ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
Notice of Annual Meeting of Stockholders
To Be Held on June 28, 1994
The Annual Meeting of Stockholders of Encore Computer
Corporation (the "Company") will be held at Encore Computer
Corporation, Building No. 7 Auditorium, 1800 N.W. 69th
Avenue, Fort Lauderdale, Florida on Thursday, June 28, 1994,
at 1:30 p.m. (Eastern Standard time) to consider and act on
the following matters.
1. To fix the number of directors at five (5) and to elect
five (5) directors to hold office for the ensuing year.
2. To approve the selection by the Board of Directors of
Coopers & Lybrand as the Company's independent auditors
for the fiscal year ending December 31, 1994.
3. To transact such other business as may properly come
before the meeting or any adjournment or adjournments of
the meeting.
Stockholders of record at the close of business on May 1,
1994 will be entitled to notice of, and to vote at, the
meeting. The stock transfer books of the Company will remain
open. All shareholders are cordially invited to attend the
meeting.
By order of the Board of Directors
T.MARK MORLEY
T. Mark Morley, Secretary
May 13, 1994
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE
REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES.
<PAGE>
ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
Proxy Statement for Annual Meeting of Stockholders
June 28, 1994
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Encore
Computer Corporation (the "Company") for use at the Annual
Meeting of Stockholders to be held on June 28, 1994, at 1:30
p.m. (Eastern Standard Time) and at any adjournment or
postponement of that meeting. All proxies will be voted in
accordance with the instructions contained in the proxy, and
if no choice is specified, the proxies will be voted in
favor of the proposals set forth in the Notice of Meeting.
Any proxy may be revoked by a shareholder at any time before
it is exercised by filing a later dated proxy or a written
notice of revocation with T. Mark Morley, Secretary of the
Company, or by voting in person at the meeting.
The Board of Directors has fixed May 1, 1994 as the record
date for determination of shareholders entitled to vote at
the Annual Meeting. At the close of business on May 1, 1994,
there were outstanding and entitled to vote 32,798,905
shares, $0.01 par value, of the Company's Common Stock. Each
share of Common Stock is entitled to one vote. With respect
to all matters submitted to the shareholders at the Annual
Meeting other than the election of directors, the
affirmative vote of the holders of a majority of the Common
Stock present or represented at the meeting and voting on
such matter is required for approval. Broker non-votes (a
broker holding shares in "street name" which has no
authority to vote on a particular matter) and abstentions on
any matter are not included in the number of shares voted on
that matter. An automated system administered by the
Company's transfer agent tabulates the votes.
The election of three of the five directors at the meeting
shall be determined by a plurality of the votes cast in
person or by proxy at the meeting by the holders of the
Common Stock. With respect to the election of those three
directors, the 3,935,900 outstanding shares of Common Stock
held by Gould Electronics Inc. ("Gould") will be voted pro
rata in accordance with the votes of the other holders of
Common Stock, as provided by a shareholders agreement among
Gould, the Company and Kenneth G. Fisher, the Company's
Chairman. The holders of the Company's Series A Convertible
Participating Preferred Stock (the "Series A Stock"), voting
as a separate class, are entitled to elect the other two
directors. Gould holds all the outstanding shares of Series
A Stock and has indicated it will elect Mr. Ferguson and Dr.
Fedor (see "Election of Directors").
Proposals of shareholders intended to be presented at the
1995 Annual Meeting of Stockholders must be received by the
Company at its principal office in Fort Lauderdale, Florida,
Attention: T. Mark Morley, Secretary, not later than
February 3, 1995, for inclusion in the proxy statement for
that meeting.
The Company's Annual Report for the year ended December 31,
1993 is being mailed to shareholders at the same time as
this Proxy Statement. The date of mailing of this Proxy
Statement and related proxy is expected to be on or about
May 13, 1994.
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the
Company, the beneficial owners of 5% or more of the
Company's outstanding Common Stock and equivalents as of
February 15, 1994:
Percentage of Percentage
Shares Common Stock of
Name and Address Beneficially and Equivalents Common Stock
of Beneficial Owner Owned Outstanding (1) Outstanding(7)
----------- --------------- -------------
Gould Electronics Inc.(2) (5) 64,789,722 50.4% 12.0%
35129 Curtis Boulevard
Eastlake, OH 44095
EFI International Inc. (3) 27,073,446 21.0% 0.0%
35129 Curtis Boulevard
Eastlake, OH 44095
Japan Energy Corporation (2)(3) 91,863,168 71.4% 12.0%
10-1, Toranomon 2-chome, (5)(6)
Minato-ku, Tokyo, Japan
Kenneth G. Fisher(4) 6,803,382 5.2% 16.9%
6901 West Sunrise Blvd.
Fort Lauderdale, FL 33313-4499
(1)For purposes of computing the percentage of Common Stock and
equivalents outstanding, the 7,364,100 shares of Common
Stock issuable upon conversion of the outstanding shares
of Series A Participating Preferred Stock, the 19,904,707
shares of Common Stock issuable upon conversion of the
outstanding shares of Series B Convertible Preferred Stock
("Series B Stock"), the 30,457,538 shares of Common Stock
issuable upon conversion of the outstanding shares of
Series D Convertible Preferred Stock ("Series D Stock")
and the 31,132,307 shares of Common Stock issuable upon
conversion of the outstanding shares of Series E
Convertible Preferred Stock ("Series E Stock") have been
included as well as shares issuable upon exercise of
options exercisable within 60 days after February 15, 1994
which an individual may own.
(2)Includes 60,853,822 shares of Common Stock issuable upon
conversion of the shares of Series A Stock, Series B
Stock, Series D Stock and Series E Stock held by Gould. The
Series D and Series E stock is convertible only by a United
States citizen or a corporation or other entity owned in
the majority by United States shareholder or in connection
with an underwritten public offering. Gould is a wholly
owned subsidiary of Japan Energy Corporation ("Japan
Energy") which is a Japanese corporation. Japan Energy
was formerly known as Nikko Kyodo Co., Ltd.
(3)Consists of 27,073,446 shares of Common Stock issuable upon
conversion of Series D Stock held by EFI International
Inc. ("EFI"). Conversion of the Series D Stock is
restricted as described in (2) above. EFI is a wholly
owned subsidiary of Japan Energy.
(4)Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii)
1,917,100 shares which may be acquired by Mr. Fisher
within 60 days after February 15, 1994 by exercise of
stock options and (iii) 3,901,134 shares of Common Stock
and 931,384 shares of Common Stock issuable upon
conversion of the shares of Series B Stock each held by
Indian Creek Capital, Ltd., a limited partnership of which
Mr. Fisher is the managing general partner.
