UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______.
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 305-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
The number of shares outstanding of the registrant's only class of
Common Stock as of August 14, 1995 was 35,016,815.
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Encore Computer Corporation
Index
Page
Part I Financial Information
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Part II OTHER INFORMATION 23
Signature Page 24
EXHIBIT 11 CALCULATION OF EARNINGS PER SHARE 25
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
Net sales:
Equipment $ 4,266 $ 12,901 $ 9,877 $ 21,763
Service 7,365 9,435 14,989 20,062
------- ------- ------ ---------
Total 11,631 22,336 24,866 41,825
Costs and expenses:
Cost of equipment sales (Note B) 20,172 9,716 26,108 15,136
Cost of service sales 5,334 6,384 11,087 13,233
Research and development 8,500 7,848 17,449 14,292
Sales, general and administrative 8,039 9,161 18,021 18,047
Restructuring costs (Note B) 4,499 - 4,499 -
------- ------- ------ ---------
Total 46,544 33,109 77,164 60,708
Operating loss (34,913) (10,773) (52,298) (18,883)
Interest expense (382) (345) (2,210) (1,218)
Interest income 46 22 80 34
Other (expense)/income, net 105 147 175 214
------- ------- ------ ---------
Loss before income taxes (35,144) (10,949) (54,253) (19,853)
Provision for income taxes 167 - 240 -
------- ------- ------ --------
Net loss $ (35,311) $ (10,949) $ (54,493) $ (19,853)
=========== ========== ========== ==========
Net loss attributable to common
shareholders $ (39,715) $ (14,548) $ (62,990) $ (25,835)
Net loss per common share $ (0.94) $ (0.36) $ (1.51) $ (0.64)
Weighted average shares of
of common stock 42,042 40,466 41,792 40,307
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Proforma (Unaudited)
July 2, July 2, December 31,
1995 1995 1994
ASSETS (See Note G)
Current assets:
Cash and cash equivalents $ 3,277 $ 3,277 $ 2,517
Accounts receivable, less allowances 11,000 11,000 19,855
Inventories (Note C) 17,190 17,190 27,555
Prepaid expenses and other current assets 1,537 1,537 1,863
------ ------- ------
Total current assets 33,004 33,004 51,790
Property and equipment, net 37,913 37,913 40,921
Capitalized software, net 3,349 3,349 5,139
Other assets 364 364 912
-------- -------- --------
Total assets $ 74,630 $ 74,630 $ 98,762
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term debt-related parties (Note E) $ 13,860 $ 13,860 $ -
Current portion of long term debt-other (Note E) 173 173 195
Accounts payable and accrued liabilities (Note D) 30,886 34,086 31,358
------- ------- --------
Total current liabilities 44,919 48,119 31,553
Long term debt-related parties (Note E) - 55,000 88,421
Long term debt-other (Note E) 745 745 828
------ ------- -------
Total liabilities 45,664 103,864 120,802
Shareholders' equity (capital deficiency)(Note F):
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred,
issued 73,641 shares in 1995 and 1994 1 1 1
6% Cumulative Series B Convertible Preferred, issued 686,594
and 666,453 in 1995 and 1994, respectively, with an
aggregate liquidation preference of $68,659,400 and
$66,645,300 in 1995 and 1994, respectively 7 7 7
6% Cumulative Series D Convertible Preferred, issued
1,050,609 and 1,019,787 in 1995 and 1994,
respectively, with an aggregate liquidation preference
of $105,060,900 and $101,978,700 in 1995 and 1994,
respectively 10 10 10
6% Cumulative Series E Convertible Preferred, issued
1,073,886 and 1,042,381 in 1995 and 1994, with an
aggregate liquidation preference of $107,388,600
and $104,238,100 in 1995 and 1994, respectively 11 11 10
6% Cumulative Series F Convertible Preferred, issued 502,500
in 1995 with an aggregate liquidation preference
of $50,250,000 5 5 -
6% Cumulative Series G Convertible Preferred, issued 550,000
in 1995 with an aggregate liquidation preference of
$55,000,000 6 - -
Common stock, $.01 par value; authorized 200,000,000 and
150,000,000 shares in 1995 and 1994, respectively;
issued 34,983,973 and 34,076,124 in 1995 and
1994, respectively 350 350 341
Additional paid-in capital 412,479 354,285 307,001
Accumulated deficit (383,903) (383,903) (329,410)
--------- --------- --------
Total shareholders' equity (capital deficiency) 28,966 (29,234) (22,040)
-------- ---------- ----------
Total liabilities and shareholders' equity (capital deficiency) $ 74,630 $ 74,630 $ 98,762
========= ======== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Six Months
Ended Ended
July 2, July 3,
1995 1994
-------- ---------
Cash flows from operating activities:
Net loss $ (54,493) $ (19,853)
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 5,832 5,114
Non cash compensation (Note F) 1,425 -
Inventory obsolescence and writedown to lower of cost or market 12,097 (620)
Bad debt provision/(credit) 2,987 (262)
Restructuring charges 4,499 -
Net changes in operating assets and liabilities:
Accounts receivable 5,868 (3,902)
Inventories (1,732) 4,767
Other current assets 139 675
Other assets 548 (200)
Accounts payable and accrued liabilities (4,337) (5,026)
Other liabilities - (93)
-------- ---------
Cash used in operating activities (27,167) (19,400)
Cash flows from investing activities:
Additions to property and equipment (2,277) (6,155)
Capitalization of software costs (1,163) (1,687)
-------- ---------
Cash used in investing activities (3,440) (7,842)
Cash flows from financing activities:
Net borrowings under revolving loan agreements 30,439 23,976
Principal payments of long term debt (105) (74)
Preferred stock dividends paid (1) (3)
Issuance of common stock 1,034 1,490
-------- ---------
Cash provided by financing activities 31,367 25,389
-------- ---------
Net increase (decrease) in cash and cash equivalents 760 (1,853)
Cash and cash equivalents, beginning 2,517 3,751
Cash and cash equivalents, ending $ 3,277 $ 1,898
======= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Six Months Six Months
Ended Ended
July 2, July 3,
1995 1994
-------- --------
Cash paid during the period for interest $ 1,704 $ 2,953
Cash paid during the period for taxes 326 9
Supplemental schedule of non-cash investing and financing activities:
On February 4, 1994, the Company exchanged $100,000,000 of idebtedness for
preferred stock.
