UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 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 May 3, 1995 was 34,671,626.
Exhibit 11 is located on page 22.
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 16
Part II OTHER INFORMATION 20
Signature Page 21
Exhibit 11 Computation of Loss Per Share 22
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
April 2, April 3,
1995 1994
---------- ----------
Net sales:
Equipment $ 5,611 $ 8,862
Service 7,624 10,627
----------- ----------
Total 13,235 19,489
Costs and expenses:
Cost of equipment sales 5,936 5,420
Cost of service sales 5,753 6,849
Research and development 8,949 6,444
Sales, general and administrative 9,982 8,886
----------- ----------
Total 30,620 27,599
Operating loss (17,385) (8,110)
Interest expense (1,828) (873)
Interest income 34 12
Other expense, net 70 67
----------- ----------
Loss before income taxes (19,109) (8,904)
Provision for income taxes (Note E) (73) -
----------- ----------
Net Loss $ (19,182) $ (8,904)
=========== ==========
Net loss attributable to common
shareholders $ (23,275) $ (11,287)
=========== ==========
Net loss per common share $ (0.56) $ (0.28)
=========== ==========
Weighted average shares of
common stock 41,540 40,120
=========== ==========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
<TABLE>
<S> <C> <C> <C>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands except share data)
April 2, December 31,
1995 1994
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,563 $ 2,517
Accounts receivable, less allowances 19,591 19,855
Inventories (Note B) 29,298 27,555
Prepaid expenses and other current assets 1,890 1,863
----------- -----------
Total current assets 53,342 51,790
Property and equipment, net 38,674 40,921
Capitalized software, net 5,597 5,139
Other assets 480 912
----------- -----------
Total assets $ 98,093 $ 98,762
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY/
(CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term
debt- other (Note D) 184 195
Accounts payable and
accrued liabilities (Note C) 35,985 31,358
----------- -----------
Total current liabilities 36,169 31,553
Long term debt - related parties (Note D) 55,902 88,421
Long term debt - other
787 828
----------- -----------
Total liabilities 92,858 120,802
Shareholders' equity (capital deficiency):
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
6% Cumulative Series B Convertible Preferred,
issued 666,453 in 1995 and 1994,
with an aggregate liquidation preference
of $66,645 7 7
6% Cumulative Series D Convertible Preferred,
issued 1,019,787 shares in 1995 and
1994, with an aggregate liquidation
preference of $101,978 10 10
6% Cumulative Series E Convertible Preferred, issued
1,042,381 shares in 1995 and 1994 with an
aggregate liquidation preference of $104,238 10 10
6% Cumulative Series F Convertible Preferred, issued
500,000 in 1995 with an aggregate liquidation
preference of $50,000 5 -
Common stock, $.01 par value; authorized 150,000,000
shares; issued 34,271,326 and 34,076,124 in
1995 and 1994, respectively 343 341
Additional paid-in capital 353,451 307,001
Accumulated deficit (348,592) (329,410)
----------- -----------
Total shareholders' equity
(capital deficiency) 5,235 (22,040)
----------- -----------
Total liabilities and
shareholders' equity (capital deficiency) $ 98,093 $ 98,762
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
April 2, April 3,
1995 1994
----------- ----------
Cash flows from operating activities:
Net loss $ (19,182) $ (8,904)
Adjustments to arrive at net cash
used in operating activities:
Depreciation and amortization 2,985 2,564
Net changes in operating assets
and liabilities:
Accounts receivable 264 (2,654)
Inventories (1,743) 677
Other current assets (27) 231
Other assets 432 (310)
Accounts payable and accrued liabilities (533) (4,578)
Other liabilities - (93)
----------- ----------
Cash used in operating activities (17,804) (13,067)
----------- ----------
Cash flows from investing activities:
Additions to property and equipment (632) (1,862)
Capitalization of software costs (564) (537)
----------- ----------
Cash used in investing activities (1,196) (2,399)
----------- ----------
Cash flows from financing activities:
Net borrowings under revolving loan agreements 17,481 13,304
Principal payments of long term debt (52) (19)
Payment of preferred stock dividends - (1)
Issuance of common stock 1,617 70
----------- ----------
Cash provided by financing activities 19,046 13,354
----------- ----------
Net decrease in cash and cash equivalents 46 (2,112)
Cash and cash equivalents, beginning 2,517 3,751
----------- ----------
Cash and cash equivalents, ending $ 2,563 $ 1,639
========== =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Three Months Ended
April 2, April 3,
1995 1994
----------- -----------
Cash paid during the period for interest $ 554 $ 1,535
Cash paid during the period for income taxes - 3
Supplemental schedule of non-cash investing and financing activities:
A. On February 4, 1994, the Company exchanged $100,000,000 of indebtedness,
for preferred stock. Refer to Note D of Notes to Condensed Consolidated
Financial Statements.
