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! NOTE: The following document is the Company's annual report to shareholders!
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<Front Cover of Annual Report>
Encore Computer Corporation
1994 Annual Report to Shareholders
<PAGE>
Chairman's Letter
1994 Progress Report
When I wrote the Chairman's letter a year ago, I had high
expectations for 1994. However, due to a variety of factors, 1994
did not produce the revenue and growth for the company which I
had anticipated at this time last year.
Encore had just entered into a promising alliance with Amdahl in
March of 1994. Later in the year the parties expanded the
initial relationship in an amendment signed in September. As a
result of these agreements, Encore expected to receive
significant revenue from shipments to Amdahl in the third and
fourth quarter. Storage product systems were built in quantity
and shipped on order to Amdahl. Encore invested substantial sums
in procuring materials and manufacturing these systems.
We began to have difficulty implementing the contract shortly
after the amendment was signed. Amdahl refused to pay us for
products shipped. Amdahl also refused acceptance of some of the
systems. Lack of anticipated payments from Amdahl caused a large
revenue and profit miss in the third and fourth quarter.
Encore has yet to realize any revenue from these Amdahl orders,
although the company has incurred all of the expenses associated
with their manufacture.
Throughout the third and fourth quarter of 1994 and into the
first quarter of 1995, Amdahl and Encore engaged in extensive
discussions in an attempt to resolve the issues between the two
companies. Despite the amount of time and energy invested by both
parties, the discussions failed to produce a satisfactory
resolution of the issues.
In late February, Encore sent a formal notice to Amdahl. The
notice required that Amdahl cure its payment defaults within
thirty days to prevent termination by Encore as permitted under
the contract. Just before the thirty day period expired, Amdahl
filed suit with the Delaware Chancery Court, seeking to have
Encore continue its performance under the contract, and asking
the Court to prevent its termination.
In a final attempt to resolve the differences between them, the
companies agreed to a "stand-still" period to allow time for
futher discussions. I am glad to be able to report to you that
during this stand-still period we have been able to reach an
agreement in principle with Amdahl. We are now in the process of
documenting that agreement in an amended contract which we hope
to execute shortly. We expect to begin performing against this
revised contract in the second quarter of 1995.
Both companies' conviction that Encore's storage product will be
a big winner in the storage marketplace has been a major factor
in driving us forward to resolve our differences. There is no
question that our difficulties with the Amdahl relationship
caused Encore a serious setback in 1994. However, with the
progress we have made in recent weeks, we look forward to putting
these difficulties behind us as we make a new start with Amdahl
in 1995. We have high expectations for the growth of a long and
fruitful relationship for both companies.
Our storage products are also being sold and marketed through a
distribution program which was established this past year.
Initial orders have started to flow from our distributors
worldwide. We expect this channel to produce significant revenue
and profit contribution over the coming year.
We continue to make progress in our business with the Department
of Defense. To date, we have shipped three Infinity 90 systems to
three different megacenters. Indications are that additional
orders may be issued for deliveries in 1995.
While our traditional real-time business continued its slow
decline in 1994, we are committed to developing new products and
supporting this market in 1995.
The company was recapitalized at the beginning of 1995 with the
conversion of fifty million dollars of debt into equity by Gould
Electronics Inc. In addition, Encore's revolving loan was
revamped and augmented in order to provide the company with the
cash necessary to finance the 1995 business plan. We are
most appreciative of the continued confidence and support we have
received from Gould Electronics Inc. as we launch our 1995
storage product program and renew our relationship with Amdahl.
The cautious outlook for 1995 is for a gradual revenue build-up,
fueled by real-time revenue, our storage product shipments to
Amdahl and distributor accounts, continued Infinity 90 system
shipments to the Department of Defense and opportunity for
profitability in the fourth quarter.
We wish to thank our directors, officers, employees, suppliers,
customers and shareholders without whom we could not succeed. I
especially acknowledge the support and wisdom of our hard-working
outside board members---Daniel O. Anderson, C. David Ferguson,
and Robert J. Fedor.
KENNETH G. FISHER
Kenneth G. Fisher
Chairman and CEO
May 2, 1995
<PAGE>
Table of Contents
Selected Financial Data 2
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 3
Consolidated Statements of Operations 12
Consolidated Balance Sheets 13
Consolidated Statements of Cash Flows 14
Consolidated Statements of Shareholders'
Equity (Capital Deficiency) 16
Notes to Consolidated Financial Statements 18
Report of Independent Accountants 35
Shareholder Information 36
Officers and Directors 37
<PAGE>
<TABLE>
<S> <C> <S><C> <C> <C>
Selected Financial Data
(in thousands except
per share data)
Proforma ------------for the year ended December 31-------
1994(2) 1994 1993 1992 1991 1990
------- ------- ------- -------- -------- --------
Net sales $76,550 $76,550 $93,532 $130,893 $153,302 $215,206
Operating loss (50,848) (50,848) (62,085) (22,544) (54,938) (8,341)
Loss before
extraordinary items (54,556) (54,556) (69,565) (32,522) (65,388) (30,147)
Net loss (54,556) (54,556) (69,565) (32,522) (65,388) (29,646)
Loss per common share
before extraordinary items (1.68) (1.68) (2.01) (.98) (1.87) (.86)
Net loss per common share (1) (1.68) (1.68) (2.01) (.98) (1.87) (.84)
Weighted average shares of
common stock outstanding (1) 40,755 40,755 39,273 37,899 36,466 35,249
Working capital 15,938 20,237 3,499 14,270 16,014 40,916
Total assets 98,762 98,762 84,070 105,686 121,186 162,180
Long term debt 39,249 89,249 112,919 66,413 106,588 140,666
Redeemable preferred stock - - - - 4,246 -
Shareholders' equity
(capital deficiency) 23,661 (22,040 (66,560) 508 (42,137) (23,693)
</TABLE>
(1) See Notes A and J of the Notes to Consolidated Financial
Statements for information on the calculation of net loss per
share. During 1994, the Company paid preferred stock dividends
of $13,986,600 in additional shares of the appropriate class of
preferred stock. During 1993 preferred stock dividends on the
Series B and Series D preferred stock of $9,184,700 were
accumulated by the Company and subsequently paid during 1994 in
additional shares of preferred stock. During 1992, preferred
stock dividends on the Series B and Series D preferred stock of
$4,471,400 were paid with additional shares of the appropriate
class of preferred stock.
(2) As discussed in Note L of the Notes to Consolidated
Financial Statements, the Company and Gould Electronics Inc.
completed a
recapitalization of the Company subsequent to the Balance Sheet
date. The column headed Proforma 1994 shows the Selected
Financial Data on a Proforma basis as if the recapitalization
had been done at December 31, 1994.
<TABLE>
<S> <C> <S> <C> <C>
Selected Fiscal Year 1994 and 1993 Quarterly Financial Data
(in thousands except per share data; unaudited)
Fiscal Year 1994 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1994
- - - - - - - -------------------- --------- --------- --------- --------- --------
Net Sales $ 19,489 $22,336 $16,558 $18,167 $76,550
Gross Profit 7,220 6,236 6,198 (4,011) 15,643
Net loss before extraordinary item (8,904) (10,949) (10,761) (23,942) (54,556)
Net loss (a) (8,904) (10,949) (10,761) (23,942) (54,556)
Net loss per share before
extraordinary item (.28) (.36) (.36) (.68) (1.68)
Net loss per common share (.28) (.36) (.36) (.68) (1.68)
Fiscal Year 1993 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1993
- - - - - - - -------------------- --------- --------- --------- --------- --------
Net Sales $28,419 $22,341 $21,431 $21,341 $93,532
Gross Profit 10,381 5,436 7,337 4,547 27,701
Net loss before extraordinary item (8,345) (25,982) (10,903) (24,335) (69,565)
Net loss (a) (8,345) (25,982) (10,903) (24,335) (69,565)
Net loss per share before
extraordinary item (.27) (.73) (.33) (.68) (2.01)
Net loss per common share (.27) (.73) (.33) (.68) (2.01)
</TABLE>
(a) Quarter 4, 1993 and Quarter 2, 1993 include restructuring
charges of $10,422,000 and $12,843,000, respectively.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Encore Computer Corporation ("Encore" or the "Company") was
founded in May 1983 and was in the development stage until
October 1986. During this period, the Company was primarily
involved in the research, development and marketing of UNIX-
based computers and terminal servers. In 1989, Encore
significantly increased its size and worldwide marketing presence
when it acquired substantially all of the assets of the Computer
Systems Division of Gould Electronics Inc. (the "Computer Systems
Business"). This was a significantly larger business which for
over twenty-five years provided real-time computer systems
solutions to the simulation, range and telemetry, and energy
marketplaces.
During the late 1980s, product demand in the computer marketplace
began to migrate from more traditional proprietary computing
technologies towards an open systems technology. The Company
anticipated this market trend and subsequent to the acquisition
of the Computer Systems Business targeted its research and
development efforts towards programs to develop a new generation
of open system computers. Since the beginning of 1992, the
Company has spent approximately $76,000,000 in research and
development activities. This has resulted in the current
availability of a family of open system computers and storage
systems targeted toward demanding, time critical applications in
both the general purpose computing and real-time marketplaces.
The most recent of these offerings include (i) the Infinity
90(TRADEMARK),
an open system alternative mainframe computer, available since
the second half of 1992, (ii) the Infinity R/T(TRADEMARK), a
real-time
version of the Infinity 90, released for volume shipments in the
second half of 1993 and (iii) the Infinity SP(TRADEMARK) storage
processor
which began early production shipments in 1994 .
The general opinion of industry analysts is that future computer
solutions will be based on open systems and standards. The
Company's open systems products designed to meet these
requirements have been favorably reviewed by certain market
research firms. However, this market is still in its infancy.