(5)Gould as the sole holder of the Series A Stock is entitled
to elect two directors to the Board of Directors. The
remaining three directors are elected by the holders of
Common Stock. With respect to the election of those three
directors, the 3,935,900 outstanding shares of Common
Stock held by Gould will be voted pro rata in accordance
with the votes of the other holders of Common Stock as
provided by a shareholders agreement among Gould, the
Company and Kenneth G. Fisher.
(6) Japan Energy may be deemed to be the beneficial owner of
the shares owned by Gould and EFI.
(7) For purposes of computing the percentage of Common Stock outstanding,
the 32,726,391 shares of Common Stock outstanding as of February 15,
1994 and, with respect to Mr. Fisher, the 1,917,100 shares of Common
Stock issuable upon the exercise of options exercisable within 60 days
after February 15, 1994 have been been included.
ELECTION OF DIRECTORS
The persons named in the proxy will vote, as permitted by
the By-Laws of the Company, to fix the number of directors
at five and to elect as directors Messrs. Fisher, Anderson
and Thomas unless authority to vote for the election of
directors is withheld by marking the proxy to that effect or
unless the proxy is marked with the names of directors as to
whom authority to vote is withheld. The proxy may not be
voted for more than three directors. Mr. Ferguson and Dr.
Fedor, the other two nominees named below, will be elected
by Gould as the holder of all the outstanding Series A Stock
pursuant to the terms of the Series A Stock.
Each director will be elected to hold office until the next
annual meeting of shareholders and until his successor is
elected and qualified. If one of the three nominees to be
elected by the holders of Common Stock becomes unavailable,
the person acting under the proxy may vote the proxy for the
election of a substitute. It is not presently contemplated
that any of the nominees will be unavailable.
The following table sets forth the name of each nominee and
the positions and offices held by him, his age, the year in
which he became a director of the Company, his principal
occupation and business experience for at least the last
five years, the names of other publicly-held companies in
which he serves as a director, the number of shares of
Common Stock and equivalents of the Company, including
shares which may be acquired within sixty days after
February 15, 1994 by exercise of outstanding stock options,
which he reported were beneficially owned by him as of
February 15, 1994, and the percentage of all outstanding
shares of Common Stock and equivalents owned by him on such
date.
Common Stock Percentage of
Name, Age, Principal and Equivalents Common Stock
Occupation, Business Beneficially and Equivalents
Experience and Directorships Owned Outstanding(1)
- ---------------------------- --------------- --------------
Kenneth G. Fisher, age 63 6,803,382(2) 5.2%(2)
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.
Rowland H. Thomas, Jr., age 58 1,317,475(4) 1.0%(4)
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 appointed 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.
Daniel O. Anderson, age 66 80,495(3) *(3)
Mr. Anderson has been a member of the Board of Directors since
May 1987. In 1991, Mr. Anderson retired as Executive Vice
President and Chief Operating Officer of the Harvard Community
Health Plan for New England, a position he held from November
1986. From October 1984 until July 1986, Mr. Anderson served as
Vice President and Chief Financial Officer of Guilford
Transportation Industries, a railroad holding company. From
November 1975 until April 1984, Mr. Anderson held various
executive positions with Itek Corporation, most recently as a
Director and President of Itek Graphics Systems. Prior to his
employment with Itek Corporation, Mr. Anderson was Vice
President, Finance and Administration, North American Operations,
for Honeywell Information Systems, Inc.
Robert J. Fedor, age 53 10,000(5) *(5)
Dr. Fedor has been a member of the Board of Directors since July
1992. He is presently Senior Vice President Corporate Development
at Gould, a position he has held since July 1992. From December
1989 to July 1992 he was Vice President, Corporate Business
Development at Gould. Prior to assuming that position, Dr. Fedor
was General Manager of Gould's U.S. and Far East Foil Business
since 1985. Since joining Gould in 1964, he has served in various
senior marketing and research positions. Dr. Fedor holds a Ph.D.
in Metallurgical Engineering from Case Western Reserve
University.
C. David Ferguson, age 52 12,304(5) *(5)
Mr. Ferguson has been a member of the Board of Directors since
April 1989. He is presently the President and Chief Executive
Officer and a director of Gould, a position he has held since
October 1988. Prior to such time, he served as Executive Vice
President, Materials and Components, at Gould's Foil Division
from 1986 until October 1988. He transferred to the Foil Division
in 1967 from the Gould Engine Parts Division where he began his
career in 1963.
______________
*Less than 0.1%.
(1) For purposes of computing the percentage of Common Stock and
equivalents outstanding, the 7,364,100 shares of Common Stock
issuable upon conversion of the outstanding shares of Series
A Stock, the 19,904,707 shares of Common Stock issuable upon
conversion of the outstanding shares of Series B Stock, the
30,457,538 shares of Common Stock issuable upon conversion of
the outstanding shares of Series D Stock and the 31,132,307
shares of Common Stock issuable upon conversion of the
outstanding shares of Series E Stock have been included as
well as shares issuable upon exercise of options exercisable
within 60 days after February 15, 1994 which an individual
may own.
(2) Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii)
1,917,100 shares which may be acquired by Mr. Fisher within
60 days after February 15, 1994 by exercise of stock options
and (iii) 3,901,134 shares of Common Stock and 931,384
shares of Common Stock issuable upon conversion of the shares
of Series B Stock held by Indian Creek Capital, Ltd., a
limited partnership of which Mr. Fisher is the managing
general partner.
(3) Includes 200 shares owned by Mr. Anderson's wife and 70,295
shares which may be acquired by Mr. Anderson within 60 days
after February 15, 1994, by exercise of stock options.
(4) Includes 500 shares owned by Mr. Thomas' wife and 1,294,725
shares which may be acquired by Mr. Thomas within 60 days
after February 15, 1994, by exercise of stock options.
(5) Mr. Ferguson is an officer and a director, and Dr. Fedor is
an officer, of Gould which beneficially owns 64,789,722
shares or 50.4% of the Company's outstanding Common Stock and
equivalents.
During the fiscal year ended December 31, 1993, the Board of
Directors held seven meetings. All directors attended 100% of the
aggregate number of meetings of the Board of Directors and the
committees of which they were members except for Mr. Thomas who
missed two meetings.
The Board of Directors has a standing Audit Committee, the
membership of which currently consists of Mr. Anderson and Dr.