On March 17, 1995, the Company exchanged $50,000,000 of indebtedness for
preferred stock. Refer to Note E of Notes to Condensed Consolidated
Financial Statements.
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D Series E
Par Par Par Par
Shares Value Shares Value Shares Value Shares Value
------ ---- ------- --- --------- ----- --------- ----
Balance 12/31/94 73,641 $ 1 666,453 $ 7 1,019,787 $ 10 1,042,381 $ 10
Common stock options exercised,
$.69 to $1.63 per share
Shares issued through employee stock
purchase plan at a price of $1.7531
Dividends Issued to Preferred Stockholders
In Shares of Series B 20,141 -
Dividends Issued to Preferred Stockholders
In Shares of Series D 30,822 -
Dividends Issued to Preferred Stockholders
In Shares of Series E 31,505 1
Dividends Issued to Preferred Stockholders
In Shares of Series F
Issuance of Series F Convertible
Preferred Stock (Note G)
Extension of expiration date on outstanding
grant of common stock options
Net loss
------ ---- ------- --- --------- ----- --------- ----
Balance July 2, 1995 73,641 $ 1 686,594 $ 7 1,050,609 $ 10 1,073,886 $ 11
====== ==== ======= === ========= ===== ========= ====
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Common Stock Shareholders'
Series F Additional Equity
Par Par Paid-in Accumulated (Capital
Shares Value Shares Value Capital Deficit Deficiency)
Balance 12/31/94 - $ - 34,076,124 $ 341 $ 307,001 $(329,410) $ (22,040)
Common stock options exercised,
$.69 to $1.63 per share 663,412 7 599 606
Shares issued through employee stock
purchase plan at a price of $1.7531 244,437 2 426 428
Dividends Issued to Preferred Stockholders
In Shares of Series B -
Dividends Issued to Preferred Stockholders
In Shares of Series D -
Dividends Issued to Preferred Stockholders
In Shares of Series E 1
Dividends Issued to Preferred Stockholders
In Shares of Series F 2,500 - -
Issuance of Series F Convertible
Preferred Stock (Note G) 500,000 5 44,834 44,839
Extension of expiration date on outstanding
grant of common stock options 1,425 1,425
Net loss (54,493) (54,493)
------ ---- ---------- ------ --------- ----------- ---------
Balance July 2, 1995 500,000 $ 5 34,983,973 $ 350 $ 354,285 $ (383,903) $ (29,234)
======= ==== ========== ====== ========= =========== =========
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Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Encore Computer Corporation ("Encore" or the
"Company") in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1994.
The condensed consolidated financial statements, in the opinion of the
Company, reflect all adjustments (including normal recurring accruals)
necessary for a fair statement of the results for the interim periods. All
adjustments made during the interim period are normal recurring adjustments
except for the charge recorded in the three month period ended July 2, 1995,
associated with the restructuring of operations. The nature of the
restructuring charge recorded is discussed in more detail in Note B below.
The year-end condensed balance sheet data is derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. Certain reclassifications have been made to conform
prior period data to current period presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the fiscal years.
The accompanying financial statements have been prepared on the basis of
accounting principles that presume the realization of assets and the
settlement of liabilities in the ordinary course of business. As discussed
more fully in Notes E and G of Notes to Condensed Consolidated Financial
Statements, the principal source of financing for the Company has been
provided by Japan Energy Corporation ("Japan Energy"; a Japanese Corporation)
and certain of its wholly owned subsidiaries including Gould Electronics Inc.
("Gould") and EFI International, Ltd. ("EFI") (collectively, the "Japan Energy
Group"). 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 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 would suffer a severe liquidity crisis and it would
have difficulty settling its liabilities in the ordinary course of business.