Many data processing users are only now beginning to define their
strategies for implementation of open systems technology.
Accordingly, demand for the Company's open systems products has
been weaker than anticipated. Sales of such new products have
been insufficient to offset declines in older, established
products which have reached the end of their competitive life
cycle. Total net sales have decreased from $130,893,000 in 1992
to $76,550,000 in 1994 and as a result the Company has incurred
significant net losses in all years reported.
Addressing the declining revenue base and resultant lower gross
margin dollars, management has taken aggressive actions
throughout this period to restructure the organization to levels
more consistent with the declining size of the Company. These
actions have included reducing the workforce to levels required
to support the business, eliminating organizational redundancies
and consolidating certain facilities to eliminate unneeded
capacity. In connection with the restructuring activities, the
Company has also recognized the non-recoverability of certain
capitalized software products and the impairment in value of
certain other long lived assets, including goodwill. As a result
of the actions taken, the Company has recorded restructuring
charges of $28,513,000 over the three year period. The Company's
future success will be based on the success of its research and
development activities. Accordingly, the Company will continue
to invest heavily in research and development. In future
periods, research and development spending as a percentage of
net sales will remain high in comparison to industry averages.
The Company believes that this will allow it to provide early
availability of leading-edge computer technology which could
position the Company favorably as the marketplace continues to
mature.
With the net losses incurred in the three years ended December
31, 1994, the Company has not generated sufficient levels of cash
flow to fund its operations and cumulatively has used cash in
operating and investing activities of $157,463,000. The
principal source of financing has been provided by Japan Energy
Corporation ("Japan Energy") and certain of its wholly owned
subsidiaries (collectively known as the "Japan Energy Group").
As discussed in more detail below and in Note L of Notes to
Consolidated Financial Statements, as of March 17,1995 the
Company and the Japan Energy Group completed an exchange of
indebtedness for Series F Cumulative Convertible Preferred Stock
("Series F"). As part of this transaction, Gould Electronics
Inc. ("Gould"), a wholly owned subsidiary of Japan Energy agreed,
among other things, to exchange $50,000,000 of indebtedness owed
to it by the Company for Series F with a liquidation preference
of $50,000,000. Additionally, Gould agreed to: (i) provide an
additional $25,000,000 borrowing capacity by raising the limit of
the Company's loan agreement to $80,000,000, (ii) extend the
loan's maturity until April 16, 1996 and (iii) waive compliance
with the financial covenants of the agreement until January 1,
1996.
Should the Company continue to incur significant losses, it will
be difficult to operate as a going concern without the continued
financial support of the Japan Energy Group. Until the Company
returns to a sustained state of profitability, it will not be
able to secure sufficient financing from other sources.
Accordingly, should the Japan Energy Group withdraw its financial
support prior to the time the Company returns to profitability,
the Company will experience a severe liquidity crisis and have
difficulties settling its liabilities in the normal course of
business. Management believes the current availability of new
technology products, such as the Infinity 90 and Infinity SP,
could improve the Company's revenue stream and related
profitability. However until such time, the Company will
continue to adjust spending to levels consistent with expected
business conditions.
Comparison of Calendar 1994, 1993 and 1992.
Net sales for 1994 were $76,550,000 compared to net sales for
1993 and 1992 of $93,532,000 and $130,893,000, respectively. The
1994 revenue decline is due to both lower equipment and service
sales. In 1994, equipment sales decreased to $38,412,000 from
$43,622,000 and $67,840,000 in 1993 and 1992, respectively.
Service revenues for 1994, 1993, and 1992 were $38,138,000,
$49,910,000 and $63,053,000, respectively. In general as
discussed below, the principal service sales declines since 1992
are due to lower equipment sales volumes.
Despite the availability of new technology products such as the
Infinity SP, the Infinity 90 and Infinity R/T and continued
enhancements to the other traditional product lines, 1994
equipment sales decreased from prior years. This 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.
Prior to 1992 the Company's principal product offerings were
proprietary architectures whose core technology was 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 in its
traditional real-time markets. As a result, such product
revenues have declined significantly. Replacement products based
on open systems technology have been available from the Company
since 1991, however, demand in the real-time markets for initial
versions of the replacement products was disappointing.
Accordingly, since 1991 the Company has experienced significant
average annual declines of approximately 26% in its real-time
equipment sales. To improve its market acceptance, the Company
recently released additional, new versions of the Infinity R/T
based on the Digital Equipment Corporation's Alpha AXP 21064 RISC
processor for volume shipments. These versions appear to be more
favorably received by customers and during the second half of
1994, the Company began delivery of the product.
The Company has targeted the information processing market as a
strategic growth market. Since 1991 Encore has developed a
series of open system products targeted at this market
culminating in the availability of the Infinity 90. However, the
open systems computer market is still in its infancy. Data
processing users are now beginning to adopt this 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 its products and technology have received
favorable reviews by certain market research firms, Encore has
had difficulty penetrating the marketplace.
Reflective of the Company's declining system sales and continued
price competitiveness in the marketplace, service revenues have
declined from the prior years by 24% and 21% in 1994 and 1993,
respectively. However, as a percentage of total net sales,
service revenues have increased from 48% in 1992 to 50% in 1994.
Most of the Company's installed equipment base remains in use for
several years after installation and customers generally elect to
purchase maintenance contracts for their system while it is in
service. Accordingly, the rate of decline in service revenues
has lagged that of equipment revenues and since 1992 service
revenues have become an increasingly larger portion of the
Company's sales mix.
The decline in net sales has occurred in both the domestic and
international markets. International sales in 1994, 1993 and
1992 were $33,937,000, $41,371,000 and $65,209,000 or 44%, 44%,
and 50%, respectively of total net sales. Sales achieved in 1994
represent an average annual decline of 28% from 1992. The
principal decreases in international sales in all years have
occurred in Western Europe. The European markets have been
adversely affected by the same factors as the overall business
discussed above. In light of the downturn in international
operations, management has taken various actions including those
discussed below to reduce expenses to levels more consistent with
expected future business levels. In 1993 and 1992 decreasing
international margins caused by the declining revenue were not
fully offset by the lower operating expenses. As displayed in
Note K of Notes to Consolidated Financial Statements,
international operations incurred operating losses in those
years. In 1994, international operations returned to
profitability as the full benefit of the cost reduction actions
were realized. The financial results of international operations
are not expected to improve further until such time as product
demand increases significantly.
During the three years ended December 31, 1994, no single
customer accounted for more than 10% of the Company's annual
sales. However, sales to various U.S. government agencies have
represented approximately 32%, 37% and 29% of net sales in 1994,
1993 and 1992, respectively. The Company recognizes that
reductions in current levels of U.S. government agency spending
on computers and computer related services could adversely affect
its traditional sources of revenue. To mitigate any potential
risk, plans are in place to strategically expand into non-
traditional, high growth markets with the Infinity 90 and
Infinity SP Family of products. The high speed processing
capabilities of these products combined with the architecture's
scalability, make the products well suited for applications
traditionally thought to be the sole domain of mainframe
computers and proprietary subsystems. Among the markets being
targeted by the Company are the decision support
system/commercial parallel processing markets and data storage
markets where high speed performance is a critical factor.
One example of this effort is the execution of a five year
Reseller Agreement between the Company and Amdahl Corporation
("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. However, since
entering into the agreement certain significant contractual
issues have arisen. These issues, discussed in detail in the
following paragraphs and Note I of Notes to Consolidated
Financial Statements, have resulted in a slower than anticipated
ramp-up of deliveries to Amdahl.
In the second and third quarters of 1994, the Company and Amdahl
agreed to begin product deliveries under the terms of the Amdahl
Agreement. After delivery of the initial shipments of Infinity
SP's and related spares, Amdahl informed the Company of its
decision to postpone further deliveries until Amdahl's testing
confirmed that the product included all the performance, features
and functionality it believed were required under the terms of
the Amdahl Agreement. In addition, Amdahl has refused to pay for
the products delivered to it in 1994. These actions have
resulted in a significant delay in the realization of product
revenues and significant unplanned increases in inventory levels,
and is largely responsible for the deterioration of operating
cash flows. The Company believes the products delivered to
Amdahl conformed fully with the terms of the Agreement. The
Company has had continuing discussions with Amdahl requesting
payment of all past due invoices and the resumption of deliveries
under the terms of the Amdahl Agreement. Amdahl has filed suit
in the Delaware Chancery Court seeking to prevent Encore from
terminating the Agreement ( see Note I "Litigation").
Because of the current uncertainties surrounding the outcome of
the discussions between the companies, management has considered
it prudent to establish certain reserves at December 31, 1994 by
charging cost of goods sold including (i) an allowance of
$3,300,000 against past due Amdahl trade receivables of
$6,100,000 and (ii) an adjustment of $5,600,000 against the
$22,300,000 carrying value of Infinity SP inventory.
Previously, no one customer has represented a significant portion
of the Company's total business. However, should Amdahl purchase
Infinity SP products in the quantities to which they committed in
the Amdahl Agreement, they could become a significant portion of
Encore's future revenues. The Company recognizes that certain
business risks can exist whenever one company becomes a
significant portion of another's total business. To limit its
exposure to such possible future risk, the Company will continue
to seek out additional strategic distribution partnerships with
other companies for all of its products as allowed under the
terms of its existing customer agreements; including the
agreement with Amdahl.