B. 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.
<PAGE>
<TABLE>
<S> <C> <S> <C>
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 January 1, 1995 73,641 $ 1 666,453 $ 7 1,019,787 $ 10 1,042,381 $ 10
Common stock options exercised,
$.63 to $2.31 per share
Issuance of Series F Convertible
Preferred Stock (Note G)
Extension of expiration date on
outstanding grant of common
stock options
Net loss
------ ----- ------- ----- --------- ----- --------- -----
Balance April 2, 1995 73,641 $ 1 666,453 $ 7 1,019,787 $ 10 1,042,381 $ 10
====== ===== ======= ==== ========= ====== ========= ======
</TABLE>
The accompanying notes are an intergral part of the
condensed consolidated financial statements.
(Continued on following page)
<PAGE>
<TABLE>
<C> <C> <S> <C> <C> <S> <C> <C> <C>
(Continued from Above)
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Common Stock Shareholders'
Series F Additional Equity
Par Par Paid In Accumulate (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,
$.63 to $2.31 per share 195,202 2 191 193
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 -19,182 -19,182
---------- ------ ---------- ----------- --------- ---------- --------
Balance April 2, 1995 500,000 $ 5 34,271,326 $ 343 $ 353,451 $ -348,592 $ 5,235
========= ===== ========== ============ ========== =========== ========
</TABLE>
The accompanying notes are an intergral part of the condensed
consolidated financial statements.
<PAGE>
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements are
unaudited and have been prepared by Encore Computer Corporation
("Encore" or the "Company") in accordance with generally accepted
accounting principles. Certain information and footnote
disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted.
It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 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. The year-end condensed
balance sheet data was derived from audited financial statements
but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal years.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock equivalents
outstanding. In fiscal periods which report net losses, the
calculation does not include the effect of common stock
equivalents such as stock options since the effect on the amounts
reported would be antidilutive. Series A Convertible
Participating Preferred Stock ("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"), Series E Convertible Preferred Stock ("Series
E") and Series F Convertible Preferred Stock ("Series F") 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 of 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. These dividends were included in the
computation of the loss per common share for the period ended
April 2, 1995. For the three month period ended April 3, 1994,
the Company also accumulated dividends on the Series B and Series
D. In computing the loss per common share, these dividends
increased the 1994 loss as reported for the per common share
calculation by $2,383,000. The Series B and Series D dividends
accumulated in the 1994 period have since been paid by the
Company.
On March 17, 1995, the Company completed, among other things, 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.
On April 15, 1995, dividends payable for the period of 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.
B. Inventories
Inventories consist of the following (in thousands):
April 2, December 31,
1995 1994
--------- ----------
Purchased parts $ 4,475 $ 3,307
Work in process:
Storage Products 18,242 18,567
Other 5,014 4,810
Finished goods 955 482
Loaned computer equipment
and consignment inventory 612 389
--------- ----------
$ 29,298 $ 27,555
========== ==========
At April 2, 1995, inventory includes $18,242,000 of Storage
Products work in process acquired to meet anticipated demand
under the Amdahl Agreement. Amdahl has decided to postpone
further deliveries until their testing of the product confirms
that it includes all the performance, features and
functionality required under the terms of the Agreement.
Accordingly, management deemed it prudent at December 31, 1994
to record an adjustment of $5,600,000 against carrying value
of the inventory. This adjustment remains in place at April 2,
1995. A program has been implemented to reduce the inventory
to desired levels over the near term. No estimate can be made
of a range of amounts of loss that are reasonably possible
should the program not be successful.
