eliminated.
In connection with the 1994 labor and employee related cost
reductions, the worldwide service workforce was significantly
reduced throughout 1993. Additionally, during the fourth quarter
of 1993, the Company entered into an agreement with Halifax
Corporation ("Halifax") in which the Company agreed to
subcontract its domestic equipment service business to Halifax.
The agreement, which took full effect during the three month
period ended April 3, 1994, provides that Halifax will supply a
large portion of the manpower necessary to service equipment
under maintenance contracts with the Company. Accordingly,
domestic service operations were able to significantly reduce its
workforce during the fourth quarter of 1993 and the first quarter
of 1994.
Research and development costs for the three and six month
periods ended July 3, 1994 increased $2,559,000 and $3,147,000,
respectively over the comparable periods of 1993. The increase
during both the three and six month periods of 1994 is due to the
acceleration of efforts to finalize the development of certain
new product offerings including the Infinity SP product line.
During these periods, development material and supplies expenses
increased by $1,600,000 and $2,500,000, respectively. As a
result of the combination of decreasing sales and higher
expenses, 1994 research and development expenses as a percentage
of net sales increased during the three and six month periods of
1994 to 35% and 34%, respectively from 24% and 22% for the
corresponding period of 1993. To remain competitive in the
marketplace, the Company must continue relatively high levels of
research and development expenditures. However, third quarter
1994 research and development spending as a percentage of net
sales should be significantly below that of the quarter ending
July 3, 1994. It is also expected that as sales increase, this
percentage should return to lower levels.
Selling, general and administrative expense decreased by
$1,915,000 and $3,637,000, respectively for the three and six
month periods of 1994 when compared to 1993. However, as a
percentage of net sales, selling, general and administrative
costs were to 41.0% and 43.1%, respectively, for the three and
six months ended July 3, 1994 compared to 49.6% and 42.7%,
respectively for the comparable periods of 1993. Since 1993,
actions have been taken to reduce the workforce to levels more
consistent with planned business conditions. As a result, labor
and employee related expenses decreased by approximately
$1,800,000 and $3,100,000 during the three and six month periods
of 1994 when compared to those of the prior year. Additionally,
other reductions have been realized throughout 1994 primarily in
the area of advertising expenses.
During the period ended July 4, 1993, management evaluated its
then latest financial forecasts of the business. In light of
lower than expected sales volumes, management initiated actions
to restructure its operations including: (i) reductions in the
workforce to levels consistent with planned future sales and (ii)
the reassessment of carrying values of certain long lived assets
including property and equipment and goodwill.
In this connection, in June 1993, the Company reduced its
workforce by approximately 10% with significant reductions made
in manufacturing, customer services and international sales
operations. Additionally, because of the decline in traditional
real-time product line profits, the Company evaluated its
investment in the property and equipment employed to support
future real-time product sales. As a result of this analysis,
management recognized the permanent impairment in value of
certain of these assets by writing off their carrying values.
Finally, in light of the continuing revenue decline and the
erosion of the earnings premium of real-time business which the
Company acquired from Gould Inc. in 1989, management determined
any excess value associated with the acquired business was fully
amortized. In this regard, the Company wrote off the remaining
carrying value of goodwill which it had originally recorded in
connection with the 1989 acquisition. Accordingly, for the three
months ended July 4, 1993, operating expenses include
restructuring costs of $12,843,000 relating to these actions.
Interest expense for the three and six month periods of 1994
decreased from 1993 levels by $1,106,000 and $1,500,000
respectively, due principally to lower 1994 debt levels. As
discussed in Notes D and E of Notes to Condensed Consolidated
Financial Statements on February 4, 1994 the Company exchanged
$100,000,000 of indebtedness for preferred stock with Gould.
Other expense for the three and six month periods of 1994
improved from 1993 by $483,000 and $895,000, respectively due
primarily to decreased foreign exchange losses incurred.
Because of the 1994 losses incurred, the Company has not recorded
a provision for income taxes. Income taxes for 1993 relate to
taxes payable by foreign subsidiaries of the Company.
LIQUIDITY AND CAPITAL RESOURCES:
Since 1989, the primary source of financing for the Company has
been provided by Japan Energy and its wholly owned subsidiaries,
Gould and EFI (the "Japan Energy Group"). The Japan Energy Group
has provided the Company with its revolving credit facility and
certain loan guarantees, refinanced subordinated debentures and
entered into various exchanges of indebtedness for the Company's
preferred stock. As discussed in more detail in Note D of Notes
to Condensed Consolidated Financial Statements, as of February 4,
1994, assuming full conversion of their holdings in the Company's
preferred stock, Gould and EFI beneficially own 50.2% and 20.9%,
respectively of the Company's common stock.
Because of operating losses incurred in 1993, the Company
reported a capital deficiency throughout the year and exceeded
the maximum borrowing limit of the revolving loan agreement
during the year. At December 31, 1993 the Company had borrowed
$61,924,000 or $26,924,000 in excess of the agreement's maximum
borrowing amount.