In connection with the Company's sales to United States
Government agencies, certain government agencies, such as the
Department of Defense, are precluded from awarding contracts
which require access to classified information to foreign owned
or controlled companies. The principal source of both debt and
equity financing for the Company has been through Japan Energy (a
Japanese corporation) and certain of its wholly owned
subsidiaries. Aware of U.S. government limitations on the
ability of certain agencies to do classified business with
foreign owned or controlled companies, Encore and the Japan
Energy Group have proactively worked to comply with all U.S.
government requirements. In this connection, the Japan Energy
Group has agreed to accept certain terms and conditions relating
to its equity securities in the Company, including limitations on
the voting rights of its shares, limitations on the number of
seats it may have on the board of directors and certain
restrictions on the conversion of its preferred shares into
common stock. In connection with the recapitalizations discussed
in more detail below and in Notes G, J, and L of the Notes to
Consolidated Financial Statements, the Company requested the
United States Defense Investigative Service ("DIS") to review the
relationship between the Company, Japan Energy, and Japan
Energy's wholly owned subsidiaries, Gould and EFI International
Ltd. ("EFI"), under the United States Government requirements
relating to foreign ownership, control or influence. DIS has
indicated that it has no objection to the relationship.
Encore is committed to complying with all U.S. government
requirements regarding foreign ownership and control of U.S.
companies. At this time, the Company is unaware of any
circumstances that would adversely affect the opinions previously
issued by DIS. However, should DIS change its opinion of the
nature of Japan Energy's influence or control on the Company, a
significant portion of the Company's future revenues realized
through U.S. government agencies could be jeopardized.
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 .
Total cost of sales decreased in 1994 to $60,907,000 from
$65,831,000 in 1993 and $79,040,000 in 1992. The decrease in all
years reported was due generally to lower sales volumes and lower
spending resulting from the restructuring of manufacturing and
customer service operations during the three year period. Since
the beginning of 1992, manufacturing and customer service
headcount have been reduced by 50%, certain customer service
field operations have been closed or scaled down, and all
manufacturing operations have been consolidated in Melbourne,
Florida. In 1994 lower costs realized as a result of lower sales
volumes and lower spending levels were partially offset by
fourth quarter charges of $3,300,000 establishing an allowance
against past due Amdahl accounts receivable and an adjustment of
$5,600,000 against the $22,300,000 carrying value of Infinity SP
inventory of built for delivery to Amdahl. An additional
discussion of the facts and circumstances surrounding this charge
is included in Note I of Notes to Consolidated Financial
Statements under the caption Concentrations of Credit Risk.
Gross margins on equipment sales in 1994 were $3,360,000 (8.7%)
compared to 1993 gross margins of $14,041,000 (32.2%) and
$33,557,000 (49.5%) in 1992.
The decrease in 1994 equipment gross margins of $10,681,000 is
due principally to: (i) the one time charge reserving $3,300,000
of Amdahl accounts receivable discussed above, (ii) lower
margins of $2,290,000 on lower equipment sales, (iii) lower
margins of $2,941,000 due to a shift in sales mix towards lower
margin products, (iv) increased obsolescence costs of $1,799,000
inclusive of the one time $5,600,000 adjustment of Infinity SP
inventory as discussed above and, (v) miscellaneous other cost
increases of $351,000. The decrease in 1993 equipment gross
margins of $19,516,000 is due principally to: (i) lower margins
of $12,500,000 on lower equipment sales, (ii) lower margins of
$2,200,000 due to price erosion, (iii) increased inventory
obsolescence charges of $3,280,000 in connection with the
Company's continued migration to its newer open systems product
offerings and, (iv) non-recurring engineering charges and other
miscellaneous cost increases of $1,536,000.
1994 service gross margin was $12,283,000 (32.2%), a decrease of
$1,377,000 from 1993. The lower margin is due to lower revenues
of $11,772,000 which were mostly offset by lower operating costs
achieved through restructuring actions taken during both 1993
and 1992. Among the most significant of these actions occurred
during the fourth quarter of 1993 when the Company entered into
an agreement with Halifax Corporation ("Halifax"). The
agreement, which took full effect during the three month period
ended April 3, 1994, provides for Halifax to supply a large
portion of the manpower necessary to service equipment under
domestic maintenance contracts with the Company. Accordingly,
service operations was able to significantly reduce its
workforce during both the fourth quarter of 1993 and the first
quarter of 1994. As a result, during 1994 labor, benefits and
employee related expenses and supplies decreased by $9,119,000
from the prior year. Additionally, during 1994 management
continued its consolidation of marginally profitable field
offices resulting in lower rent expense of $796,000. Among the
principal cost reductions achieved in 1993 were lower employee
costs of approximately $5,500,000 due to reduced headcount,
lower field office rental costs of approximately $1,200,000 as
marginally profitable field locations were consolidated or
closed and other miscellaneous cost reductions of $1,807,000.
Service business profitability continues to be unfavorably
affected by the Company's declining computer equipment sales,
competitive pricing pressures, declining defense spending which
has resulted in some maintenance program cancellations, and the
termination of certain other service contracts as older installed
systems are being decommissioned by their users. Since 1990
approximately 25% of each year's existing service contracts have
not been renewed with the Company.
Management has implemented various plans over the three year
period ended December 31, 1994 to minimize the effect of
declining equipment and service sales on gross margins. These
actions have included reductions in workforce, the closing and
consolidation of unprofitable field operations and the
outsourcing of certain business functions as done in the Halifax
agreement discussed above. In future periods, management will
continue to assess the levels of spending in relation to the
forecasted size of the business and will, when necessary, make
appropriate adjustments.
During 1994, research and development expenses increased by
$7,008,000 to $30,339,000 (39.6% of net sales). The increase
is due principally to the acceleration of efforts to finalize the
development of certain new product offerings including the
Infinity SP product line. Among the significant expense
increases during 1994 are: (i) higher labor, benefits and
employee related expenses of $2,999,000, as both the permanent
and temporary research and development workforce increased, (ii)
increased development material and supplies expenses of
$1,597,000 in support of the finalization of new product
prototypes, (iii) higher software and consulting expenses of
$1,139,000 associated with the development of the Infinity SP,
and (iv) other miscellaneous cost increases of $1,273,000. 1993
research and development expenses were $23,331,000 (24.9% of net
sales) or an increase of $998,000 from 1992. The increase in
spending is due to efforts in the fourth quarter of 1993 to
accelerate the availability of new products then scheduled for
release in the first half of 1994. As a result of both lower net
sales and higher expense levels, research and development
expenses as a percentage of net sales in 1994 increased to 39.6%
from 24.9% and 17.1% in 1993 and 1992, respectively. Over the
three year period, management has elected to increase
expenditures on those strategic product offerings necessary to
the future growth of the business while significantly reducing
the level of investment in areas outside the Company's principal
focus. To effectively compete in its market niches, the Company
must continue to invest aggressively in research and development
activities. While the aggregate amount invested by the Company
in research and development may not decrease significantly during
the next several quarters, it is expected that as sales increase
research and development spending as a percentage of net sales
will return to lower levels.
Sales, general and administrative ("SG&A") expenses in 1994 were
$36,152,000 compared to $42,499,000 and $45,156,000 in 1993 and
1992, respectively. In 1994, SG&A expenses decreased in part due
to lower commissions on the year's lower sales but also due to
management's actions taken to minimize headcount, close or
consolidate marginally profitable field offices and to more
effectively focus its advertising programs. In this regard,
commissions decreased by $512,000, labor, benefits and other
employee related expenses decreased $5,125,000 as headcount
decreased by approximately 20% from 1993, advertising spending
declined by $900,000 and rent expenses decreased $786,000. These
reductions were partially offset by increased consulting expenses
of $644,000, related in part to the introduction of the Infinity
SP, and other miscellaneous increases of $332,000. SG&A expenses
decreased by $2,657,000 in 1993 when compared to 1992 due
primarily to (i) the effect of prior restructuring actions taken
by the Company, including lower labor on a reduced 1993 workforce
and (ii) lower sales commissions due to lower 1993 revenues.
These savings were partially offset by a non-recurring non-cash
charge to compensation expense of $788,000 made in connection
with the extension of the expiration date of certain stock
options made during the Company's fourth fiscal quarter. A more
complete discussion of this transaction is included in Note J of
Notes to the Consolidated Financial Statements. As a percentage
of net sales, SG&A expenses were 47.2%, 45.4% and 34.5% in 1994,
1993, and 1992, respectively. The increase as a percentage of
sales reflects the fact that reductions in SG&A spending have
been more than offset by declines in net sales. This is
partially due to the time delay in reducing certain fixed costs.
In the future, sales, general and administrative costs should
begin to return to lower levels as a percentage of net sales.
In 1993 and 1992, the Company took actions to restructure its
operations to levels consistent with the then expected levels of
future revenues. As discussed in Note F to Consolidated
Financial Statements, 1993 and 1992 operating expenses include
restructuring charges of $23,265,000 and $5,248,000,
respectively.
During the second and fourth quarters of 1993 management
evaluated its then latest financial forecasts of the business.
In light of lower than previously expected sales volumes,
management initiated actions to restructure its operations
including the reduction of its workforce to levels consistent
with planned future sales and the reassessment of carrying values
of certain long lived assets including property and equipment and
goodwill. In June 1993, the Company reduced its workforce by
approximately 10% with significant reductions made in
manufacturing, customer services and international sales
operations and then in the fourth quarter of 1993 approved plans
to further reduce the European workforce by 20% and U.S.
headcount by approximately 8%. Because of the reduced field
sales and service workforce, actions were also taken to eliminate
the resulting excess field office space by closing those offices
which were underutilized.
Because of the decline in traditional real-time product line
profits, the Company evaluated its investment in the property and
equipment employed to support future real-time product sales. As
a result of the analysis, management recognized the permanent
impairment in value of certain of these assets by writing off
their carrying values.
Finally, in light of the continuing revenue decline and the
erosion of the earnings premium of the real-time business which
the Company acquired from Gould in 1989, management determined
any excess value associated with the acquired business was fully
amortized. In this regard, the Company wrote off the remaining
carrying value of goodwill which it had originally recorded in
connection with the 1989 acquisition.