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
April 2, December 31,
1995 1994
----------- ----------
Accounts payable $ 7,464 $ 10,582
Accrued salaries and benefits 5,857 4,663
Accrued restructuring costs 4,012 4,926
Accrued interest 7,175 1,882
Accrued taxes 4,256 3,359
Deferred income,
principally maintenance contracts 2,228 1,548
Other accrued expenses 4,993 4,398
---------- -----------
$ 35,985 $ 31,358
========= ==========
D. Debt
Debt consists of the following (in thousands):;
April 2, December 31,
1995 1994
----------- ----------
Debt to unrelated parties:
Mortgages payable and capital
lease obligations $ 971 $ 1,023
Less:
Current portion of debt (184) (195)
-------- ----------
Total long term debt to unrelated parties $ 787 $ 828
======= ==========
Debt to related parties:
Revolving loan agreements with
Gould Electronics Inc. $ - $ 50,000
Credit Agreement with Gould Electronics Inc. 55,902 38,421
--------- ---------
Total long term debt to related parties $ 55,902 $ 88,421
======== =========
Related Party Transactions
The Company, Japan Energy Corporation ("Japan Energy") and its
subsidiaries Gould Electronics Inc. ("Gould") and EFI
International Limited ("EFI") (Japan Energy, Gould and EFI are
collectively know as the "Japan Energy Group") are related
parties due to the significant financial interests of Gould and
EFI in the Company. As of April 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 Note
E:
Transaction Effective Dates Amount
- - ----------------------- -------------------- ------------
Revolving Loan Agreement, Prior to 1994 through $ 50,000,000
as amended March 17, 1995
Exchange of Series E for the As of February 4, 1994 $100,000,000
cancellation of indebtedness
under the Term Loan and the
Revolving Loan Agreement
Uncommitted Loan Agreement From December 21, 1994 $ 55,000,000
through March 17, 1995
Amended Uncommitted Loan From March 17, 1995 $ 80,000,000
Agreement to present
Exchange of Series F for the As of March 17, 1995 $ 50,000,000
cancellation of indebtedness
under the Revolving Loan
Agreement
1994 Exchange of Indebtedness for Convertible Preferred Stock
On February 4, 1994, Gould exchanged its then outstanding 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
Cumulative Convertible Preferred Stock with a liquidation
preference of $100,000,000.
Uncommitted Loan Agreement
On December 21, 1994 the Company and Gould entered into an
Uncommitted Loan Agreement under which Gould may, at its sole
discretion, provide the Company with up to $55,000,000 in short
term borrowings. Terms of the Uncommitted Loan Agreement are
discussed below. As of March 17, 1995 the Company and Gould
agreed among other things to amend and restate the terms of the
agreement providing the Company with a committed, additional
borrowing facility of $25,000,000 thereby increasing the
agreement's maximum borrowing limit to $80,000,000.
1995 Exchange of Indebtedness for Convertible Preferred Stock
As more fully described in Note E of Notes to Condensed
Consolidated Financial Statements, as of March 17, 1995, the
Company and Gould agreed, among other things, to cancel
$50,000,000 of indebtedness under the revolving loan agreement in
exchange for the issuance of $50,000,000 of Series F Cumulative
Convertible Preferred Stock.
Total interest expense on indebtedness to Gould for the three
months ended April 2, 1995 and April 3, 1994 was $1,801,000 and
$798,000, respectively. In addition to the loans described
above, amounts currently due to Gould at April 2, 1995 and
December 31, 1994, included accrued interest of $2,475,000 and
$1,882,000, respectively.
Revolving Loan Agreements
Since 1989, Gould has provided the Company with various revolving
credit facilities. Borrowings under the revolving loan
agreements are collateralized by substantially all of Encore's
tangible and intangible assets and the agreements contain various
covenants including maintenance of cash flow, leverage and
tangible net worth ratios and limitations on capital
expenditures, dividend payments and additional indebtedness.
Interest is equal to the prime rate plus 1% (9.5% at December 31,
1994) and is payable monthly in arrears.
On February 4, 1994, the Company and Gould exchanged $100,000,000
of indebtedness owed to Gould by the Company for Series E with a
liquidation preference of $100,000,000. $50,000,000 of the debt
exchanged was indebtedness under the revolving loan agreement.
Upon completion of the exchange, borrowings under the revolving
loan agreement were $19,134,000. On April 11, 1994, the Company
and Gould agreed to increase the maximum borrowing limit of the
revolving credit facility from $35,000,000 to $50,000,000 and to
extend its maturity date to April 16, 1996. All other terms and
conditions of the revolving loan agreement were essentially
unchanged except certain financial covenants contained in the
agreement were modified to more closely reflect the Company's
then current financial position.
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 agreement'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 as discussed below, 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 agreement's maximum. At December 31, 1994,
borrowings under the revolving loan agreement were $50,000,000.
As discussed in more detail in Note E of Notes to Condensed
Consolidated Financial Statements, 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 to Gould. Because of the
1995 recapitalization and refinancing, the revolving loan
agreement is classified as a long-term obligation at December 31,
1994.