Fedor. The principal functions of the Audit Committee are to make
recommendations to the Board of Directors as to the selection of
the Company's independent auditors, to act as liaison between the
Board of Directors and the firm so selected and, on advice of
such firm or otherwise, to recommend institution or modification
of accounting procedures employed by the Company. The members of
the Audit Committee are not salaried employees and are, in the
opinion of the Board of Directors, free from any relationship
that would interfere with their exercise of independent judgment
as Audit Committee members. The Audit Committee met on January
19, 1994 in connection with the Company's audit for the fiscal
year ended December 31, 1993. During the fiscal year ended
December 31, 1993, the Audit Committee held four meetings.
The Board of Directors also has a Compensation Committee, which
committee presently consists of Messrs. Fisher, Anderson and
Ferguson. The principal responsibilities of the Compensation
Committee are to function as a stock option committee with
respect to the Company's stock option and stock purchase plans,
except for the granting of options to officers as to whom the
Board of Directors has reserved authority, and to make
recommendations with respect to implementation of present
compensation programs and adoption of future compensation
programs.
Compensation Committee Interlocks and Insider Participation
As discussed above, Mr. Fisher and Mr. Ferguson are members of
the Compensation Committee. Mr. Fisher, in addition to his
position as Chairman of the Board, is the Company's Chief
Executive Officer. Mr. Ferguson, in addition to being a director
of the Company, is a director and President and Chief Executive
Officer of Gould, the beneficial owner of 50.4% of the Company's
Common Stock.
<PAGE>
EXECUTIVE COMPENSATION
Total compensation paid or accrued for services rendered during
the three most recent fiscal years for the Chief Executive Officer
and the four other most highly compensated executive officers of
the Company for the year ended December 31, 1993 was as follows:
<TABLE>
<S> <C> <C> <C> <C> <S> <C> <C> <S> <C>
Summary Compensation Table
-----------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
-------------------------------- ------------
Number of
Other Shares All
Name and Annual Underlying Other
Principal Position Year Salary Bonus Compensation(1) Options(2) Compensation(3)
- ------------------- ---- -------- ------ ------------- ------------ ---------------
Kenneth G. Fisher 1993 $341,963 $ 0 $0 0 $ 0
Chairman of the 1992 332,677* 0 0 1,300,000 0
Board and Chief 1991 301,103 0 0 0 0
Executive Officer
Rowland H. Thomas 1993 $256,167 $33,250 $0 0 $ 0
President and 1992 248,330* 46,000 0 1,300,000 94,250
Chief Operating 1991 204,220 54,000 0 437,000 0
Officer
T. Mark Morley 1993 $180,111 $18,300 $61,353 280,000(4) $102,318
Vice President, 1992 175,597* 21,500 0 486,400 0
Finance and Chief 1991 159,995 26,400 0 585,000 0
Financial Officer
Robert A. DiNanno 1993 $175,535 $29,865 $0 0 $ 0
Vice President and 1992 172,174* 45,785 0 486,000 0
General Manager, 1991 150,479 38,138 0 330,000 57,325
Real-Time
Operations
Thomas F. Perry (5) 1993 $166,171 $22,050 $15,243 0 $ 60,592
Vice President, 1992 25,384* 0 0 400,000 0
World Wide Sales & 1991 0 0 0 0 0
Marketing,
Information Systems
</TABLE>
* 1992 salary includes 27 biweekly pay periods compared to the
customary 26 pay periods in 1993 and 1991.
(1) Consists entirely of amounts paid to the individual
during the year for the payment of taxes on relocation
expense reimbursements.
(2) During 1991, the Board of Directors approved a program
that permitted holders of certain outstanding stock options
exercisable for shares of Common Stock 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 eighty percent (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. Under the Exchange, Messrs. Thomas,
Morley and DiNanno exchanged options to purchase 515,000,
700,000 and 225,000 shares of Common Stock for options to
purchase 412,000, 560,000 and 180,000 shares of Common
Stock. The options exchanged in the Exchange included all
the options granted to these individuals in 1990 and the
options received in the Exchange are included as option
grants in 1991.
(3) All other compensation consists solely of reimbursement
for relocation expenses .
(4) These options were originally granted in 1986 and were
scheduled to expire in 1993 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.
(5) Mr. Perry joined the Company in 1992.
The following table sets forth the number of shares of Common
Stock and equivalents of the Company, including shares which
may be acquired within sixty days after February 15, 1994 by
exercise of outstanding stock options, which are beneficially
owned by executive officers of the Company named in the
Summary Compensation Table and all directors and executive
officers of the Company as a group as of February 15, 1994
along with the percentage of all outstanding shares of Common
Stock and equivalents owned by each executive officer and
director on such date.
Common Stock Percentage of
and Equivalents Common Stock
Beneficially and Equivalents
Name Owned Outstanding(1)
- -------------------- ------------ --------------
Kenneth G Fisher 6,803,382(2) 5.2%
Chairman of the Board and
Chief Executive Officer
Rowland H. Thomas 1,317,475(3) 1.0%
President and
Chief Operating Officer
T. Mark Morley 904,012(4) 0.7%
Vice President Finance and
Chief Financial Officer
Robert A. DiNanno 484,609(5) 0.4%
Vice President and General Manager
Real-Time Operations
Thomas F. Perry 120,000(6) 0.1%
Vice President
WorldWide Sales and Marketing,
Information Systems
Total directors and executive
officers as a group (13 people) 10,898,416(7) 8.1%
(1)For purposes of computing the percentage of Common Stock
and equivalents outstanding, the 7,364,100 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series A Stock, the 19,904,707 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series B Stock, the 30,457,538 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series D Stock and the 31,132,307 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series E Stock have been included as well as
shares issuable upon exercise of options exercisable
within 60 days after February 15, 1994 which an
individual may own.
(2)Includes: (i) 53,764 shares owned by Mr. Fisher's wife,
(ii) 1,917,100 shares which may be acquired by Mr.
Fisher within 60 days after February 15, 1994 by
exercise of stock options and (iii) 3,901,134 shares of
Common Stock and 931,384 shares of Common Stock issuable
upon conversion of the shares of Series B Stock each
held by Indian Creek Capital, Ltd., a limited
partnership of which Mr. Fisher is the managing general
partner.
(3)Includes 500 shares owned by Mr. Thomas' wife and
1,294,725 shares which may be acquired by Mr. Thomas
within 60 days after February 15, 1994, by exercise of
stock options.
(4)Includes 900,054 shares which may be acquired within 60
days after February 15, 1994, by exercise of stock
options.
(5)Includes 482,019 shares which may be acquired within 60
days after February 15, 1994, by exercise of stock
options.
(6)Includes 120,000 shares which may be acquired within 60
days after February 15, 1994, by exercise of stock
options.