The 1992 restructuring charge includes severance and outplacement
costs associated with a 9% reduction in the workforce, the
write-off
of certain capitalized software assets relating to the on-
going transition of the Company's UNIX-based product lines, and
certain costs to be incurred related to the closure of certain
sales and service offices. $1,250,000 of this charge reflects
non-cash charges to operations and as a result of the 1992
restructuring, annual operating expenses were reduced by
approximately $6,000,000.
The Company recognized goodwill in recording the acquisition of
the Computer Systems Business which represented the excess of
acquisition cost over the fair value of assets acquired. During
1991 management determined the future earnings power associated
with certain portions of the acquired Computer Systems Business
had diminished significantly. Accordingly, in the fourth quarter
of 1991, the Company wrote down the carrying value of goodwill
from $12,979,000 to $4,979,000 by charging operations. The
carrying value of goodwill after the write-down was equivalent to
the estimated remaining earnings premium associated with the
Computer Systems Business. During 1992 in light of the
declining base of acquired business, management increased the
rate of amortization of goodwill so that by the end of 1994 any
excess value associated with the Computer Systems Business would
be fully amortized. However, because of the continued decline in
the acquired business during 1993, the remaining carrying value
of goodwill ($2,628,000) was written off by charging operations.
Interest expense decreased to $3,363,000 in 1994 from $6,380,000
in 1993 and $7,425,000 in 1992. During each year reported,
Encore completed a series of refinancing agreements with Japan
Energy, Gould and EFI as discussed in more detail below and in
Notes G and J of Notes to Consolidated Financial Statements. As
a result of the various refinancings in the three year reporting
period, the Company's annual interest expense was reduced by
approximately $13,000,000 through the conversion of debt with a
face value of $180,000,000 into the Company's preferred stock.
Interest income decreased in 1994 by $6,000 to $128,000 compared
to $134,000 and $263,000 in 1993 and 1992, respectively due
primarily to lower interest rates.
Other expense decreased by $850,000 from 1993's other expense of
$780,000 and other expense in 1992 of $2,077,000 due principally
to lower foreign exchange losses.
Income taxes provided in 1994, 1993, and 1992 relate to taxes
payable by foreign subsidiaries (see Note H of the Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
Because of operating losses incurred for the three years ending
December 31, 1994, the Company has been unable to generate cash
from operating activities. In 1994, 1993, and 1992, the Company
used cash in operating activities of $64,409,000, $36,415,000 and
$15,307,000, respectively.
From 1993 to 1994, cash used in operating activities increased by
$27,994,000. While 1994's net loss (net of non-cash items)
decreased from the prior year by $331,000 to $43,707,000, the
Company significantly increased its investment in accounts
receivable and inventories as a result of the acceleration of
activity under the Amdahl Agreement. In this connection,
accounts receivable increased by $3,014,000. Inventories
increased by $9,795,000 due principally to increased Infinity SP
finished goods built for sale to Amdahl and only partially offset
by reductions made in loaned equipment and other product line
inventory levels. In addition to the increases associated with
the start-up of the Amdahl Agreement, at December 31, 1994
accounts payable and accrued expenses were $9,048,000 lower than
the prior year as: (i) the Company settled $6,048,000 of
restructuring costs during the current year which were accrued at
December 31, 1993, (ii) accrued salaries and benefits decreased
by $694,000 due to a lower worldwide workforce at December 31,
1994 and, (iii) other miscellaneous accrued expenses decreased by
$2,306,000. Finally, the Company realized other miscellaneous
working capital increases of $1,182,000.
Cash used in operating activities in 1993 increased by
$21,108,000 from 1992 to $36,415,000. A higher 1993 net loss
(net of non-cash items) of $44,038,000 compared to 1992's
$12,161,000 was partially offset by reductions of $7,638,000 made
in working capital at December 31, 1993. During 1993 accounts
receivable decreased by $11,857,000 due in large part to the
year's lower net sales. Such improvement was offset by increased
inventories of $2,031,000 and $2,188,000 of other working capital
increases.
Expenditures for property and equipment during 1994, 1993 and
1992 were $13,089,000, $11,780,000 and $10,119,000,
respectively. Expenditures for capitalized software during 1994,
1993, and 1992 were $2,467,000, $2,142,000 and $2,365,000,
respectively. As of December 31, 1994, there were no material
commitments for capital expenditures.
The Company used cash in operating and investing activities
during 1994, 1993 and 1992 of $79,745,000, $50,277,000 and
$27,441,000, respectively. These cash outflows were principally
offset by cash provided through financing activities of
$78,496,000, $49,007,000 and $24,327,000 in 1994, 1993, and 1992,
respectively. The principal source of financing has been through
various agreements provided by the Japan Energy Group.
As discussed in more detail in Notes G, J and L of Notes to
Consolidated Financial Statements, since 1989 Gould has provided
the Company with its revolving credit facility. Additionally,
during the three years ended December 31, 1994 the Company and
the Japan Energy Group have entered into a series of financing
transactions involving the cancellation of $190,000,000 of
indebtedness owed by the Company to the Japan Energy Group in
exchange for the issuance of various classes of the Company's
Preferred Stock to 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 $2,517,000 was at
various international subsidiaries. With minor exceptions, all
cash is freely remittable to the United States.
<PAGE>
<TABLE>
<S> <C> <S> <C>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Operations
(in thousands except per share data)
Year Ended:
December 31, December 31, December 31,
1994 1993 1992
--------- -------- ---------
Net sales:
Equipment $ 38,412 $ 43,622 $ 67,840
Service 38,138 49,910 63,053
--------- -------- -----------
Total 76,550 93,532 130,893
Costs and expenses:
Cost of equipment sales 35,052 29,581 34,283
Cost of service sales 25,855 36,250 44,757
Research and development 30,339 23,331 22,333
Sales, general and administrative 36,152 42,499 45,156
Amortization of goodwill - 691 1,660
Restructuring costs - 23,265 5,248
--------- -------- ---------
Total 127,398 155,617 153,437
--------- -------- ---------
Operating loss (50,848) (62,085) (22,544)
Interest expense, principally
related parties (3,363) (6,380) (7,425)
Interest income 128 134 263
Other expense, net 70 (780) (2,077)
--------- -------- ---------
Loss before income taxes (54,013) (69,111) (31,783)
Provision for income taxes (Note H) 543 454 739
--------- --------- ---------
Net loss $ (54,556) $ (69,565) $ (32,522)
========== ========= =========
Net loss per common share (Note A):
Net loss attributable to common
shareholders $ (68,543) $ (78,750) $ (36,993)
========== ========= ===========
Loss per common share $ (1.68) $ (2.01) $ (0.98)
========== ========= ============
Weighted average shares
of common stock 40,755 39,273 37,899
========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<S> <C> <C> <C>
ENCORE COMPUTER CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
(UNAUDITED)
PROFORMA
December 31, December 31, December 31,
1994 1994 1993
-------- -------- --------
(See Note L)
ASSETS
Current assets:
Cash and cash equivalents (Note A) $ 2,517 $ 2,517 $ 3,751
Accounts receivable, less allowances
of $5,017 in 1994 and $2,150 in 1993 19,855 19,855 16,555
Inventories (Notes A and B) 27,555 27,555 17,764
Prepaid expenses and other
current assets (Note C) 1,863 1,863 3,047
-------- -------- --------
Total current assets 51,790 51,790 41,117
Property and equipment, net
(Notes A and D) 40,921 40,921 37,603
Capitalized software, net
(Notes A and E) 5,139 5,139 4,403
Other assets 912 912 947
-------- -------- --------
Total assets $ 98,762 $ 98,762 $ 84,070
========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term
debt-other (Note G) 195 195 197
Accounts payable and accrued
liabilities (Notes F and G) 35,657 31,358 37,421
-------- -------- --------
Total current liabilities 35,852 31,553 37,618
Long term debt - related
parties (Note G) 38,421 88,421 111,924
Long term debt - other (Note G) 828 828 995
Other liabilities (Note G) - - 93
-------- -------- --------
Total liabilities 75,101 120,802 150,630
-------- -------- --------
Commitments and contingencies
(Note I)
Shareholders' equity (capital
deficiency) (Note J and L) :
Preferred stock, $.01 par value;
authorized 10,000,000 shares:
Series A Convertible Participating
Preferred, issued 73,641 shares
in 1993 and 1992 1 1 1
6% Cumulative Series B
Convertible Preferred, issued
666,453 and 591,625 shares in 1994 and
1993, respectively with an
aggregate liquidation preference of
$66,645 and $59,162 in 1994 and
1993, respectively 7 7 6
6% Cumulative Series D Convertible
Preferred, issued 1,019,787 and
905,283 shares in 1994 and 1993,
respectively with an aggregate
liquidation preference of $101,978
and $90,528 in 1994 and 1993,
respectively 10 10 9
6% Cumulative Series E Convertible
Preferred, issued 1,042,381 shares in 1994
with an aggregate liquidation preference
of $104,238 10 10 -
6% Cumulative Series F Convertible
Preferred, issued 500,000 shares in 1995
with an aggregate liquidation preference
of $50,000 5 - -
Common stock, $.01 par value;
authorized 150,000,000 shares; issued
34,076,124 and 32,726,391 in 1994 and
1993, respectively 341 341 327
Additional paid-in capital 352,697 307,001 207,951
Accumulated deficit (329,410) (329,410) (274,854)
-------- -------- --------
Total shareholders' equity
(capital deficiency) 23,661 (22,040) (66,560)
-------- -------- --------
Total liabilities and shareholders'
equity (capital deficiency) $ 98,762 $98,762 $ 84,070
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C> <S> <C>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Year Ended:
December 31, December 31, December 31,
1994 1993 1992
------ -------- --------
Cash flows used in operating activities:
Net loss $(54,556) $ (69,565) $ (32,522)
Adjustments to arrive at net cash used in
operating activities:
Depreciation and amortization 10,850 12,320 16,092
Write off of property and equipment - 10,543 1,004
Write off of intangible assets - 2,628 1,248
(Gain)Loss on sale of fixed assets (1) 36 451
Amortization of debt discount - - 1,566
Net changes in operating assets and liabilities:
Accounts receivable (3,014) 11,857 4,787
Inventories (9,795) (2,031) (1,172)
Other current assets 1,217 (1,575) 1,613
Other assets 31 176 144
Accounts payable and accrued liabilities (9,048) 1,182 (6,941)
Other liabilities (93) (1,986) (1,577)
------ -------- ---------
Cash used in operating activities (64,409) (36,415) (15,307)
------ -------- --------
Cash flows used in investing activities:
Additions to property and equipment (13,089) (11,780) (10,119)
Cash proceeds from sale of property and equipment 220 60 350
Capitalization of software costs (2,467) (2,142) (2,365)
------ -------- --------
Cash used in investing activities (15,336) (13,862) (12,134)
------ -------- --------
Cash flows from financing activities:
Net borrowings under revolving loan agreements 76,497 46,724 23,930
Principal payments of long term debt (169) (214) (631)
Issuance of preferred stock 2 - -
Dividends paid on Preferred Stock (4) - -
Issuance of common stock 2,170 2,497 1,028
------ -------- --------
Cash provided by financing activities 78,496 49,007 24,327
------ -------- --------
Effect of exchange rate changes on cash 15 215 1,843
Decrease in cash and cash equivalents (1,234) (1,055) (1,271)
Cash and cash equivalents, beginning 3,751 4,806 6,077
------ -------- --------
Cash and cash equivalents, ending $ 2,517 $ 3,751 $ 4,806
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
1994 1993 1992
------- -------- -----
Cash paid during the period for interest $ 2,162 $ 8,648 $ 5,233
Cash paid during the period for income taxes - 912 365
Supplemental schedule of non-cash investing and financing
activities:
A. On September 10, 1992, the Company exchanged
indebtedness and redeemable preferred stock for, among other
things, preferred stock. Refer to Note G of Notes to Consolidated Financial
Statements.