Short Term Loan Agreement
The terms of the Short Term Loan Agreement provide that Gould, at
its sole discretion, may 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 mature no later than September 30, 1995 and
may be paid earlier at the discretion of the Company. Borrowings
are collateralized by substantially all of Encore's tangible and
intangible assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible net
worth ratios and limitations on capital expenditures, dividend
payments and additional indebtedness. Interest on the loans are
based on the length of time the loan is outstanding beginning at
the prime rate plus 1% and increasing to prime rate plus 2% for
amounts outstanding for more than 181 days. Interest on the
borrowings accrues monthly in arrears and is payable upon
maturity of the note. At December 31, 1994, borrowings under the
agreement were $38,421,000.
As of March 17, 1995, the Company and Gould agreed to amend and
restate the Short Term Loan Agreement to provide the Company with
an additional committed borrowing facility of $25,000,000. The
amended and restated Short Term Loan Agreement (the "Credit
Agreement") increases the maximum borrowing limit from
$55,000,000 to $80,000,000. On March 17, 1995, the Company had
incurred borrowings under the agreement of $55,000,000.
The Credit Agreement matures on April 16, 1996. Borrowings
continue to be collateralized by substantially all of Encore's
tangible and intangible assets and the agreement contains various
covenants including maintenance of cash flow, leverage and
tangible net worth ratios and limitations on capital
expenditures, dividend payments and additional indebtedness.
Interest on the loans are based on the length of time the loan is
outstanding beginning at the prime rate plus 1% and increasing to
prime rate plus 2% for amounts outstanding for more than 181
days.
In conjunction with the execution of the Credit 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 1995 recapitalization and refinancing, the
Short Term Loan Agreement is classified as a long-term obligation
at December 31, 1994.
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 was
collateralized by substantially all of Encore's tangible and
intangible assets and contains various covenants, including
maintenance of cash flow, leverage, and tangible net worth ratios
and limitations on capital expenditures, dividend payments and
additional indebtedness. As amended, the maturity date of the
loan was April 2, 1995. However, on February 4, 1994, the
Company and Gould cancelled the indebtedness owed by the Company
to Gould under the Term Loan agreement in the amount of
$50,000,000 in exchange for Series E convertible preferred stock.
E. 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.
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 to
74.0%.
In addition to the exchange of indebtedness for Series F, the
Company and Gould also agreed to amend and restate their
Uncommitted Loan Agreement ("Credit Agreement"). As amended, the
Credit Agreement provides the Company with an additional
committed borrowing facility of $25,000,000. The amendment
increases the maximum borrowing limit under the Credit Agreement
from $55,000,000 to $80,000,000.
A summary of the financial effects of the above described
transactions are as follows (in thousands):
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 Credit Agreement
for the remaining term of the agreement (4,560)
---------
Increase in additional paid in capital $ 44,835
=========
Along with the refinancing, Gould and the Company agreed to
extend Encore's period of exclusive use under the terms of their
Intellectual Property license through June 30, 1995. During 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. As of December 31, 1994 the Company
has achieved neither the net revenue nor operating income levels
necessary under the agreement to maintain its exclusive right to
the use of the intellectual property. 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 June 30, 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.
Finally in connection with the refinancing, Gould 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 September 30, 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. In connection with this transaction
Gould agreed to defer any such action at least until September
30, 1995. It is unlikely that the Company will return to
compliance with the terms of the Series B prior to September 30,
1995 at which time Gould, as the principal holder of the Series
B, could exercise its rights to elect a majority of the
directors.
Since 1989, the principal source of financing for the Company has
been provided by Japan Energy Corporation and its wholly owned
subsidiaries. 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
normal course of business.
<PAGE>
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three Months Ended April 2, 1995
Compared to
Three Months Ended April 3, 1994
RESULTS OF OPERATIONS:
Total net sales for the three month period of 1995 decreased by
$6,254,000 or 32% compared to the same period of 1994. Declines
from the 1994 three month period occurred in both equipment and
service sales with equipment sales declining $3,251,000 or 37%
and service sales declining $3,003 or 28%. During the first
three months of 1994 as a percentage of total sales, equipment
and service sales were 42% and 58%, respectively. In the
comparable period of 1994, equipment and service sales as a
percentage of total sales were 45% and 55%, respectively. The
Company's results are affected by continued delays in the
commencement of storage product sales under the terms of its
Reseller Agreement with Amdahl Corporation ("Amdahl") as well as
by an on-going decline in real-time and open system computer
sales.