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 ("Series A") has been considered common stock (on an assumed converted
basis) for purposes of income (loss) per share calculations. The Series B
Convertible Preferred Stock ("Series B"), Series D Convertible Preferred Stock
("Series D") and Series E Convertible Preferred Stock ("Series E") have been
determined to be common stock equivalents but are not included in the weighted
average number of shares of common stock and equivalents because the effect
would be antidilutive for the periods presented.
At December 31, 1994, the Company reported a capital deficiency and was
precluded from paying dividends on its preferred stock outstanding.
Accordingly, the normal quarterly dividends payable January 15, 1995, for the
period October 15, 1994 to January 15, 1995 on the Series B, Series D and
Series E in the amounts of $999,600, $1,529,600 and $1,563,500, respectively,
were accumulated by the Company. On March 17, 1995, the Company completed an
exchange of Series F Convertible Preferred Stock for indebtedness owed.
Following the exchange, the Company reported a capital surplus and was able to
pay all dividends previously accumulated. Accordingly, it declared all
accumulated dividends payable on April 15, 1995. In addition, dividends
payable for the period January 15, 1995 to April 15, 1995 on the Series B,
Series D, and Series E of $1,014,500, $1,552,600, and $1,587,000, respectively
and dividends payable for the period of March 17, 1995 to April 15, 1995 on
the Series F of $250,000, were paid in additional shares of preferred stock on
April 15, 1995. In computing the loss per common share, these dividends
increased the loss for the three and six month periods ended July 2, 1995 as
reported on the per common share calculation.
For the three and six month periods ended July 3, 1994, the Company paid
dividends on the Series B, Series D and Series E of $3,598,700 and $5,981,700,
respectively. In computing the loss per common share, these dividends
increased the loss for the three and six month periods ended July 3, 1994 as
reported for the per common share calculation.
On July 2, 1995, the Company reported a capital deficiency and was precluded
from paying dividends on its preferred stock outstanding. Accordingly, the
normal quarterly dividends payable July 15, 1995, for the period April 15,
1995 to July 15, 1995 on the Series B, Series D, Series E and Series F in the
amounts of $1,029,800, $1,575,800, $1,610,800 and $753,700, respectively, were
accumulated by the Company.
B. Termination of Amdahl Agreement
During 1994, the Company and Amdahl Corporation ("Amdahl") entered into a
five year reseller agreement (the "Amdahl Agreement") which granted Amdahl the
right to distribute the Company's Infinity Storage Products under the Amdahl
brand. The agreement provided that Amdahl would receive exclusive marketing
and distribution rights to the product, except for sales to U.S. government
agencies, system integrators responding to government agency bid requests, and
pre-existing Company distributors in Japan, China, and Malaysia, where the
Company retained the right to market the products on a non-exclusive basis.
The Amdahl Agreement as amended, established procurement schedules, which if
certain product requirements were met, would have required Amdahl to purchase
a significant amount of product from the Company. Sales under the Amdahl
Agreement were anticipated to begin in the second half of 1994 with
significant sales volumes scheduled in the first half of 1995.
However, after entering into the agreement certain significant contractual
issues arose delaying the sale of products. In February 1995, the Company
notified Amdahl of its intent to terminate the Amdahl Agreement; however,
Amdahl filed suit in the Delaware Chancery Court on March 29, 1995, seeking to
prevent the Company from terminating the agreement. On March 30, 1995, the
Company and Amdahl entered in to a "Stand-Still" Agreement to preserve the
status quo until the companies could more thoroughly discuss the contractual
issues. On April 24, 1995, the companies jointly announced that they had
reached an agreement in principle as to the existing issues and the Stand-
Still agreement had been extended to allow sufficient time to document those
agreements. However, the companies were unable to reach a final agreement.
On June 8, 1995, Encore announced that the Amdahl Agreement had been
terminated.
The Company's inventory levels and overhead costs were based on a plan
designed to meet accelerating sales commitments defined in the Amdahl
Agreement. However, because of the termination of the Amdahl Agreement,
product sales have fallen well short of expectations and all elements of the
Company's results of operations and future short term prospects have been
adversely affected. As a result of these events, during the quarter ended
July 2, 1995, the Company charged operations $19,241,000, consisting of
$11,442,000 charged to cost of sales to reduce inventory carrying amounts to
estimated net realizable value as well as $2,800,000 charged to cost of
sales for uncollected Amdahl accounts receivable; $500,000 charged to research
and development to write down capitalized software projects in process; and
$4,499,000 charged to restructuring costs in recognition of the impairment in
value of certain assets, severance and benefit pay of $1,335,000 as a result
of a 95 person reduction in workforce, principally in manufacturing and
development, and other expenses associated with the termination of the Amdahl
Agreement. Approximately $1,905,000 of these charges will require future cash
expenditures.