B. Accretion of the discount on Series C redeemable
preferred stock for the year ended December 31, 1992 was $721,000.
C. Effective March 31, 1992, the Company's existing
$50,000,000 revolving credit facility was converted to a term loan. Refer to
Note G of Notes to Consolidated Financial Statements.
D. On February 4, 1994, the Company exchanged
$100,000,000 of indebtedness for shares of the Company's Series E Convertible
Preferred Stock. Refer to Note J of Notes to Consolidated
Financial Statements.
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<S> <C>
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
-----------------------Preferred Stock---------------------------
Series A SeriesB Series D Series E
Par Par Par Par
Shares Value Shares Value Shares Value Shares Value
------ ------ ------- ----- ------- ------ ------ -------
Balance January 1, 1992 73,641 $ 1 552,194 $ 6 - $ - - $ -
Common stock options exercised,
$.63 to $1.63 per share
Shares issued through employee stock
purchase plan at an average price
of $.86 per share
Dividends issued to Preferred Stockholders
in shares of Series B 39,431 -
Adjustment of estimated transaction costs
relating to Gould 1991 capital transaction
Issuance of Series D Convertible
Preferred Stock (Note G) 900,000 9
Dividends issued to Preferred Stockholders
in shares of Series D 5,283 -
Net loss
------ ------ ------- ----- ------- ------ ------ -------
Balance December 31, 1992 73,641 1 591,625 6 905,283 9 - -
Common stock options exercised,
$.63 to $2.00 per share
Shares issued through employee stock purchase
plan, at an average price of $1.56 per share
Extension of expiration date on outstanding
grant of common stock options
Net loss
Balance December 31, 1993 73,641 1 591,625 6 905,283 9 - -
Common stock options exercised,
$.63 to $2.00 per share
Shares issued through employee stock purchase
plan at an average price of $2.69 per share
Dividends issued to Preferred Stockholders
in shares of Series B 74,828 1
Dividends issued to Preferred Stockholders
in shares of Series D 114,504 1
Issuance of Series E Convertible
Preferred Stock 1,000,000 10
Dividends issued to Preferred Stockholders
in shares of Series E (Note G) 42,381 -
Adjustment of estimated transaction costs
relating to Gould capital transaction
Net loss
------ ------ ------- ----- --------- ------ --------- -------
Balance December 31, 1994 73,641 $ 1 666,453 $ 7 1,019,787 $ 10 1,042,381 $ 10
====== ====== ======= ===== ========= ====== ========= =======
</TABLE>
(Continued Below)
<TABLE>
<S> <C> <S> <C> <S> <C> <S>
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
(Continued for above)
Common Stock Additional Shareholders'
Paid-in Accumulated Equity/
Shares Value Capital Deficit Deficiency
---------- ------ ------- ---------- -----------
Balance January 1, 1992 30,064,556 $ 301 $ 130,322 $(172,767) $ (42,137)
Common stock options exercised,
$.63 to $1.63 per share 352,248 3 323 326
Shares issued through employee stock
purchase plan at an average price
of $.86 per share 815,411 8 694 702
Dividends issued to Preferred Stockholders
in shares of Series B -
Adjustment of estimated transaction costs
relating to Gould 1991 capital transaction 900 900
Issuance of Series D Convertible
Preferred Stock (Note G) 73,230 73,239
Dividends issued to Preferred Stockholders
in shares of Series D
-
Net loss (32,522) (32,522)
---------- ------ ------- ---------- -----------
Balance December 31, 1992 31,232,215 312 205,469 (205,289) 508
Common stock options exercised,
$.63 to $2.00 per share 1,016,597 10 955 965
Shares issued through employee stock purchase
plan, at an average price of $1.56 per share 477,579 5 739 744
Extension of expiration date on outstanding
grant of common stock options 788 788
Net loss (69,565) (69,565)
---------- ------ ------- ---------- -----------
Balance December 31, 1993 32,726,391 327 207,951 (274,854) (66,560)
Common stock options exercised,
$.63 to $2.00 per share 966,734 10 1,131 1,141
Shares issued through employee stock purchase
plan at an average price of $2.69 per share 382,999 4 1,025 1,029
Dividends issued to Preferred Stockholders
in shares of Series B (2) (1)
Dividends issued to Preferred Stockholders
in shares of Series D (2) (1)
Issuance of Series E Convertible
Preferred Stock 96,273 96,283
Dividends issued to Preferred Stockholders
in shares of Series E (Note G)
Adjustment of estimated transaction costs
relating to Gould capital transaction 625 625
Net loss (54,556) (54,556)
---------- ------ ------- ---------- -----------
Balance December 31, 1994 34,076,124 $ 341 $ 307,001 $ (329,410) $ (22,040)
========== ===== ========= =========== ==========
</TABLE>
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies;
Principles of Consolidation
The accompanying financial statements include the accounts of
Encore Computer Corporation and its wholly owned subsidiaries
("Encore" or the "Company"). All material intercompany
transactions have been eliminated.
Revenue Recognition
Revenue related to equipment and software sales is recognized
upon shipment. Service revenue is recognized over the term of the
related maintenance agreements.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with
maturities at the date of purchase of three months or less. The
Company maintains its cash in bank deposit accounts which, at
times, may exceed insured limits. The Company has not
experienced any losses related to these accounts.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Loaned equipment
which consists primarily of finished computer systems that are
loaned to customers for test and evaluation is classified as
inventory only if the equipment is intended for resale and
anticipated to be in service for a period of less than 12 months
prior to sale. Loaned equipment in service for more than 12
months is presented as property and equipment.
Property and Equipment
Property and equipment is stated at cost. Property and equipment
includes customer service inventory which consists principally of
spare parts utilized to support repairs at customer installations
and is generally not available for resale. Additions, renewals
and improvements are capitalized, and repair and maintenance
costs are expensed. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
reflected in the results of operations. Depreciation is provided
on a straight line basis over the estimated lives of the assets,
generally three years for loaned equipment, five years for
equipment and customer service inventory, ten years for furniture
and fixtures, and 25 to 30 years for buildings. Leasehold
improvements are amortized over their expected useful lives or
the lease term, whichever is shorter.
Goodwill
Goodwill originated from the 1989 acquisition of the Computer
Systems Business of Gould Electronics Inc. (the "Computer Systems
Business") and represented the excess of the acquisition cost
over the estimated fair value of the net assets acquired. From
1989 until 1991, goodwill was being amortized on a straight line
basis over a 10 year period. However in 1991, based on the
operating losses incurred since the acquisition of the Computer
Systems Business, the Company determined goodwill had been
permanently impaired. Accordingly, the Company reduced its
carrying value from $12,979,000 to $4,979,000 resulting in a
charge in 1991 of $8,000,000. In 1992, due to continuing
operating losses, the Company reduced the amortization period for
the remaining carrying value of goodwill to December 31, 1994.
During 1993, due to the continued inability to achieve
profitability, the remaining carrying value of goodwill of
$2,628,000 was charged to operations.
Amortization of goodwill is presented as a component of operating
expense.
Capitalized Software
The Company capitalizes certain internal costs associated with
software development after the project reaches technological
feasibility. Such costs as well as capitalized costs for
purchased software, are amortized to cost of sales at the greater
of straight line amortization over the expected commercial life
of each product, or the proportion of the current period's
product revenues to total expected product revenues. The
amortization periods generally range from 3 to 5 years. Software
development costs incurred prior to reaching the point of
technological feasibility are considered research and development
costs and are expensed as incurred.