During 1994 the Company and Amdahl entered into a five year
Reseller Agreement (the "Amdahl Agreement") which allows Amdahl
the right to distribute the Company's Infinity SP under the
Amdahl brand. The agreement provides Amdahl with the exclusive
marketing and distribution rights to the product in exchange for
purchase commitments of specified volumes, except for sales to
the U.S. government agencies, system integrators responding to
government agency bid requests, pre-existing Encore distributors
and in Japan, China, and Malaysia, where Encore retains the right
to market the products on a non-exclusive basis. The Amdahl
Agreement as amended establishes procurement schedules, which if
certain product requirements are met, could require Amdahl to
purchase a significant amount of product from Encore. 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, since entering into the agreement certain significant
contractual issues have arisen delaying the sale of products. In
February 1995 the Company sent a letter to Amdahl notifying
Amdahl of its intent to terminate the Amdahl Agreement. Amdahl
filed suit in the Delaware Chancery Court on March 29, 1995
seeking to prevent Encore from terminating the agreement. On
March 30, 1995, Encore and Amdahl agreed 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. While the companies have made
significant progress towards the resolution of their differences,
shipments under the agreement have not yet commenced.
The Company has invested heavily in the manufacturing and
overhead support capacity necessary to meet the accelerating
sales commitments defined in the Amdahl Agreement. However,
because of the recent delays encountered, product sales have
fallen well short of expectations and the capacity in place has
not been fully absorbed adversely affecting all elements of the
Company's results of operations. The Company has not taken
actions to eliminate the under utilized capacity at this time as
it believes the existing differences can be resolved in the near
term allowing for the beginning of shipments and the full
absorption of the existing capacity.
With regard to declining computer system sales, the decline 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 has been 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. 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
product offerings to market .
Declining service revenues in 1995 reflects the effect of the
Company's prolonged decline in system sales on the service
business as well as the continued price competitiveness of the
marketplace. Because most of the Company's installed equipment
base remains in use for several years after installation and
customers generally elect to purchase maintenance contracts for
their systems while they are in service, the rate of decline in
service revenues has lagged that of equipment revenues.
Accordingly, service revenues have become an increasingly larger
portion on the Company's sales mix.
International sales for the period ended April 2, 1995 were
$6,763,000 or 51% of total sales compared to sales of $8,511,000
or 44% of total net sales in the comparable period of 1994. The
principal decreases have occurred in Western Europe. The
European markets are adversely affected by the same factors as
the overall business.
The cost of equipment sales for the three month period of 1995
increased by $516,000 or 10% compared to the 1994 period. As
previously discussed, because of the delays in sales under the
Amdahl Agreement, sales volumes in the first quarter of 1995 were
significantly less than expected and significant levels of under-
utilized production capacity occurred. Lower costs of equipment
sales ($1,312,000) due to the current period's lower sales
volumes were more than offset by higher warranty costs ($719,000)
as the Company established provisions during the current period
for the cost of retro-fit upgrades to certain installed computer
systems sold in prior periods, unfavorable manufacturing capacity
variances due to the period's lower revenues ($548,000),
increased inventory obsolescence costs ($270,000), increased
amortization costs of certain capitalized software products
($208,000) and other miscellaneous cost increases ($83,000). As
a result of both the unfavorable cost increases and the decline
in the period's equipment sales, the cost of equipment sales as a
percentage of equipment sales, increased to 106% for the three
months ended April 2, 1995 compared to 61% in the three month
period of 1994.
Cost of service sales for the three month period of 1995
decreased by $1,096,000 or 16% when compared to the same period
of 1994. The 1995 decrease is due principally to on-going
actions taken to reduce costs to levels more consistent with the
projected business. Among the most significant reductions
realized are: (i) lower labor and employee related costs of
$501,000 due to lower 1995 headcount levels, (ii) lower office
rent of $400,000 as certain field locations were closed or
consolidated and, (iii) other miscellaneous cost reductions of
$195,000. However, during the three month period ended April 2,
1995, the Company continued its investment in various programs
and infrastructure necessary to support of the launch of the
Storage Products line. Accordingly, the 28% decline in service
revenues exceeded that of the reductions realized in the cost of
services sales. As a percentage of service revenues cost of
service sales in 1995 increased to 76% compared to 64% in the
prior year.