(7)Includes 5,881,463 shares which may be acquired within 60
days after February 15, 1994, by exercise of stock
options.
<PAGE>
The following table shows, as to those executive officers named
in the Summary Compensation Table above, the number, exercise
price and expiration date of options to acquire Common Stock
granted under the Non-qualified Stock Option Plan during fiscal
1993, and the potential realizable value of those shares
assuming certain annual rates of appreciation in the Company's
stock price.
<TABLE>
<S> <C> <S><C> <S> <C> <C>
Option Grants for the year ended December 31, 1993
Potential realizable
values at
assumed annual
rates of stock price
appreciation for
the term of the grant
Percentage
Number of of total
shares options
underlying granted Share
options in fiscal Exercise price on Expiration
Name granted year price grant date date 0% 5% 10%
- ----------------- --------- -------- ----------- ---------- ---------- --------- -------- ---------
Kenneth G. Fisher 0
Rowland H. Thomas 0
Robert A. DiNanno 0
T. Mark Morley (1) 280,000 47.3% $ 0.8125 $ 3.625 See Note (1) $787,500 $812,875 $ 838,250
Thomas F. Perry 0
</TABLE>
(1) These options were originally granted in 1986 and were
scheduled to expire in 1993 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.
<PAGE>
The following table provides information on option exercises in
1993 by the named executive officers and the value of such
officers' unexercised options as of December 31, 1993.
<TABLE>
Aggregated Option Exercises in the year ended December 31, 1993 and
Option Values as of December 31, 1993
<S> <C> <S> <C> <S>
Number of Value of
Shares Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Number of 12/31/93 12/31/93
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ---------------- ----------- -------- ----------- ----------
Kenneth G. Fisher 0 0 1,700,000/ $3,453,125/
650,000 1,746,875
Rowland H. Thomas 0 0 1,077,625/ 2,932,969/
659,375 1,763,281
T. Mark Morley 0 0 818,825/ 2,255,944/
252,575 670,006
Robert A. DiNanno 286,290 $ 686,953 400,790/ 1,105,271/
318,200 873,913
Thomas F. Perry 0 0 80,000/ 210,000/
320,000 840,000
</TABLE>
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
Executive Compensation Philosophy
It is the goal of the Compensation Committee of the Board of
Directors to provide compensation to executives of the Company in
accordance with the following considerations:
* To provide compensation that is competitive with other high
technology companies that are of similar size to Encore with
similar products and markets;
* To provide compensation that will attract, retain and reward
superior, industry-knowledgeable executives who can manage
the shareholders' short and long term interest;
* To provide total compensation wherein the majority of value
to be delivered is based on the financial performance of the
Company and the appreciation of the Company's stock.
To meet these goals, the Committee establishes, administers and
reviews several programs for the Company. These programs are
designed to address the above considerations and consist of three
major components;
Base Salary
For executives of the Company, base salary is determined by the
level of job responsibility and overall competitive practices in
the labor market for the Company's executive talent. The
Committee recognizes that there is a scarcity of executive talent
with the technical capabilities that are critical to the
Company's long-term success. The Committee also considers the
Company's location outside of traditional labor markets for
technical talent to be a considerable factor for base salary
positioning. As such, the Committee positions the Company's
executives base salaries at the 75th percentile of the
competitive market and generally believes that this base salary
posture is an essential factor in maintaining a highly skilled
executive team. The Committee derives competitive data
representing the high tech and computer products sectors from an
independent compensation consultant, Towers Perrin. The
Committee believes that most of the companies in the S & P
Computer Systems Index which is used as the Company's industry
comparison line in the performance graph appearing below, are
represented in the various surveys used by the compensation
consultant.
Several of the named executives received base salary increases
between 6% and 7% in 1993. These executives had not received
increases since 1990, and the Committee believes that these
adjustments were necessary to keep executive salaries in step
with inflation.
Annual Incentives
All executive officers are eligible to receive incentives which
are based on the short-term performance of the Company. The
program is intended to highlight critical business goals and
reward the achievement of these goals through individual and team
contributions. Target incentive opportunities typically range
from 15% to 45% of executives' base salaries and are based on
median bonus levels observed in other high technology and
computer related companies. Target award levels are structured
so that at target award levels, executives' total cash
compensation (base salary plus annual incentive) would be
comparable to the 75th percentile total cash compensation of the
competitive market as discussed earlier.
The specific performance criteria used for incentive compensation
goals include the attainment of profit before tax objectives,
achievement of quarterly financial plans and subjective
functional and teamwork goals as determined by management. The
relative weighting of each factor depends on the executive's
position within the Company's organizational structure.
Typically, profit before tax objectives and quarterly financial
plan targets account for 60% to 100% of the named executives'
incentives; functional and teamwork goals account for 25% to 40%
of the total incentive. In 1993, the Company did not achieve its
profit before tax objective and therefore no incentive payments
were made that were based on the Company's profit performance.
Incentive payments that were made to certain named executives in
1993 reflect the attainment of individual functional and teamwork
goals.
Long-Term Incentives
The Committee believes that stock-based incentives provide the
strongest link between the rewards earned by executives and the
returns generated for shareholders. The Committee also believes
that providing the potential for significant share ownership
helps focus executive behavior on the long-term growth and
strength of the organization. As such, the Committee has made
significant stock option grants throughout the Company to focus
all recipients on long-term growth and the enhancement of
shareholder value. The Committee has generally observed that
stock option grants comprise a significant portion of executive
compensation in the high technology and computer related
industries. Stock options represent the right to purchase the
Company's stock at the fair market value of the Company's stock
on the date of grant. Since the value ultimately realized from
the option depends entirely on the future success of the Company
and the growth of the stock price, an option serves to provide an
incentive to the executive for years after it has been awarded.
The Committee has adopted formal stock option grant guidelines
which will base annual option grants on the executive's base
salary grade and individual performance factors. This practice
will ensure that executives at similar organizational levels will
have equal long-term incentive opportunities while allowing the
Committee some discretion to augment awards as it feels
appropriate to recognize significant individual accomplishments.
Competitive stock option grant levels have been determined by an
external compensation consultant, Towers Perrin. The present
value of an option for grant purposes has been determined through
the Black-Scholes option valuation method.
The Committee feels that executives act in the best interests of
shareholders when they have a significant portion of their own
wealth invested in the Company. As such, the Committee has also
adopted formal stock ownership guidelines for the CEO and other
executive officers who report directly to the CEO. The Committee
believes that requiring executives to maintain a certain
ownership interest in the Company complements the existing long-
term incentive program in that once stock options are exercised,
there is an added emphasis on retaining exercised shares and
further enhancing shareholder value. The specific guidelines
require that, within the next three years, the CEO acquire and
maintain ownership of Company stock with a value equal to two
times his current base salary; direct reports to the CEO are
required to acquire and maintain ownership of Company stock with
a value equal to at least one-half their current base salaries.