Income Taxes
The Company utilizes the liability method of accounting for
deferred income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse.
In addition, the liability method of accounting for deferred
income taxes requires the recognition of future tax benefits,
such as net operating loss carryforwards, to the extent that
realization of such benefits are more likely than not. The tax
benefits recognized must be reduced by a valuation allowance
where it is more likely than not the benefits may not be
realized. Due to the uncertainties associated with the
realization of such benefits by the Company, the full amount of
these benefits is offset by a valuation allowance.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock equivalents
outstanding. In fiscal periods which report net losses, the
calculation does not include the effect of common stock
equivalents such as stock options since the effect on the amounts
reported would be antidilutive. Series A Convertible
Participating Preferred Stock has been considered common stock
(on an assumed converted basis) for purposes of all income (loss)
per share calculations. The Series B Convertible Preferred Stock
("Series B"), Series D Convertible Preferred Stock ("Series D")
and Series E Convertible Preferred Stock ("Series E") have been
determined to be common stock equivalents but are not included in
the weighted average number of shares of common stock and
equivalents or in the calculation of net loss per share for the
periods presented because the effect would be antidilutive.
For the period ended December 31, 1994, the Company paid 1994
dividends on the Series B, Series D and Series E in additional
shares of the appropriate class of preferred stock in the amounts
of $3,852,800, $5,895,700 and $4,238,100, respectively. For the
period ended December 31, 1993, because it reported a capital
deficiency, the Company accumulated dividends on the Series B and
Series D of $3,630,000 and $5,554,700, respectively. All
dividends accumulated during 1993 were subsequently paid in
additional shares of preferred stock during 1994. During the
year ended December 31, 1992 dividends of $3,943,100 were paid to
holders of the Series B and the then outstanding Series C
Redeemable Preferred Stock with shares of Series B.
Additionally, dividends of $528,300 were paid to holders of the
Series D with shares of Series D. In computing the loss per
share for all years reported, these dividends increased the
respective year's loss as reported for the earnings per share
calculation.
Dividends on the Series B, Series D and Series E payable on
January 15, 1995 for the period of October 16, 1994 to January
15, 1995 of $999,700, $1,529,700, and $1,563,600 have been
accumulated by the Company. At that time the Company reported a
capital deficit and was thereby precluded from paying dividends
under Delaware law.
Foreign Currency Translation and Transactions;
Management has determined that the functional currency of each of
the Company's subsidiaries is the United States dollar.
Consequently, assets and liabilities of foreign operations are
translated into U.S. dollars at period end exchange rates, except
that, inventory and property and equipment are translated at
historical exchange rates. Income and expenses are translated at
the average rates prevailing during the year, except that cost of
sales and depreciation are translated at historical exchange
rates. All gains and losses arising from changes in exchange
rates are included in operating results in the period incurred.
The Company has, at times, enter into forward exchange contracts
to reduce the effect of foreign currency fluctuations on
operations and the asset and liability positions of foreign
subsidiaries. Resultant gains and losses on these contracts are
included in operating results when the operating revenues and
expenses are recognized and for assets and liabilities in the
period in which the exchange rates change. At December 31, 1994
and December 31, 1993, however, the Company had no forward
exchange contracts outstanding. For 1994, the Company recognized
a foreign exchange gain of $93,000. In 1993 and 1992, Encore
incurred foreign exchange losses of $744,000 and $1,576,000,
respectively.
Warranties
The Company provides a standard product warranty on its computer
systems for parts and labor which generally extends ninety days
from the date of installation, but on certain products for up to
one year. On its storage processor product line, the standard
product warranty for parts and labor generally extends two and,
in some cases, three years from the date of installation. The
estimated cost of providing such warranty on products sold is
included in cost of sales at the time revenue is recognized.
B. Inventories
Inventories consist of the following (in thousands):
December 31, December 31,
1994 1993
--------- ----------
Purchased parts $ 3,307 $ 4,660
Work in process:
Storage Products 18,567 -
Other 4,810 9,618
Finished goods 482 1,065
Loaned computer equipment
and consignment inventory 389 2,421
--------- ----------
$ 27,555 $ 17,764
========= ==========
At December 31, 1994, inventory includes $18,567,000 of Storage
Products work in process acquired to meet the anticipated demand
under the Amdahl Agreement. As discussed in Note I, 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 to record an adjustment
of $5,600,000 against the carrying value of the inventory.
Additionally, a program has been implemented to reduce the
inventory to desired levels over the near term and no further
losses should be incurred on its disposition. No estimate can be
made of a range of amounts of loss that are reasonably possible
should the program not be successful.
C. Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the following
(in thousands):
December 31, December 31,
1994 1993
--------- ----------
Deferred customer sponsored
engineering costs$ - $ 1,187
Prepaid rent 302 266
Prepaid expenses 1,416 1,477
Other current assets 145 117
--------- ----------
$ 1,863 $ 3,047
========= ==========
D. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31, December 31,
1994 1993
--------- ----------
Land $ 5,100 $ 5,100
Buildings 14,878 14,874
Equipment 43,285 38,110
Customer service inventory 12,922 15,245
Furniture and fixtures 3,286 3,503
Leasehold improvements 1,861 1,872
Loaned equipment 4,915 2,735
Construction in progress 561 496
--------- ----------
86,808 81,935
Less: accumulated depreciation
and amortization (45,887) (44,332)
--------- ----------
$ 40,921 $ 37,603
============ =============
Depreciation expense in 1994, 1993 and 1992 amounted to
$8,619,000, $9,853,000, and $12,297,000, respectively.
E. Capitalized Software
Capitalized software consists of the following (in thousands):
December 31, December 31,
1994 1993
--------- ----------
Capitalized software $ 11,840 $ 8,878
Accumulated amortization (6,701) (4,475)
--------- ----------
$ 5,139 $ 4,403
========== ==========
Software costs capitalized in 1994, 1993, and 1992 amounted to
$2,467,000, $2,142,000 and $2,365,000, respectively.
Amortization of capitalized software costs charged to expense
amounted to $2,226,000, $1,696,000 and $2,043,000, respectively.
F. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
December 31, December 31,
1994 1993
--------- ----------
Accounts payable $ 10,582 $ 10,805
Accrued salaries and benefits 4,663 5,357
Accrued restructuring costs 4,926 10,974
Accrued interest 1,882 682
Accrued taxes 3,359 3,545
Deferred income,
principally maintenance
contracts 1,548 1,563
Other accrued expenses 4,398 4,495
--------- ----------
$ 31,358 $ 37,421
======== ==========
During 1993 and 1992 the Company recognized restructuring
expenses of $23,265,000 and $5,248,000, respectively.
In 1993, restructuring expenses related to (i) the recognition of
the permanent impairment in value of certain long lived assets
including fixed assets and goodwill, (ii) severance and
outplacement costs associated with a 12% reduction in workforce,
(iii) the accrual of costs to be incurred for field offices
abandoned due to the reduced sales and service workforce. The
1993 charge includes approximately $12,000,000 of non-cash
charges related to the write down of the carrying value of assets
deemed permanently impaired.
In 1992, the Company recognized restructuring costs relating to
severance and outplacement costs associated with a reduction in
workforce as well as the write-off of capitalized software and
certain other assets as part of the Company's continued
transition of its product line. Of the total 1992 charges,
approximately $1,250,000 was a non-cash charge to operations.
All accrued restructuring expenses at December 31, 1994 consist
of cash items and settlement of such items will result in cash
outflows.
G. Debt
Debt consists of the following (in thousands):
Unaudited
(See Note L)
Pro Forma
December 31, December, 31, December 31,
1994 1994 1993
--------- ---------- ----------
Debt to unrelated parties:
Mortgages payable and capital
lease obligations $ 1,023 $ 1,023 $ 1,192
Less:
Current portion of debt (195) (195) (197)
--------- ---------- ----------
Total long term debt to
unrelated parties $ 828 $ 828 $ 995
======== ========= ========
Debt to related parties:
Revolving loan agreements with
Gould Electronics Inc. $ - $ 50,000 $ 61,924
Uncommitted loan agreement with
Gould Electronics Inc. 38,421 38,421 -
Term loan with Gould
Electronics Inc. - - 50,000
--------- ---------- ----------
Total long term debt to
related parties $38,421 $ 88,421 $111,924
======== =========== ==========
Related Party Transactions
The Company, Japan Energy Corporation ("Japan Energy") and its
subsidiaries Gould Electronics Inc. ("Gould") and EFI
International Limited ("EFI") are related parties due to the
significant financial interests of Gould and EFI in the Company.
As of December 31, 1994, assuming full conversion of their
holdings in the Company's preferred stock, Gould and EFI
beneficially owned 50.0% and 21.0%, respectively of the Company's
common stock. Since 1989, Gould has provided the Company with
its revolving line of credit and, as discussed in more detail
throughout this note, Note J, and Note L , has entered into
certain other financing transactions including the following:
1995 Exchange of Indebtedness for Convertible Preferred Stock
As more fully described in Note L of Notes to 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.
Upon completion of the transaction and assuming
full conversion of all preferred stock, Japan Energy's beneficial
ownership increased to 74.0%.
1994 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 described in Note L of Notes to Consolidated
Financial Statements, 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.
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 (See Note J).
1992 Exchange of Indebtedness and Redeemable Preferred Stock
for Preferred Stock
On September 10, 1992, Encore and EFI entered into an agreement
whereby EFI exchanged $80,000,000 ($65,451,000 net of debt
discount) of indebtedness owed to EFI under the then existing
subordinated loan agreement for 800,000 shares of the Company's
Convertible Preferred Series D Stock with an
aggregate liquidation preference of $80,000,000. In addition,
Gould exchanged all of its outstanding 100,000 shares of Series C
Redeemable Preferred Stock ("Series C") with a liquidation
preference of $10,000,000 for 100,000 shares of the Series D also
with a liquidation preference of $10,000,000.