C. Inventories
Inventories consist of the following (in thousands):
July 2, December 31,
1995 1994
-------- ------------
Purchased parts $ 5,468 $ 3,307
Work in process 9,882 23,377
Finished goods 1,402 482
Loaned computer equipment
and consignment inventory 438 389
-------- ------------
$ 17,190 $ 27,555
At December 31, 1994, inventories included $18,567,000 of storage product
acquired to meet anticipated demand under the Amdahl Agreement described in
more detail in Note B above. Storage product inventory after provision to
restate inventory at its estimated net realizable value amounted to
$10,295,000 at July 2, 1995. In light of the termination of the Amdahl
Agreement, the Company is expanding its programs to market the Company's
Storage Products through various other channels. This includes direct,
distributor and OEM sales and marketing campaigns.
D. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following (in
thousands):
July 2, December 31,
1995 1994
------------ ------------
Accounts payable $ 7,271 $ 10,582
Accrued salaries and benefits 5,416 4,663
Accrued restructuring costs 4,967 4,926
Accrued interest 7,452 1,882
Accrued taxes 3,240 3,359
Deferred income,
principally maintenance contracts 1,761 1,548
Other accrued expenses 3,979 4,398
------------ ------------
$ 34,086 $ 31,358
Accrued interest of $7,452,000 at July 2, 1995, includes $3,051,000 due to
Gould under the Short Term Loan Agreement. As discussed in Note F, the
balance also includes $4,400,000 of interest under the Short Term Loan
Agreement accrued in connection with the March 17, 1995, recapitalization.
Accrued interest of $1,882,000 at December 31, 1994, includes $110,000 due to
Gould under the Revolving Loan Agreement. As discussed in Note E, the balance
also includes $1,772,000 of interest under the Revolving Loan Agreement
accrued in connection with the February 4, 1994, recapitalization.
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E. Debt
Debt consists of the following (in thousands):;
(Note G)
Proforma July 2, December 31,
July 2,1995 1995 1994
Debt to unrelated parties:
Mortgages payable and capital
lease obligations $ 918 $ 918 $ 1,023
Less:
Current portion of debt (173) (173) (195)
Total long term debt to unrelated parties $ 745 $ 745 $ 828
Debt to related parties:
Revolving loan agreement with
Gould Electronics Inc. $ - $ - $ 50,000
Credit Agreement with Gould Electronics Inc. 13,860 68,860 38,421
Total debt to related parties 13,860 68,860 88,421
Less:
Current portion of debt 13,860 13,860 -
Total long term debt to related parties $ - $ 55,000 $ 88,421
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Related Party Transactions
The Japan Energy Group is a related party due to the significant financial
interests of Gould and EFI in the Company. As of July 2, 1995, assuming full
conversion of their holdings in the Company's preferred stock, the Japan
Energy Group beneficially owned 74.0% of the Company's common stock. Since
1989, Gould has provided the Company with its revolving line of credit,
entered into certain borrowing agreements and entered into certain exchanges
of equity for indebtedness. Transactions consummated in 1994 and 1995 are
discussed in more detail below and in Notes F and G.
Total interest expense on indebtedness to Gould for the three and six month
periods ended July 2, 1995 was $336,000 and $2,137,000, respectively. Total
interest expense on indebtedness to Gould for the three and six month periods
ended July 3 1994 was $298,000 and $1,095,000, respectively. In addition to
the loans described above, amounts currently due to Gould at July 2, 1995 and
December 31, 1994, include accrued interest of $3,051,000 and $110,000,
respectively.
Revolving Loan Agreements
On February 4, 1994, the Company and Gould exchanged $100,000,000 of
indebtedness owed to Gould by the Company for Series E Preferred Stock with a
liquidation preference of $100,000,000. $50,000,000 of the debt exchanged was
indebtedness under a Revolving Loan Agreement ("Revolving Loan"). On April
11, 1994, the Company and Gould agreed to increase the maximum borrowing limit
of the revolving credit facility from $35,000,000 to $50,000,000 and to extend
its maturity date to April 16, 1996.
Due to continued operating losses since February 4, 1994, and the need to
increase its investment in working capital to meet management's expectation of
demand for its new storage product, the Company exceeded the Revolving Loan's
$50,000,000 maximum borrowing amount on September 6, 1994. From September 6,
1994, until December 21, 1994, Gould allowed the Company to borrow additional
funds in excess of the agreement's maximum limit. On December 21, 1994, the
Company and Gould entered into an uncommitted loan agreement (the "Short Term
Loan Agreement") which the Company used to repay borrowings in excess of the
Revolving Loan's maximum. At December 31, 1994, borrowings under the
Revolving Loan agreement were $50,000,000.
As discussed in more detail in Note F, as of March 17, 1995, the Company and
Gould agreed to cancel the $50,000,000 of indebtedness owed by the Company to
Gould under the terms of the Revolving Loan in exchange for the issuance of
500,000 shares of the Company's Series F Convertible Preferred Stock with a
liquidation preference of $50,000,000. Because of the 1995 recapitalization
and refinancing, the Revolving Loan was classified as a long term obligation
at December 31, 1994.