Compensation for Mr. Fisher
Mr. Fisher's base salary was increased in 1993 by 6.9% to
$340,000 per annum. Mr. Fisher had not received a base salary
adjustment since 1990 and the Committee felt it was appropriate
to keep Mr. Fisher's base salary in line with inflation. The
Committee has positioned Mr. Fisher's base salary slightly above
the market average of other high technology and computer related
companies of similar size to the Company. The Committee intends
to deliver most of Mr. Fisher's compensation in the form of
annual cash-based incentives and long-term stock-based incentives
that will deliver significant value to Mr. Fisher if and only if
the Company achieves positive returns and the stock price
appreciates over time.
To focus Mr. Fisher on the attainment of short-term financial
results, the Committee awards a bonus equal to 5% of the
Company's profit before taxes to Mr. Fisher as an incentive award
on a quarterly basis. This formula approach ensures shareholders
that an annual incentive payment will be made to Mr. Fisher only
if the Company is profitable. In addition, this approach
provides a consistent incentive to maximize profit each quarter.
In 1993, the Company incurred a loss and as such no incentive
payment was made to Mr. Fisher.
The Committee did not grant any stock options to Mr. Fisher in
1993. However, the Committee feels that Mr. Fisher has a
significant portion of his personal wealth invested in the
Company and that he is well motivated to increase the overall
value of the Company and to generate returns on behalf of all
shareholders.
Other Compensation Matters
The Committee is evaluating the potential impact of the $1
million dollar deduction limitation on executive pay for the top
five executives which was implemented as part of the Omnibus
Budget Reconciliation Act of 1993. At this time, the Committee
does not believe executive compensation will be in a range that
will be subject to the limitation, but the Committee will evaluate
the Company's potential exposure to the deduction limitation on
an annual basis and will address the issue in the future if
necessary.
In conclusion, the Committee feels that all pay programs are
reasonable and appropriate given the Company's industry, size and
organizational structure. Base salary and incentive programs
provide attractive features to attract, retain and motivate
executives to enhance the performance of the Company from year to
year. The stock option grants provide a significant incentive to
executives to undertake policies and actions to enhance the
overall value of the organization well into the future.
The Compensation Committee of the Board of Directors
D. O. Anderson, Chairman
C. D. Ferguson
K. G. Fisher
<PAGE>
Comparison of Five-Year Cumulative Total Return of
the Company, S&P 500 Composite Index and
S&P Computer Systems Index
The following chart depicts the Company's performance for the
five year period ending December 31, 1993, as measured by total
shareholder return on the Company's Common Stock compared with
the total return of the Standard & Poors 500 Composite Index
and the Standard & Poors Computer Systems Index.
- ----------
NOTE: In the mailing to shareholders, the following table will
be shown as a graph.
- ----------
Value(1) of Investment at December 31,
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
S&P 500 Index $143.00 $133.60 $168.80 $176.30 $188.80
S & P Computer Systems Index 77.70 84.70 72.40 51.10 52.10
Encore Computer Corporation 106.10 29.70 39.40 63.70 175.80
(1) This table assumes the investment of $100 in the Company's
Common Stock, the S&P 500 Index and the S&P Computer Systems
Index on December 31, 1988.
Directors' Compensation
During 1992, the Board of Directors approved a resolution
fixing the compensation of non-officer directors to an
amount of $2,500 per board meeting. The resolution is
inapplicable to meetings held by telephone. In this regard,
a total of $10,000 was paid to Mr. Anderson for meetings
attended during fiscal 1993. Mr. Ferguson and Dr. Fedor
have waived payment to them of fees for attendance at board
meetings. Directors who are also officers of the Company
receive no compensation for serving as directors. During
the past fiscal year, the Company has also reimbursed
certain of its directors for reasonable out-of-pocket
expenses relating to attendance at Board and Committee
meetings.
Disclosure of Section 16(a) Filings by Officers, Directors
and greater than 10% Beneficial Owners
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors and executive officers, and
persons who own more than ten percent of the Company's
Common Stock, to file with the Securities and Exchange
Commission ("SEC") initial reports of ownership and reports
of changes in ownership of Common Stock and other equity
securities of the Company. Executive officers, directors and
greater than ten percent shareholders are required by SEC
regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Company's knowledge,
based solely on review of the copies of such reports
furnished to the Company and written representations that no
other reports were required, during the two fiscal years
ended December 31, 1993, all Section 16(a) filing
requirements applicable to its executive officers, directors
and greater than ten percent beneficial owners were complied
with, except Mr. Ferguson, a director of the Company, was
delinquent in filing a report on Form 4 in 1993 with respect
to one transaction.
Certain Transactions
Financing by Gould
- ------------------------
During the second half of 1992, estimates of short-term cash
requirements indicated the Company would have borrowing
requirements in excess of its available credit during the
fourth calendar quarter of 1992. Accordingly, the Company
initiated discussions with Gould to increase the amount
available under the existing 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.
However, as a result of operating losses, the Company had
exceeded the maximum borrowing amount available under the
credit facility at December 31, 1992.
Effective April 1, 1993, Gould increased the amount
available under the revolving loan agreement by $20,000,000
to $35,000,000 under essentially the same terms and
conditions as the original agreement, extended the maturity
date of the agreement to April 16, 1994 and waived
compliance with the covenants contained in the agreement
through the loan's maturity. Additionally, Gould agreed to
extend the maturity date of the $50,000,000 term loan to
the Company by approximately one year to April 2, 1995 and
waived compliance with the covenants contained in the term
loan agreement through the end of the first fiscal quarter
of 1994.
The Company continued to incur operating losses throughout
1993 and as a result reported a capital deficiency
throughout the year. At October 3, 1993 the Company
exceeded the maximum borrowing amount of its revolving line
of credit. Gould allowed the Company to borrow funds in
excess of the agreement's maximum limit to fund its daily
operations and during the fourth fiscal quarter the Company
began negotiations with Gould to significantly recapitalize
the Company. At December 31, 1993, borrowings were
$26,924,000 in excess of the loan's maximum borrowing limit.