Total interest expense on indebtedness to Gould for 1994, 1993
and 1992 was $3,156,000, $6,082,000 and $3,040,000, respectively.
Interest expense on then outstanding indebtedness to EFI during
1992 was $1,726,000.
In addition to the loans described above, amounts due to Gould at
December 31, 1994 and 1993, included accrued interest of
$1,882,000 and $677,000, respectively.
Revolving Loan Agreements
Since 1989, Gould has provided the Company with its revolving
credit facility. Borrowings under the revolving loan agreement
are collateralized by substantially all of Encore's tangible and
intangible assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible net
worth ratios and limitations on capital expenditures, dividend
payments and additional indebtedness. Interest is equal to the
prime rate plus 1% (9.5% at December 31, 1994 and 7.0% on
December 31, 1993) and is payable monthly in arrears.
Due to operating losses incurred, during 1993 the Company
exceeded the $35,000,000 then maximum borrowing amount of the
revolving line of credit. Gould, however, allowed the Company
to borrow funds in excess of the agreement's maximum limit to
fund its daily operations. At December 31, 1993, borrowings
under the agreement were $61,924,000.
On February 4, 1994, the Company and Gould 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.
Then, on April 11, 1994, the Company and Gould agreed to
increase the maximum borrowing limit of the revolving credit
facility from $35,000,000 to $50,000,000 and to extend its
maturity date to April 16, 1996. All other terms and conditions
of the revolving loan agreement were essentially unchanged
except certain financial covenants contained in the agreement
were modified to more closely reflect the Company's 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 L of Notes to 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.
In connection with the execution of the Short Term Loan
Agreement, Gould provided the Company with statements affirming
it would not exercise certain remedies with respect to certain
defaults of the financial covenants contained in the Revolving
Loan Agreement until after January 31, 1995.
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. On April 12, 1993, the Company and
Gould agreed to extend the maturity date of the loan to April 2,
1995. Additionally, Gould agreed to provide the Company with
waivers of compliance with the covenants contained in the
agreement through the end of the first fiscal quarter of 1994.
On February 4, 1994, the Company and Gould cancelled the
indebtedness owed by the Company to Gould under the Term Loan
agreement in exchange for Series E convertible preferred stock.
H. Income Taxes
The Company utilizes the liability method of accounting for
deferred income taxes and has recorded a provision of $543,000,
$454,000 and $739,000 for the years ended 1994, 1993 and 1992,
respectively. The provisions relate to the profitable operations
of certain foreign subsidiaries.
The financial reporting bases of investments in certain foreign
subsidiaries exceeds their tax bases. In accordance with SFAS
No. 109, a deferred tax liability is not recorded for the excess
because the investments are essentially permanent. A reversal of
the Company's plans to permanently invest in these operations
would cause the excess to become taxable. On December 31, 1994,
these temporary differences were approximately $5,400,000. A
determination of the amount of unrecognized deferred tax
liability related to these investments is not practicable.
The significant components of the deferred tax account as of
December 31, 1994, 1993 and 1992 were as follows (in thousands):
1994 1993 1992
-------- ------- --------
Deferred tax assets:
Net Operating Losses $ 99,993 $ 79,396 $ 59,597
Research & Experimental Credits 1,750 1,750 1,750
Capital Losses 4,396 4,396 4,396
Allowance for Doubtful Accounts 2,836 676 639
Inventory Reserves 2,722 3,535 2,846
Accrued Vacation 928 847 834
Various Reserves/Other 1,028 590 1,037
Accrued Restructuring 1,397 2,372 1,439
-------- ------- --------
115,050 93,562 72,538
Valuation Allowance 113,732 92,319 71,193
1,318 1,243 1,345
Deferred tax liabilities:
Capitalized Software $ (1,318) (1,243) (1,345)
-------- ------- --------
Net $ - $ - $ -
========= ======== =========
For income tax purposes the Company had a change in ownership, as
defined by Internal Revenue Code Section 382, in connection with
the Gould debt exchange on January 28, 1991. The change in
ownership resulted in an annual limitation of approximately
$2,000,000 on the amount of net operating losses incurred prior
to January 28, 1991 that can be utilized to offset the Company's
future taxable income.
At December 31, 1994, the Company has available approximately
$85,000,000 of pre change net operating losses of which only
$30,000,000 are allowable after application of the Section 382
limitation, pre change tax credit carryforwards, principally
research and development credits, of approximately $1,750,000 and
post change net operating losses of $176,000,000. These net
operating losses and tax credit carryforwards expire in the years
2005 through 2009. The Company also has a net capital loss
carryforward of $12,937,000 related to the Gould debt exchange on
January 28, 1991, which expires in 1996. For financial reporting
purposes, the full amount of the deferred tax assets was offset
by a valuation allowance due to uncertainties associated with the
eventual realization of such benefits.
As of December 31, 1994, the U.S. Federal Income Tax Returns for
1992 were in the process of examination by the Internal Revenue
Service. Management believes that the amounts that have been
provided are adequate and that the ultimate resolution of the
examination will result in no material impact on the Company's
consolidated results of operations or financial position.
I. Commitments and Contingencies
Leases
The Company leases office, research facilities, sales offices and
equipment under operating leases. Certain building leases have
renewal options generally for periods ranging from one to five
years. Rental expenses, net of sublease income, were
approximately $3,594,000, $4,127,000 and $5,768,000 for the
years ended 1994, 1993, and 1992, respectively. Future minimum
lease payments under capital lease obligations and minimum rental
payments under operating leases for the next five years are
approximately as follows:
(in thousands) Capital Operating
Year Leases Leases
------- ----------
1995 $ 42 $ 2,717
1996 - 1,825
1997 - 1,349
1998 - 1,000
1999 - 1,047
------- ----------
Total Minimum Lease Payments 42 $ 7,938
Less: Amounts representing interest 1 =========
-------
Present value of net minimum
lease payments $ 41
=======
Future minimum rental income under noncancelable subleases
extending through 1999 amounts to $320,000.
Litigation
During 1994 the Company and Amdahl entered into a multi-year
Reseller Agreement which provides Amdahl, in exchange for
purchase commitments of specified volumes, with the exclusive
marketing and distribution rights to the Company's Infinity SP
storage product, except for sales to the U.S. government and
system integrators responding to U.S. government 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.
During the second and third quarters of 1994 the Company
delivered products to Amdahl under the terms of the Amdahl
Agreement which Encore believes conformed fully with the
agreement. However, as of December 31, 1994 Amdahl had not paid
for the products received.
The Company has had continuing discussions with Amdahl requesting
payment of all past due invoices and the resumption of deliveries
under the terms of the Amdahl Agreement. In response to a
February 1995 letter sent by the Company to Amdahl notifying
Amdahl of its intent to terminate the Amdahl Agreement if past
due invoices were not paid, 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 which, in effect, preserves
the status quo to allow the companies time to more thoroughly
discuss the contractual issues that exist. The "Stand-Still"
Agreement runs until April 14, 1995.
Because of the current uncertainties surrounding the outcome of
the discussions between the companies, management has considered
it prudent to establish certain reserves at December 31, 1994 by
charging cost of goods sold including (i) an allowance of
$3,300,000 against past due Amdahl trade receivables of
$6,100,000 and (ii) an adjustment of $5,600,000 against the
$22,300,000 carrying value of Infinity SP inventory. The
unfavorable resolution of this matter could adversely impact
Encore's future business prospects and, accordingly, the future
results of the Company.
There are no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries are party to or of which
any of their property is the subject. The unfavorable settlement
of any of these existing matters would not have an adverse impact
on the financial results of the Company.
Employer's Postemployment Benefits
The Company provides employees with no Company-paid
postemployment benefits other than salary continuation and job
counseling services in the event of an employee's involuntary
termination. The Company recognizes such costs on a terminal
accrual basis recording the estimated cost of post-employment
benefits at the date of the event giving rise to the liability to
pay those benefits.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations
of credit risk are limited to trade receivables. The Company
grants credit terms in the normal course of business to its
customers which are consistent with industry practices.
Generally, the Company's customers are United States government
agencies or substantial international corporations often included
among the Fortune 500. Additionally, as part of its ongoing
control procedures, the Company monitors the credit worthiness of
its major customers and establishes individual customer credit
limits accordingly. Bad debts realized by the Company in prior
years have not been excessive and doubtful accounts are
adequately reserved when identified.
At December 31, 1994 the Company's trade receivables include
$6,100,000 due from Amdahl Corporation. As discussed in this
Note under the caption "Litigation", to date Amdahl has withheld
payment on invoices that are past due pursuant to the contract
until they are able to complete the additional testing necessary
to confirm that product performance, features and functionality
conforms with that defined under the terms of the Agreement. The
Company believes the products delivered to Amdahl conform with
the terms of the contract under which the equipment was sold and
is actively pursuing the immediate payment of all outstanding
items. Because of the uncertainty surrounding the outcome of the
negotiations and the timing of any eventual payment, management
considered it prudent to establish an allowance of $3,300,000
against the Amdahl receivable at December 31, 1994 by charging
cost of goods sold. When negotiations are finalized and
collection of the amounts due are obtained, the reserve will be
adjusted appropriately.