Short Term Loan Agreement
The original Short Term Loan Agreement provided that Gould, at its sole
discretion, could loan up to $55,000,000 to the Company to provide funds for
(a) repayment of principal and interest under the revolving loan agreement,
(b) working capital purposes in the ordinary course of business, or (c)
general corporate purposes. Borrowings originally were to mature no later
than September 30, 1995. Borrowings are collateralized by substantially all
of the Company's tangible and intangible assets and the agreement contains
various covenants including maintenance of cash flow, leverage and tangible
net worth ratios and limitations on capital expenditures, dividend payments
and additional indebtedness. Interest is equal to the prime rate plus 2% (11%
at July 2, 1995), accrues monthly in arrears and is payable upon maturity of
the agreement. At December 31, 1994, borrowings under the agreement were
$38,421,000 plus interest.
In conjunction with the execution of the Short Term Agreement, Gould provided
the Company with waivers of compliance with the financial covenants contained
in the agreement until January 1, 1996. In light of the March 17, 1995
recapitalization and refinancing, the Short Term Loan Agreement was classified
as a long term obligation at December 31, 1994.
As of March 17, 1995, the Company and Gould agreed to increase the maximum
borrowing limit to provide the Company with an additional committed borrowing
facility of $25,000,000. The amended and restated Short Term Loan Agreement
increases the maximum committed borrowing limit from $55,000,000 to
$80,000,000. The maturity date was also extended to April 16, 1996. All
other terms and conditions were unchanged. At July 2, 1995, borrowings under
the agreement were $68,860,000.
As discussed in more detail in Note G, on August 17, 1995, Gould agreed to
cancel $55,000,000 of indebtedness in exchange for 550,000 shares of the
Company's Series G Preferred Stock. In light of this recapitalization,
$55,000,000 of the outstanding debt has been classified as a long term
obligation at July 2, 1995.
At August 17, 1995, after giving effect to the exchange of Series G Preferred
Stock for debt and the extension of an additional uncommitted loan facility of
$20,000,000, the Company has an unused borrowing capacity of $23,121,000, of
which $3,121,000 is committed. Funding on the $20,000,000 uncommitted portion
of the loan facility is at the sole discretion of Japan Energy Group.
F. Shareholders' Equity
On March 17, 1995, Gould agreed to cancel $50,000,000 of indebtedness owed to
it by the Company under the revolving loan agreement for 500,000 shares of the
Company's Series F Convertible Preferred Stock with a liquidation preference
of $50,000,000.
The principal terms of the Series F are:
(i) The Series F 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 F 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 F 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 F would be converted.
(vi) non-voting, except for the right to approve actions adversely affecting
the Series F.
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 above
described transactions are as follows (in thousands):
<TABLE>
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Reduction of debt $50,000
Less:
Par value of shares issued (500,000 shares at $.01 par value) (5)
Accrued estimated transaction costs (600)
Accrued interest on the remaining indebtedness under the
Short Term Loan Agreement for the remaining term of the agreement (4,561)
Increase in additional paid in capital $ 44,834
</TABLE>
In 1991, the Company and Gould entered into an intellectual property licensing
agreement whereby the Company agreed to license substantially all of its
intellectual property to Gould under certain conditions. The intellectual
property license is royalty free and provides that as long as the Company
achieved certain revenue levels, Gould could not use the intellectual property
until January 1994. Additionally, it allows the Company to extend its
exclusivity period for up to five additional years by making certain cash
payments to Gould. The exclusivity period is automatically extended however,
if certain operating income levels are achieved by the Company. Along with
the August 17, 1995 refinancing discussed in more detail in Note G, Gould and
the Company agreed to extend the Company's period of exclusive use under the
terms of the Intellectual Property license through December 31, 1995. The
Company will not achieve the revenue or operating profit levels necessary to
maintain its exclusivity under the terms of the licensing agreement prior to
December 31, 1995. Should the Company be unable to negotiate further
extensions to its exclusivity period, Encore could lose the exclusive right to
use the intellectual property and Gould at its option could begin to exercise
its rights under the agreement. Such an event could have a material adverse
effect on the Company's business.
In connection with the August 17, 1995 refinancing, Gould has also agreed it
would not vote its shares of the Series B or take any other action as a holder
of the Series B to elect a majority of the directors of the Company until at
least December 31, 1995. The Series B includes terms which allow the holders
to elect a majority of the directors of the Company if certain operating
income levels are not achieved by the Company. The Company will not comply
with the terms of the Series B prior to December 31, 1995, at which time
Gould, as the principal holder of the Series B, could exercise its rights to
elect a majority of the directors.
During the three months ended July 2, 1995, options granted to certain
officers and employees 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 them from exercising
the options. Accordingly, the Board of Directors approved an extension of the
expiration date until September 7, 1996. The extension was 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 compensation charge of
$1,425,000 was recorded in the three month period ended July 2, 1995, in
connection with the extension of the expiration date of the stock options.
G. Subsequent Events
On August 17, 1995, Gould agreed to cancel $55,000,000 of indebtedness owed to
it by the Company under the Amended and Restated Short Term Loan Agreement
for 550,000 shares of the Company's Series G Convertible Preferred Stock with
a liquidation preference of $55,000,000. The principal terms of the Series G
are similar to the terms of the Series B, D, E and F, except that G is senior
in liquidation preference.
Upon completion of the transaction, assuming the full conversion of their
preferred stock holdings, the Japan Energy Group's beneficial ownership of the
Company' s common stock increased from 74% to 77%.