On February 4, 1994, the Company and Gould agreed to
exchange indebtedness owed by the Company to Gould for
Series E Stock. The indebtedness exchanged was the
$50,000,000 term loan and $50,000,000 borrowed under the
revolving credit agreement. Upon completion of the
exchange, borrowings under the revolving loan agreement were
$19,134,000, or $15,866,000 below the maximum borrowing
limit of the credit facility.
In exchange for cancellation of indebtedness, the Company
issued to Gould 1,000,000 shares of Series E Stock. The
Series E Stock is senior in liquidation priority to all
other classes of the Company's preferred and common stock
and contains the following additional terms:
(i) a 6% cumulative annual dividend which the Company
can elect to (a) pay in additional shares of Series E
Stock 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.
(ii) a liquidation preference of $100 per share.
(iii) 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 a corporation or other
entity owned in the majority by United States citizens or
(b) in connection with an underwritten public offering.
(iv) convertible, at the Company's option in accordance
with the conversion methodology described in (iii) 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 Stock 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 Stock would be converted.
(v) non-voting, except for the right to approve actions
adversely affecting the Series E Stock.
As a result of this transaction, the Company reduced debt by
$100,000,000 and related interest expense by approximately
$7,000,000 per year. Further, 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. The 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.
The following tables display the investment of Gould and EFI
in the Company before the February 4, 1994 transaction as of
December 31, 1993 and on a pro forma basis after the
transaction as of December 31, 1993:
Before the Exchange of Indebtedness for Equity
as of December 31, 1993
Debt (1) Beneficial Ownership(2)
($000's) % of total Shares % of total
-------- ---------- ---------- ---------
Gould $ 111,924 98.9 % 33,327,015 34.4%
EFI(3) - - 26,673,354 27.6
Other 1,192 1.1 36,808,094 38.0
--------- ----- ---------- ------
Total $ 113,116 100.0 % 96,808,463 100.0%
After the Exchange of Indebtedness for Equity
Pro Forma as of December 31, 1993
Debt (1) Beneficial Ownership (4)
($000's) % of total Shares % of total
------- --------- ---------- -------
Gould $ 11,924 90.9% 64,096,245 50.2%
EFI(3) - - 26,673,354 20.9
Other 1,192 9.1 36,808,094 28.9
-------- ------ ----------- ------
Total $ 13,116 100.0% 127,577,693 100.0%
(1) Includes both current and long-term portion of debt.
(2) Includes 56,982,100 shares of Common Stock issuable upon
full conversion of all outstanding Series A Stock, Series B Stock and Series D
Stock after payment of all dividends payable through January 15, 1994.
(3) Consists solely of Series D Stock whose conversion to
Common Stock is limited by the terms of the stock as discussed in Note (4)
below.
(4) Includes 87,751,330 shares of Common Stock issuable upon
full conversion of all outstanding Series A Stock, Series B Stock, Series D
Stock, and Series E Stock. The Series D and Series E Stock is convertible
only by a United States citizen or a corporation or other entity owned
in the majority by United States shareholders or in connection with an
underwritten public offering.
In connection with the exchange of indebtedness for Series E
Stock by Gould the United States Defense Investigative Service
("DIS") has indicated no objection to the relationships under
the United States government requirements relating to foreign
ownership, control or influence between the Company, Japan
Energy (a Japanese corporation) and its wholly owned
subsidiaries (EFI and Gould).
The above described exchange of equity for indebtedness has
eliminated the Company's capital deficiency and provided
tangible net worth in excess of minimum requirements for
inclusion into the Nasdaq National Market System. On March 18,
1994, Encore was accepted into the system and the Company's
common stock trades under the symbol ENCC. Management believes
participation in the Nasdaq system could improve the Company's
ability to obtain financing.
Since 1989, Japan Energy and its wholly owned subsidiaries,
Gould and EFI, have been the principal source of the Company's
financing by either directly providing or guaranteeing the
Company's loans. Each of the Company's debt agreements with
Japan Energy and its wholly owned subsidiaries have contained
various covenants including maintenance of cash flow, leverage,
and tangible net worth ratios and limitations on capital
expenditures, dividend payments and additional indebtedness.
At various times in the past the Company has been in default of
certain covenants contained in the agreements but waivers of
compliance with those covenants have been obtained and,
generally, the Company has been able to successfully
renegotiate terms with the creditor. To continue operating in
the normal course of business, the Company is and will remain
dependent on the continued financial support of Japan Energy
and its subsidiaries until such time as the Company returns to
a state of sustained profitability and is able to secure
funding from other parties and/or generates sufficient levels
of cash through operations to meet the needs of the business.
Loan to Officer
- -----------------
The Company loaned $60,000 to Mr. DiNanno during 1986 to enable
him to purchase 100,000 shares of the Company's Common Stock at
the then current price of $.60 per share. The loan to Mr.
DiNanno was evidenced by a recourse promissory note, payable on
demand, bearing interest at a rate of eight percent (8%) per
annum. The largest principal amount outstanding on Mr.
DiNanno's loan during fiscal year 1993 was $60,000. On August
8, 1993, the loan and all accrued interest was repaid by Mr.
DiNanno.
APPROVAL OF AUDITORS
The Board of Directors has selected the firm of Coopers &
Lybrand, independent public accountants, as auditors of the
Company for the year ending December 31, 1994, and is
submitting the selection to the shareholders for approval.
The Board of Directors recommends a vote "FOR" this
proposal. It is intended that the shares represented by the
enclosed proxy will be voted (unless the proxy indicates to
the contrary) to approve such selection.
Representatives of Coopers & Lybrand are expected to be
present at the Annual Meeting of Stockholders. They will
have an opportunity to make a statement if they desire to do
so and will also be available to respond to appropriate
questions from shareholders.
OTHER MATTERS
The Board of Directors does not know of any other matters
that may come before the meeting. However, if any other
matters are properly presented at the meeting, it is the
intention of the persons named in the accompanying proxy to
vote, or otherwise to act, in accordance with their judgment
on such matters.
All costs of solicitation of proxies will be borne by the
Company. In addition to solicitations by mail, the Company's
directors, officers and regular employees, without
additional remuneration, may solicit proxies by telephone
and personal interviews. Brokers, custodians and fiduciaries
will be required to forward proxy soliciting material to the
owners of stock held in their names, and the Company will
reimburse them for their out-of-pocket expenses in this
regard.
By order of the Board of Directors
T. MARK MORLEY
T. Mark Morley, Secretary
May 13, 1994
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND
THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE
URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE MEETING, AND YOUR
COOPERATION WILL BE APPRECIATED. STOCKHOLDERS WHO ATTEND
THE MEETING MAY VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY
HAVE SENT IN THEIR PROXIES.