In this regard, during the fourth quarter of 1993 the Company
initiated discussions with Gould to significantly recapitalize
the Company. On February 4, 1994, the Company and Gould agreed
to exchange the existing $50,000,000 term loan and $50,000,000 of
borrowings under the revolving loan agreement for Series E
Convertible Preferred Stock. Terms of the Series E are discussed
in detail in Note E of the Notes to Condensed Consolidated
Financial Statements. Additionally, on April 11, 1994, the terms
of the revolving loan agreement were amended and restated to
increase the amount available under the agreement to $50,000,000
and to extend the agreement's maturity date to April 16, 1996.
All other terms and conditions of the agreement were essentially
unchanged except certain financial covenants contained in the
agreement were modified to more closely reflect the Company's
current financial position.
During the six month period ended July 3, 1994, the Company used
cash in operating activities of $19,400,000 compared to
$17,121,000 used in the comparable period of 1993. Among the
significant uses of cash in 1994 are: (i) the net loss for the
six month period (net of amortization and depreciation) of
$14,739,000, (ii) the settlement of $4,207,000 of restructuring
costs accrued at December 31, 1993 as well as a general decrease
in accounts payable of $819,000 and, (iii) an increase in
accounts receivable of $4,164,000. These uses of cash were
partially offset by lower inventory levels at July 3, 1994 of
$4,147,000 and other improvements in working capital.
During the six month periods ended July 3, 1994 and July 4, 1993,
expenditures for property and equipment were $6,155,000 and
$5,042,000, respectively while expenditures for capitalized
software were $1,687,000 and $1,070,000, respectively.
Cash provided through financing activities for the six month
periods ended July 3, 1994 and July 4, 1993 were $25,389,000 and
$19,731,000, respectively. The principal source of financing has
been through various loan agreements provided by Gould or Japan
Energy and as discussed above, Gould has recently increased the
amount available under the revolving loan agreement.
As of August 16, 1994, borrowings under the revolving loan
agreement were $47,200,000 or $2,800,000 below the maximum
allowed under the terms of the credit facility. Given recent
demand for the Company's Infinity SP(TRADEMARK) and product delivery
schedules requested by Amdahl under its distribution agreement
with the Company, Encore will have to increase its current
investment in working capital, particularly in the areas of
inventory and accounts receivable. While some of this increase
may be offset by increased accounts payable, on a short term
basis, it is likely that a significant portion of the investment
will need to be provided through financing activities. Amounts
remaining under the revolving loan agreement are not sufficient
to meet this need. Accordingly, the Company has begun
discussions with the Japan Energy Group regarding its need for
additional financing.
Over the short term, and until the time the Company returns to a
state of continued profitability, Encore will be unable to
generate the levels of cash through operations necessary to meet
the on-going needs of the business. It is unlikely the Company
will be able to secure sufficient financing from sources other
than the Japan Energy Group. Should the Japan Energy Group be
unwilling to provide the Company with additional financing as it
is required, the Company could experience a severe liquidity
crisis and its ability to meet its customers ordering
requirements on a timely basis may be jeopardized.
The majority of the cash on hand was at various international
subsidiaries. With minor exceptions, all cash is freely
remittable to the United States.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per
share earnings. See page 20.
Exhibit No. 27 - Financial Data Schedule. See page 21.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended July 3, 1994.
Encore Computer Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned as the chief
accounting officer and an officer of the registrant
thereunto duly authorized.
Encore Computer Corporation
T. MARK MORLEY
Date: August 16, 1994 T. Mark Morley
Vice President Finance and
Chief Financial Officer
<TABLE>
<S> <C> <S> <C> <C>
Exhibit No. 11
ENCORE COMPUTER CORPORATION
Computation of Loss per Share
(unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- ------- -------- --------
Net loss $ (10,949) $ (25,982) $ (19,853) $ (34,327)
Accumulated Series B
and D Preferred Stock
Dividends - (2,279) - (4,524)
Series B, D and E
Preferred Stock
Dividends (3,599) - (5,982) -
---------- ---------- ---------- ----------
Net loss attributable to
common shareholders $ (14,548) $ (28,261) $ (25,835) $ (38,851)
========== ========== ========== ==========
Weighted average common
shares outstanding 33,102 31,514 32,943 31,380
Series A assumed converted 7,364 7,364 7,364 7,364
------- ------ ------ ------
Weighted average shares
outstanding 40,466 38,878 40,307 38,744
---------- ---------- ---------- ----------
Net loss per share $ (0.36) $ (0.73) $ (0.64) $ (1.00)
======== ======== ======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000764037
<NAME> ENCORE COMPUTER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUL-03-1994
<CASH> 1638
<SECURITIES> 260
<RECEIVABLES> 22615
<ALLOWANCES> (1896)
<INVENTORY> 13615
<CURRENT-ASSETS> 38604
<PP&E> 88090
<DEPRECIATION> 48395
<TOTAL-ASSETS> 84487
<CURRENT-LIABILITIES> 34674
<BONDS> 912
<COMMON> 338
0
27
<OTHER-SE> 10992
<TOTAL-LIABILITY-AND-EQUITY> 84487
<SALES> 41825
<TOTAL-REVENUES> 41825
<CGS> 28369
<TOTAL-COSTS> 60708
<OTHER-EXPENSES> (214)
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<INCOME-PRETAX> (19853)
<INCOME-TAX> 0
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