In addition to the exchange of indebtedness for Series G, the Company and
Gould also agreed to amend and restate their Short Term Loan Agreement. As
amended, the Short Term Loan Agreement provides the Company with an additional
uncommitted borrowing facility of $20,000,000 The committed loan facility of
$80,000,000 was reduced to $25,000,000 to reflect the cancellation of debt for
Series G Preferred Stock. Accordingly, as of August 17, 1995,
Encore has available $3,121,000 committed and $20,000,000 in uncommitted
loan facilities.
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 above
described transactions are as follows (in thousands):
<TABLE>
<S> <C> <C>
Reduction of debt $55,000
Less:
Par value of shares issued (550,000 shares at $.01 par value (6)
Reversal of accrued interest on previous recapitalization 3,697
Accrued interest on the remaining indebtedness under the
Short Term Loan Agreement for the remaining term of the agreement ( 1,500)
Increase in additional paid-in capital $ 57,191
</TABLE>
<PAGE>
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three and Six Months Ended July 2, 1995
Compared to the Three and Six Months Ended July 3, 1994
The following is management's discussion and analysis of the financial
condition and the results of operations of Encore Computer Corporation
("Encore" or the "Company") for the three and six month periods ended July 2,
1995 compared to the three and six month periods ended July 3, 1994. The
Company's net loss for the three and six months ended July 2, 1995 was
$35,311,000 and $54,493,000 respectively compared to the net loss for the same
periods of 1994 of $10,949,000 and $19,853,000 respectively. As discussed in
Note B of the Notes to Condensed Consolidated Financial Statements, during the
second quarter of 1995 the Company recorded a charge to operations totalling
$19,241,000 which related to the termination of the reseller agreement between
Encore and Amdahl Corporation.
RESULTS OF OPERATIONS:
Total net sales for the three and six month periods of 1995 were $11,631,000
and $24,866,000 respectively compared to net sales for the three and six month
periods of 1994, of $22,336,000 and $41,825,000, respectively. For the six
month period ended July 2, 1995, domestic and international sales have
declined 53% and 23%, respectively from the prior year. For this same period,
domestic sales represent 48% of total sales compared to 62% for the comparable
period of 1994.
During the six month period ended July 2, 1995, equipment sales have declined
by $11,886,000, or 55% and service sales have declined $5,073,000, or 25% from
the same period of 1994. For the three months ended July 2, 1995, equipment
sales decreased from the comparable 1994 period by $8,635,000 or 67%, to
$4,266,000 and service sales decreased by $2,070,000 or 22%, to $7,365,000.
With regard to the decrease in equipment sales for the second quarter of
1995, the Company's results are affected by the on-going decline in real-time
and open system computer sales. Furthermore, the termination of the Amdahl
contract has, and will continue to, adversely effect sales in the near term.
The decline in computer system sales is due in large part to the fact that
(i) certain of the Company's real-time products have reached the end of their
life cycles and are increasingly less competitive in today's marketplace; and
(ii) acceptance of the Company's new open systems technology products in the
information systems marketplace continues to be slower than anticipated.
Certain of the Company's principal product offerings are proprietary
architectures developed in the early 1980s. Although product enhancements
were made, over time these older products have lost some of their
technological edge. Accordingly, the Company has been increasingly less
competitive selling into new, long-term programs. Replacement products based
on open systems technology are available; however, demand for initial versions
of the products has been disappointing. Recently, the Company released
additional new versions of the Infinity R/T, a real-time system based on
Digital Equipment Corporation's Alpha AXP 21064 RISC processor. These
versions are being more favorably received by customers.
In connection with its open system computer system sales, the Company has
targeted the information processing market as a strategic growth market
developing a series of open system products for this market including the
Infinity 90. The open systems computer market is; however, still in its
infancy. Data processing users are now beginning to adopt the technology but
the migration of a data processing operation to an open systems technology is
generally viewed as a complex and expensive process. To minimize the
perceived risks associated with this migration, early adapters have often
selected larger, more established companies as their computer hardware
provider. Accordingly, while the Company's products and technology have
received favorable reviews by certain market research firms, Encore has had
difficulty penetrating the marketplace. To improve demand for its products,
the Company continues to actively leverage and enhance the core technology of
its open system products. One such result of this effort is the recent
availability of the Infinity SP storage processor. Utilizing the technology
of the Infinity 90, the Infinity SP offers a new, cost effective, high
performance approach to traditional applications in the high growth data
storage markets. As a result of the termination of the Amdahl Agreement the
Company has begun to expand its base of distributors and its direct sales
force. This includes a direct distribution and OEM sales and
marketing campaign. Additionally, Encore continues to seek out strategic
distribution partners whose industry presence, expertise and sales channels
will allow it to more efficiently bring the Company's leading edge open system
and Storage Product offerings to market.
Declining service revenues in 1995 continues the trend and reflects the effect
on the service business of the Company's prolonged decline in system sales as
well as the continued price competitiveness of the marketplace. Because most
of the Company's installed equipment base remains in use for several years
after installation and customers generally elect to purchase maintenance
contracts for their systems while they are in service, the rate of decline in
service revenues has lagged that of equipment revenues. Accordingly, service
revenues have become an increasingly larger portion of the Company's sales
mix.