<PAGE>
The following is a depicition of the Proxy cards which will be used
in the solicitation of votes for the Annual Shareholders meeting:
(Front of Card)
P SOLICITED BY THE BOARD OF DIRECTORS
R
O ENCORE COMPUTER CORPORATION
X
Y ANNUAL MEETING OF STOCKHOLDERS - June 28, 1994
The undersigned hereby appoints Kenneth G. Fisher and Rowland H.
Thomas, Jr., and each of them, with power of substitution,
proxies for the undersigned and authorizes them, and each of
them, to represent and vote, as designated, all of the shares of
Common Stock of the Company which the undersigned may be entitled
to vote at the Annual Meeting of Stockholders to be held at
Encore Computer Corporation, Building No. 7 Auditorium, 1800 N.
W. 69th Avenue, Fort Lauderdale, Florida at 1:30 P.M. (Eastern
Standard time) on June 28, 1994 and at any adjournments or
postponements of such meeting, for the following purposes and
with discretionary authority as to any other matters that may
properly come before the meeting, all in accordance with and as
described in the Notice and accompanying Proxy Statement. If no
direction is given, this proxy will be voted FOR proposals 1 and
2.
IMPORTANT - TO BE SIGNED AND DATED ON REVERSE SIDE
(SEE REVERSE SIDE)
(Back of Card)
_X_ Please mark votes as in this example.
The Board recommends a vote FOR proposals 1 through 2.
1. To fix the number of directors at five (5) and to elect three
(3) directors. (Under the Company's Certificate of
Incorporation, Gould Electronics, Inc., as the holder of all the
outstanding Series A Convertible Participating Preferred Stock
of the Company is entitled to elect the other two directors.)
Nominees: Kenneth G. Fisher, Daniel O. Anderson and Rowland H.
Thomas, Jr.
FOR ALL WITHHELD FROM ALL
___________ NOMINEES ______________ NOMINEES
_____
|____|
________________________________________________________________
(Instruction: To withhold authority for a specific nominee,
mark box on the line above and write the nominee's name in the
space provided.)
2. To approve the selection by the Board of Coopers & Lybrand as
the Company's independent auditors for its fiscal year ending
December 31, 1994.
_______________FOR _______________AGAINST ___________WITHHOLD
AUTHORITY
MARK HERE FOR ADDRESS CHANGE____ AND NOTE AT RIGHT___________________________
Please sign exactly as your name appears
on your stock certificate.
Signature:_______________________Date _______
If you are signing on behalf of a corporation
as an officer, or as a general partner of a
partnership, or acting as attorney, executor, Signature:________Date _______
trustee, fiduciary, administrator, guardian or
in any other representative capacity, sign
name and title.
<PAGE>
PROXY FOR GOULD ELECTRONICS, INC.
SOLICITED BY THE BOARD OF DIRECTORS
ENCORE COMPUTER CORPORATION
ANNUAL MEETING OF STOCKHOLDERS - June 28, 1994
The undersigned hereby appoints Kenneth G. Fisher and Rowland H.
Thomas, Jr., and each of them, with power of substitution,
proxies for the undersigned and authorizes them, and each of
them, to represent and vote, as designated, all of the shares of
common Stock of the Company which the undersigned may be entitled
to vote at the Annual Meeting of Stockholders to be held at
Encore Computer Corporation, Building No. 7 Auditorium, 1800 N.
W. 69th Avenue, Fort Lauderdale, Florida at 1:30 P.M. (Eastern
Standard time) on June 28, 1994 and at any adjournments or
postponements of such meeting, for the following purposes and
with discretionary authority as to any other matters that may
properly come before the meeting, all in accordance with and as
described in the Notice and accompanying Proxy Statement.
1. To vote all shares of the Company's Series A
Convertible Participating Preferred Stock held by the
undersigned to elect C. David Ferguson and Robert J. Fedor
directors of the Company.
2. On the matters of fixing the number of directors at five
(5) and electing three (3) directors for the ensuing year,
to vote all shares of the Company's Common Stock owned by
the undersigned pro rata in accordance with the votes cast
by the other stockholders at the Annual Meeting.
3. On the matter of approving the selection by the Board of
Coopers & Lybrand as the Company's independent auditors for
its fiscal year ending December 31, 1994, to vote all shares
of the company's Common Stock held by the undersigned in the
manner designated below.
_______________FOR _______________AGAINST _________WITHHOLD
AUTHORITY
GOULD ELECTRONICS, INC.
Dated:______________,1994 By:___________________________
Title:_________________________
(front cover)
<PAGE>
_____________________________
The following is the Annual Report to Shareholders which will be sent as
part of the Proxy materials in connection with the 1994 Annual Meeting
of Shareholders:
- -----------------------------
<PAGE>
(Front Cover of Annual Report)
Encore
Computer Corporation
Annual Report
to Shareholders
for the Year ended
December 31, 1993
Launching
Corporate Success
From a Position
of Innovation
(End of Front Cover)
<PAGE>
Chairman's Letter
1993 Progress Report
By some measures, 1993 was a successful year. Our first priority is to
enhance shareholder wealth. At this writing, our stock price has tripled
since the end of 1992, so by that one important measure, 1993 was a good
year.
By other measures, however, our company is still fragile. Our strategy has
been to put in place a core set of people, products, markets, skills, and a
culture, which will sustain the company by producing revenues and profits
sufficient to produce growth. This is the task we have diligently pursued
since the merger in 1989 with Gould's Computer Systems Division. Using the
skills and technology from our Real-Time heritage, we are now transitioning
the company into an alternate mainframe and storage systems company.
However, the fruits of our labor still lay before us. Our $69.6 million
loss in 1993 was, I believe, the nadir of our revenue and earnings profile.
Specifically, for 1993, we wanted to validate our technologies, products,
markets and viability. The following events were important to that process
and will have a long-term impact on the company.
* We reached agreement with DEC (Digital Equipment Corporation) to license
our connectivity technology to be used extensively throughout their
product line. After a period of development, which is nearly
complete, we expect DEC to gradually incorporate our technology, which
should produce a flow of royalties over time.
* We won an endorsement by the Department of Defense of our Infinity 90
alternate mainframe to replace and upgrade installed IBM mainframes at
several megacenters around the world. (In January 1994, we installed
the first $2.5 million system in Columbus, Ohio). The DoD has
notified us of their schedule and intent to install about $20 million
of systems in 1994.
* We concluded an agreement with EDS (Electronic Data Systems) for the
Infinity 90 alternate mainframe system. The contract allows EDS to
include us in their bids. We understand there is considerable bid
activity, and we do expect purchase orders against the contract in
1994. EDS, of course, is one of the world's largest users and
purchasers of mainframes. Their interest in the Infinity 90 is
further validation of this outstanding new product.