Research and development expenses increased 39% or $2,505,000 in
the first quarter of 1995 versus the same period of 1994. The
increase in 1995 spending is due to the concentration of efforts
to finalize the development of certain Infinity SP product
offerings for delivery under the Amdahl Agreement and the fact
that during the 1994 period the Company received customer funding
of approximately $650,000 for the completion of various
engineering projects. No projects were customer funded during
the 1995 period. As a percentage of net sales, research and
development expenses were 68% in the three months ended April 2,
1995 compared to 33% for the corresponding period of 1994. Both
the increase in 1995 spending and the decline in net sales
contributed to this increase. To remain competitive in the
marketplace, the Company must continue high levels of research
and development expenditures. While second quarter 1995 research
and development spending as a percentage of net sales will remain
high, it is expected that as sales increase, this percentage
should return to lower levels.
For the three months ended April 2, 1995, sales, general and
administrative expenses increased by $1,096,000 from the same
period of 1994. The increase is due principally to the
recognition of a one time, non cash charge to compensation
expense as the expiration date of certain stock options issued to
officers of the Company were extended. This charge was partially
offset by lower advertising expenses in the current period. In
connection with the extension of the stock option expiration
date, options to acquire shares of the Company's common stock
issued to officers 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 would have
effectively prevented them from exercising the options.
Accordingly, the Board of Directors approved an extension of the
expiration date of the individual grants for a period of
approximately eighteen months. A non-cash non-recurring charge of
$1,412,000 was incurred in connection with this extension.
Exclusive of the one-time charge, sales, general and
administrative expenses actually decreased from the prior period
by $316,000. Principally because of the one-time charge, as a
percentage of net sales, sales, general and administrative
expenses increase in the 1995 period to 75% from 46% in the
comparable period of 1994.
Interest expense for the first quarter of 1995 increased $955,000
from the first quarter of 1993 due principally to higher debt
levels.
The Company recorded a provision for income taxes for the three
months ended April 2, 1995 of $73,000. The 1995 provision
relates to operations of certain foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES:
Since 1989, the primary source of financing for the Company has
been provided by Japan Energy and its wholly owned subsidiaries,
Gould and EFI. The Japan Energy Group 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 March
17,1995, assuming full conversion of their holdings in the
Company's preferred stock, the Japan Energy Group beneficially
owns 74.0% of the Company's common stock.
Because of operating losses incurred during the three months
ending April 2, 1995 and April 3, 1994, the Company has been
unable to generate cash from operating activities. In the 1995
and 1994 periods the Company used cash in operating activities of
$17,804,000 and $13,067,000, respectively.
Expenditures for property and equipment for the three months
ended April 2, 1995 and April 3, 1994 were 71,000 and $1,862,000,
respectively while expenditures for capitalized software during
the same periods were $1,125,000, and $537,000, respectively. As
of April 2, 1995, there were no material commitments for capital
expenditures.
Cash used in operating and investing activities during the three
month periods of 1995 and 1994 was principally offset by cash
provided through financing activities of $19,046,000 and
$13,354,000 in 1995 and 1994, respectively. The principal
source of financing has been through various agreements provided
by the Japan Energy Group.
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 with Gould should be
sufficient to meet such 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 provide additional credit 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.
The majority of the year end cash on hand of $2,563,000 was at
various international subsidiaries. With minor exceptions, all
cash is freely remittable to the United States.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of
per share earnings. See page 22.
(b) Reports on Form 8-K
During the quarter ended April 2, 1995, the Company filed
a report on Form 8-K in connection with the exchange of
Series F Convertible Preferred Stock for Indebtedness
owed on March 17, 1995.
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: May 19, 1995 Kenneth G. Fisher Kenneth S. Silverstein
Chairman of the Board Corporate Controller
and Chief Executive Officer Chief Accounting Officer
<PAGE>
Exhibit No. 11
ENCORE COMPUTER CORPORATION
Computation of Loss Per Share
(Unaudited)
Three Months Ended
April 2, April 3,
1995 1994
---------- ----------
Net loss $ (19,182) $ (8,904)
Series B and D Preferred Stock Dividend (2,529) (2,383)
Series E Preferred Stock Dividend (1,564) -
---------- ----------
Net loss after effect of dividend payment $ (23,275) $ (11,287)
========== ==========
Weighted average common shares outstanding 34,176 32,756
Series A assumed converted 7,364 7,364
Weighted average shares outstanding 41,540 40,120
---------- ----------
Net loss per share $ (0.56) $ (0.28)
========== ==========