Cost of equipment sales for the three and six month periods of 1995 increased
from the comparable periods of 1994 by $10,456,000 or 108% and $10,972,000 or
72%, respectively. As a percentage of net sales, 1995 cost of equipment sales
in the three and six month periods was 473% and 264% compared to 75% and 70%
in the three and six month periods of 1994, respectively. The increase in the
cost of equipment sales is attributable to the cost related to the termination
of the Amdahl Agreement. The termination of the Amdahl Agreement resulted in
sales volumes during the first half of the year, and will result in sales
volumes for the near future, being significantly less than expected. This
caused an under-utilization of production capacity. As a result, during the
second quarter the Company charged cost of sales $14,242,000 as discussed in
Note B of the Notes to Condensed Consolidated Financial Statements. The
Company expects that as future sales volumes increase, gross margins will
return to levels more consistent with prior years results.
Cost of service sales for the three and six month periods ended July 2, 1995,
decreased from the comparable periods of 1994 by $1,050,000 or 16% and
$2,146,000 or 16%, respectively. The 1995 decrease in both the three and six
month periods is attributable to cost reduction actions taken throughout the
reporting period to adjust expenses to levels more consistent with the
declining revenue base. However, during the three and six month periods ended
July 2, 1995, the Company continued its investment in various programs and
infrastructure necessary to support the launch of the Storage Product line.
Accordingly, the spending reductions have not occurred as rapidly as revenues
decreased, gross margins for three and six months ended July 2, 1995 were 28%
and 26% , compared to the same periods in 1994 of 32% and 34%.
Research and development costs for the three and six month periods ended July
2, 1995, increased from the comparable periods of 1994 by $652,000 or 8% and
$3,157,000 or 22%, respectively. The increase in 1995 spending is due to the
concentration of efforts to finalize the development of certain Infinity
Storage Product offerings for delivery under the Amdahl Agreement. However,
as a percentage of net sales, research and development expenses were 73% and
70%, respectively for the three and six month periods of 1995 compared to 35%
and 34% for the comparable periods of 1994. The percentage increase is
principally attributable to the decline in net sales. To remain competitive
in the marketplace, the Company plans to continue high levels of research and
development expenditures. The Company expects research and development
spending in the third quarter of 1995, as a percentage of net sales, to remain
high; however, as sales increase this percentage should return to lower
levels.
Selling, general and administrative expenses decreased by $1,122,000 and
$26,000, respectively for the three and six month periods of 1995 when
compared to 1994. The decrease in cost is attributable to cost reduction
actions taken throughout the reporting period to adjust expenses to levels
more consistent with the declining revenue base. As a percentage of net
sales, selling, general and administrative costs were 69% and 72%,
respectively for the three and six months ended July 2, 1995 compared to 41%
and 43%, respectively for the comparable three and six month periods of 1994.
The increase as a percentage of net sales in 1995 is due principally to the
decline in 1995 revenues. An increase in sales, general and administrative
expenses is expected in the near term as the Company expands its sales efforts
for the Storage Product.
During the second quarter management evaluated the Company's latest financial
projections, and concluded; (i) the termination of the Amdahl contract
resulted in a significant delay in the realization of product revenues; (ii)
the rate of decline in real-time equipment and service revenues had exceeded
its previous estimates and; (iii) the rate of worldwide sales growth
anticipated in newer product lines remained significantly below projected
levels. In light of these conclusions; management restructured its operations
and recorded a charge to operations of $4,499,000. The most significant of
these restructuring actions were (i) a 95 person reduction in workforce
primarily in manufacturing and development, resulting in a severance
charge of $1,335,000; (ii) a write down of $782,000 in the carrying value
of the equipment used in the support of the Amdahl Agreement; and (iii)
the write off of $1,123,000 of capitalized software assets relating to
the Company's UNIX based product lines. 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.
Interest expense for the three and six month periods of 1995 increased from
1994 levels by $37,000 and $992,000 respectively, due principally to increased
1995 debt levels. This was partially offset by the increased amoritization of
interest previously accrued as a result of the Company's recapitalization as
discussed in Notes E and F of the Notes to Condensed Consolidated Financial
Statements. For the three and six month periods of 1995 the amortization of
interest was $1,390,000 and $1,972,000, compared to the same periods of 1994
of $342,000 and $564,000.
Other expense for the three and six month periods of 1995 improved from 1994
by $42,000 and $39,000, respectively due primarily to decreased foreign
exchange losses incurred.
Income taxes for the three and six month periods of 1995 related to profitable
operations of certain foreign subsidiaries. For the comparable three and six
month periods of 1994 the Company has not recorded a provision for income
taxes because of the 1994 losses incurred.