* We conceived and developed an IBM-compatible storage system, which is a
slightly modified Infinity 90, and started negotiations with the
Amdahl Corporation to be a distribution partner for the product. (I'm
pleased to report that on March 29, 1994, we announced an agreement on
a five-year alliance estimated to exceed $1 billion). I can't
emphasize enough the importance of this new product and the
marketplace for which it competes. This is the company's first
product aimed to be compatible with the IBM environment, and as such,
opens up a $13 billion marketplace. This will be the industry's first
product capable of directly connecting to an IBM system and performing
the storage function for that system while simultaneously performing
as an open systems mainframe. As such, it will be unique. We
believe we will enjoy a fast start-up ramp since the marketplace for
IBM storage is well developed and the only criteria necessary for
inclusion is to be able to directly connect to an IBM processor system
and react to IBM protocol.
* We started conversations with our partners, Gould and Japan Energy
Corporation (formerly Nikko Kyodo), to recapitalize the company. On
February 7, 1994, we announced the conversion of $100 million of debt
into equity, which greatly enhanced our balance sheet. (The details
of the conversion are covered in the body of this report). We are
most appreciative of the continued confidence and support of our
partners, Gould and the Japan Energy Corporation.
* We initiated discussions with Nasdaq concerning the steps required to get
relisted for trading on their national market system. With the
recapitalization, we were able to cure our deficiencies, and I'm happy
to report that effective March 18, 1994, we were relisted for trading
on the Nasdaq national market. At this writing, Encore has 18 market
makers who have taken an active interest in the company and its
prospects.
Our outlook for the future is buoyed by the validation of our technologies,
products and viability by the likes of DEC, the DoD, EDS and especially
Amdahl, who has committed to significant volumes in 1994. The
first half still looks to produce losses; however, as shipments pick up in
the second half, I believe we have a reasonable opportunity to be near
break-even net for the year. I also believe that fourth quarter momentum
will signal the start of a new era for your company, a harbinger of strong,
sustainable growth with profits, to come in 1995.
I want to thank our hard-working and valued Board of Directors whose
patience and counsel I greatly appreciate. I especially point out the
investment in time and diligence of our outside directors, Dan Anderson,
Bob Fedor and Dave Ferguson.
I also appreciate the support of our employees, managers, suppliers,
customers and you, our shareholders.
May 1994 be good for all.
Respectfully,
KENNETH G. FISHER
Kenneth G. Fisher
Chairman and CEO
April 19, 1994
<PAGE>
Table of Contents
Selected Financial Data 4
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 5
Consolidated Statements of Operations 14
Consolidated Balance Sheets 15
Consolidated Statements of Cash Flows 16
Consolidated Statements of Shareholders'
Equity (Capital Deficiency) 18
Notes to Consolidated Financial Statements 20
Report of Independent Accountants 35
Shareholder Information 36
Officers and Directors 37
<PAGE>
<TABLE>
Selected Financial Data
(in thousands except Pro Forma -------------for the year ended December 31,------------
per share data)
<S> <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)
(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.
</TABLE>
<PAGE>
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 of
Notes 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 operations 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 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 1993, 1992, and 1991 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 was $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 contained in the agreement were modified to
more closely reflect the Company's current 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 except certain financial
covenants contained in the agreement were modified to more
closely reflect the Company's current financial position.
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>
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)
Pro Forma
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 1994, 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>
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 in 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 (in thousands):
Deferred tax assets:
Net Operating Losses $ 57,775
Research & ExperimentaL Credits 1,750
Capital Losses 3,622
Inventory Reserves 3,535
Accrued Vacation 847
Various Reserves/Other 1,266
Accrued Restructuring 2,372
--------
71,167
Valuation Allowance 69,924
------
1,243
Deferred tax liabilities:
Capitalized Software (1,243)
----------
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.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
of Encore Computer Corporation
We have audited the the accompanying consolidated balance sheets of Encore
Computer Corporation and Subsidiaries as of December 31, 1993 and 1992
and the related consolidated statements of operations, shareholders' equity
(capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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.
COOPERS & LYBRAND
Coopers & Lybrand
Miami, Florida
February 25, 1994, except for Note L as to
which the date is April 11, 1994.
<PAGE>
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.
Annual Meeting
The Annual Meeting of Shareholder's will be held at Encore Computer
Corporation, Building 7 Auditorium, 1800 N.W. 69th Avenue, Ft.
Lauderdale, FL at 1:30P.M, June 28, 1994. Shareholders of record at
the close of business on May 1, 1994 will be entitled to notice of,
and to vote at, the meeting. The Company's annual report on Form 10-K
as filed with the Securities and Exchange Commission is available
without charge upon written request mailed to: Charles S. Anderson,
Vice President, Corporate Relations, Encore Computer Corporation, 6901
W. Sunrise Boulevard, Ft. Lauderdale Fl 33313 (305) 587-2900.
<PAGE>
(Back Cover of Report)
General Counsel Independent Accountants
Choate, Hall & Stewart Coopers & Lybrand
Exchange Place 1900 S. Biscayne Blvd Ste. 1900
53 State Street Miami, FL 33131
Boston, MA 02109
Board of Directors
Kenneth G. Fisher C. David Ferguson
Chairman President
Chief Executive Officer Chief Executive Officer
Encore Computer Corporation Gould Electronics Inc.
Daniel O. Anderson, Retired Rowland H. Thomas, Jr.
formerly, Executive Vice President President
Chief Operating Officer Chief Operating Officer
Harvard Community Health Plan Encore Computer Corporation
Robert J. Fedor
Senior Vice President
Corporate Development
Gould Electronics Inc.
Corporate Officers
Kenneth G. Fisher T. Mark Morley
Chairman Vice President Finance
Chief Executive Officer Chief Financial Officer
Rowland H. Thomas, Jr. Thomas F. Perry
President Vice President
Chief Operating Officer Worldwide Sales and Marketing
Information Systems
Charles S. Anderson James C. Shaw
Vice President Vice President
Corporate Relations Manufacturing Operations
Ziya A. Aral George S. Teixeira
Vice President Vice President
Systems Engineering and Product Business Group
Chief Technology Officer
Robert A. DiNanno J. Thomas Zender
Vice President and Vice President
General Manager Corporate Business Development
Real Time Operations
Compensation Committee Audit Committee
Kenneth G. Fisher Daniel O. Anderson
Daniel O. Anderson Robert J. Fedor
C. David Ferguson