LIQUIDITY AND CAPITAL RESOURCES:
Since 1989, the primary source of financing for the Company has been provided
by the Japan Energy Corporation and its wholly owned subsidiaries, Gould
Electronics, Inc. and EFI, Inc. (the "Japan Energy Group"). The Japan Energy
Group has provided the Company with its revolving credit facility, loan
guarantees, refinanced subordinated debentures and entered into various
exchanges of indebtedness for the Company's preferred stock. As of August 17,
1995, assuming full conversion of their holdings in the Company's preferred
stock, the Japan Energy Group beneficially owns 77% of the Company's common
stock.
The Company has suffered recurring operating losses including those incurred
during the three and six month period ended July 2, 1995 and has been unable
to generate cash from operating activities. During the six month period ended
July 2, 1995, the Company used cash in operating activities of $26,667,000
compared to $19,400,000 used in the comparable period of 1994. Among the
significant uses of cash in the six months of 1995 were: (i) the net loss for
the six month period of $54,493,000 and (ii) a decrease in accounts payable of
$4,337,000. These uses of cash were partially offset by decreases in accounts
receivable of $5,868,000, the non cash expenses caused by the inventory write
off of $12,097,000 as well as other improvements in working capital.
During the six month periods ended July 2, 1995 and July 3, 1994, expenditures
for property and equipment were $2,277,000 and $6,155,000, respectively while
expenditures for capitalized software were $1,163,000 and $1,687,000,
respectively.
Cash provided by financing activities for the six month periods ended July 2,
1995 and July 3, 1994 amounted to $31,367,000 and $25,389,000, respectively.
The principal source of financing has been through various loan agreements
provided by Japan Energy Group. On August 17, 1995 the Japan Energy Group
continued it's support as discussed in Note B of the Notes to Condensed
Consolidated Financial Statements. In addition to accepting Preferred Series
"G" Stock in exchange for $55,000,000 of debt, Japan Energy Group agreed to
expand the revolving loan agreement by adding a $20,000,000 uncommitted
facility. The uncommitted loan facility of $20,000,000 will be funded at the
sole discretion of the Japan Energy Group. As of August 17,1995, Encore had
available $3,121,000 of the committed facility available.
During the next twelve months and until such time in the future as the Company
returns to a state of continued profitability, it will have to fund its
operating activities through further financing activities. The Company
believes the amounts currently available under its credit agreement including
the uncommitted facility with Gould should be sufficient to meet its needs
through December 31, 1995. Until and beyond that time, should the Japan
Energy Group withdraw its financial support before the Company returns to
profitability by either failing to renew existing debt agreements as they
expire or failing to fund the uncommitted portion of the loan to the Company
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.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per share earnings. See page 25.
Exhibit No. 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended July 2, 1995.
<PAGE>
Encore Computer Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused
this report to be signed on its behalf by the undersigned.
Encore Computer Corporation
KENNETH G. FISHER KENNETH S. SILVERSTEIN
Date: August 21, 1995 Kenneth G. Fisher Kenneth S.Silverstein
Chairman of the Board Corporate Controller
and Chief Executive Officer Chief Accounting Officer
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Encore Computer Corporation was held at
Encore Computer Corporation's Headquarters on Tuesday, June 27, 1995. The
meeting agenda included: (1) the election of the Company's directors; (2)
amendment of the Company's Certificate of Incorporation; (3) the approval of
the adoption of the Non-qualified Stock Option Plan; and (4) the approval of
the selection of the Company's independent auditors. The results of the votes
for each of these proposals were as follows:
1. Election of Directors:
For Against
Kenneth G. Fisher 30,425,270 1,570,135
Daniel O. Anderson 30,365,871 1,619,534
Rowland H. Thomas 30,359,900 1,625,505
2. To amend the Company's Certificate of Incorporation to increase
the number of shares authorized Common Stock to 200,000,000 shares from the
current authorization of 150,000,000 shares by a vote of 30,414,697 in favor
to 1,379424 against, with 174,314 abstentions
3. To approve the adoption of the Non-qualified Stock Option Plan
and reserve 19,612,383 shares of common stock for issuance under the terms of
the plan, by a vote of 15,861,495 in favor to 1,944,648 against, with 250,896
abstentions.
4. The shareholders approved Coopers & Lybrand L.L.P. as the
Company's independent auditors for the fiscal year ending December 31, 1995,
by a vote of 31,607,103 in favor to 221,412 against with 156,890 abstentions.
Exhibit No. 11
<TABLE>
<S> <C> <C> <C>
ENCORE COMPUTER CORPORATION
Computation of Loss per Share
(unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
Net loss $ (35,311) $(10,949) $ (54,493) $ (19,853)
Series B, D and E and F (3,599) (8,247) (5,982)
Preferred Stock Dividends (4,404)
Net loss attributable to
common shareholders $ (39,715) $ (14,548) $ (62,740) $ (25,835)
Weighted average common
shares outstanding 34,678 33,102 34,428 32,943
Series A assumed converted 7,364 7,364 7,364 7,364
Weighted average shares outstanding 42,042 40,466 41,792 40,307
Net loss per share $ (0.94) $ (0.36) $ (1.50) $ (0.64)
</TABLE>
<TABLE> <S> <C>
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<NAME> ENCORE COMPUTER CORP.
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
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