Intellectual Property License
As part of a 1991 exchange of preferred stock for indebtedness,
the Company and Gould entered into an intellectual property
licensing agreement whereby the Company licensed substantially
all of its intellectual property to Gould under certain
conditions. The intellectual property license is exclusive,
royalty free and provided that the Company achieved certain
revenue levels, would not have allowed Gould to use the
intellectual property until January 1994. The Company has the
option to extend its exclusivity period for up to five additional
years by making certain cash payments to Gould. However, the
period is automatically extended if certain operating income
levels are achieved by the Company. The intellectual property
license can be terminated by the Company if all Gould borrowings
are repaid and the commitment under the Gould revolving credit
agreement terminated and (i) the Series B is converted into
common stock or Series A convertible participating preferred
stock or (ii) the Series B is redeemed or (iii) the Company pays
Gould the fair value of the license. The Company has not
achieved the net revenue or operating income levels necessary
under the agreement to maintain its exclusive right to the use of
the intellectual property in either 1993 or 1994. As part of the
February 1994 refinancing, Gould agreed to extend the Encore
exclusivity period through December 31, 1994. In conjunction
with execution of the Uncommitted Loan Agreement, Gould agreed to
not exercise certain remedies with respect to the defaults under
the terms of the Intellectual Property License until after
January 31, 1995. In connection with the March 17, 1995
refinancing discussed more fully in Note L of Notes to
Consolidated Financial Statements, Gould agreed that the Encore
period of exclusive use under the terms of the agreement will not
end prior to June 30, 1995. It is unlikely that the Company will
return to compliance with the terms of the agreement prior to
June 30, 1995. If Encore is unable to negotiate further
extensions to its exclusivity period, the Company could lose its
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.
J. Capital Stock
Series A Convertible Participating Preferred Stock
Certain of the Company's operations relate to classified U.S.
Government contracts. Accordingly, the government expressed
concern regarding the extent of Gould's ownership of the
Company's common stock, since Gould, the Company's largest
shareholder, is owned and controlled by Japan Energy, a foreign
corporation. In this connection, the Company has issued to Gould
73,641 shares of Series A Convertible Participating Preferred
Stock in lieu of common stock. The Company has
agreed to reserve 7,364,100 shares of common stock for issuance
to Gould upon exercise of the conversion option.
The holder of Series A and the Company each have the option at
any time, with 30 days prior notice, to convert or require to be
converted, all or any portion of the Series A preferred shares to
common at a ratio of 1 to 100. Dividend rights are equal to those
of the common shares (on an assumed converted basis); however,
there are significant restrictions on the voting rights of the
Series A. The Series A is entitled to elect two members of the
Board of Directors but is not entitled to participate in the
election of other members of the Board. Based upon the
characteristics and rights of the Series A, the Company has
deemed these shares to be common stock (on an assumed converted
basis) for purposes of loss per share calculations for the fiscal
periods presented herein.
Cumulative Series B Convertible Preferred Stock
The Cumulative Series B Convertible Preferred has a
6% cumulative annual dividend payable quarterly, which the
Company can accumulate or pay in additional shares of Series B
(valued at its liquidation preference) until the Company's
shareholders' equity exceeds $50,000,000. The Series B is
convertible into the Company's common stock at $3.25 per share at
the holder's option at any time and at the Company's option upon
satisfaction of certain conditions. The shares are non-voting,
except for the right to elect one director of the Company upon
certain dividend payment defaults, the right to elect a majority
of the directors of the Company if certain operating income
levels are not achieved by the Company and the right to approve
actions adversely affecting the Series B. The Series B may be
redeemed by the Company at any time for cash equal to the
liquidation preference plus accumulated dividends. The Company
has reserved shares of common stock sufficient for issuance upon
conversion of the Series B and additional shares of Series B
which may be issued as a dividend. As of December 31, 1994, the
number of common shares reserved for this purpose amounts to
20,506,246.
At December 31, 1994, the Company had not achieved operating
income levels set forth by the terms of the Series B and
accordingly, the holders of the Series B could elect a majority
of the directors of the Company. However, as part of the
December 21, 1994 transaction Gould provided the Company with a
statement affirming that they would not exercise such remedies
until after January 31, 1995. Then in connection with the March
17, 1995 refinancing discussed more fully in Note L of Notes to
Consolidated Financial Statements, 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 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 that time Gould, as the
principal shareholder, of the Series B could exercise its rights
under the terms of the preferred stock.
During 1994, the Company paid dividends on the Series B of
$3,852,800 in additional shares of Series B. During 1993, the
Company reported a capital deficiency and under Delaware law was
precluded from issuing dividends. Accordingly, the Company
accumulated dividends during 1993 of $3,630,000. These dividends
were subsequently paid in 1994 after the Company completed a
refinancing and reported a capital surplus. During 1992 the
Company paid dividends of $3,943,100 in additional shares of
Series B.
A quarterly dividend on the Series B for the period of October
16, 1994 through January 15, 1995 of $999,600 was payable on
January 15, 1995. Because the Company reported a capital deficit
at that time it was precluded from paying dividends under
Delaware law. Accordingly such dividends have been accumulated by the
Company.
Cumulative Series D Convertible Preferred Stock
The Series D has a liquidation preference of $100 per share and
carries a 6% cumulative annual dividend which the Company can
elect to accumulate or pay currently. The Company may (i) pay
the dividend in cash or additional shares of Series D valued at
its liquidation preference until shareholders' equity exceeds
$50,000,000, or (ii) pay the dividend in cash when shareholders'
equity exceeds $50,000,000. The Series D is convertible, at the
holder's option, into the Company's common stock at $3.25 per
share only (a) if the shareholder is a United States citizen or a
corporation or other entity owned in the majority by United
States citizens or (b) in connection with an underwritten public
offering. The stock is convertible, at the Company's option, if
the price of the common stock exceeds $3.90 per share for twenty
consecutive days and (a) a buyer is contractually committed to
purchase for at least $3.90 per share at least 50% of the shares
into which all outstanding Series D would be converted or (b) a
buyer is contractually committed to purchase for at least $3.50
per share at least 75% of the shares into which all outstanding
Series D would be converted. The shares are non-voting, except
for the right to approve actions adversely affecting the Series
D.
The Series D was issued to Gould and EFI as part of a 1992
refinancing. Due to the related party nature of this
transaction, the difference between the carrying amount of the
indebtedness exchanged and the fair value of the securities
issued, other considerations granted and accrued
professional fees associated with the transaction, the amount of
$73,230,000 was credited to additional paid-in capital as follows
(in thousands):
Total indebtedness exchanged (net of
unamortized debt discount) $ 65,451
Total Series C exchanged at redemption
value (equivalent to carrying value
plus deferred credit) 10,000
Estimated value of claims against
Gould forgiven by the Company (1,120)
Estimated transaction costs (500)
Write-off of debt issue costs
related to indebtedness exchanged (592)
Par value of Series D exchanged (9)
--------
Addition to paid-in capital $73,230
========
The Company has reserved shares of common stock sufficient for
issuance upon conversion of the Series D and additional shares of
Series D which may be used for future stock dividends. As of
December 31, 1994, the number of shares reserved for this purpose
was 31,378,062.
During 1994, the Company paid dividends on the Series D of
$5,895,700 in additional shares of Series D. During 1993, the
Company reported a capital deficiency and under Delaware law was
precluded from issuing dividends. Accordingly, the Company
accumulated dividends during 1993 of $5,554,700. These dividends
were subsequently paid in 1994 after the Company completed a
refinancing and reported a capital surplus. During 1992 the
Company paid dividends of $528,300 in additional shares of Series
D.
A quarterly dividend on the Series D for the period of October
16, 1994 through January 15, 1995 of $1,529,600 was payable on
January 15, 1995. Because the Company reported a capital deficit
at that time it was precluded from paying dividends under
Delaware law. Accordingly such dividends have been accumulated
by the Company
Cumulative Series E Convertible Preferred Stock
The Series E was issued to Gould as part of the February 4, 1994
exchange of indebtedness for preferred stock. The principal
terms of the Series E are: (i) the Series E is senior in
liquidation priority to all previously issued classes of the
Company's preferred and common stock; (ii) includes a 6%
cumulative annual dividend which the Company can elect to (a)
pay in additional shares of Series E valued at its liquidation
preference until shareholders' equity exceeds $50,000,000; or
(b) accumulate and pay in cash when shareholders' equity exceeds
$50,000,000; (iii) has a liquidation preference of $100 per
share; (iv) is 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) is convertible, at the Company's option in
accordance with the conversion methodology described in (iv)
above if the price of the common stock exceeds $3.90 per share
for twenty consecutive days and (a) a buyer is contractually
committed to purchase for at least $3.90 per share at least 50%
of the shares into which all outstanding Series E would be
converted; or (b) a buyer is contractually committed to purchase
for at least $3.50 per share at least 75% of the shares into
which all outstanding Series E would be converted; and (vi) is
non-voting, except for the right to approve actions adversely
affecting the Series E.
Because of the related party nature of the transaction, the
difference between the carrying amount of the indebtedness
exchanged and the fair value of the securities issued and other
consideration granted has been credited to additional paid-in
capital.
A summary of the financial effects of the transaction are
as follows (in thousands):
Reduction of debt $100,000
Less:
Par value of shares issued
(1,000,000 shares at $.01 par value) (10)
Accrued transaction costs (700)
Accrued interest on the remaining
indebtedness under the revolving loan
agreement for the remaining term of
the agreement (3,017)
----------
Increase in additional paid-in capital $ 96,273
=========
During 1994, the Company paid dividends on the Series E of
$4,238,100 in additional shares of Series E. As of December 31,
1994, the number of shares reserved for this purpose was
32,073,261.
A quarterly dividend on the Series E for the period of October
16, 1994 through January 15, 1995 of $1,563,500 was payable on
January 15, 1995. Because the Company reported a capital deficit
at that time it was precluded from paying dividends under
Delaware law. Accordingly such dividends were accumulated by the
Company until such time as they could be paid in additional shares
of Series E.
Exchange of Indebtedness for Series F Convertible Preferred Stock
As discussed more fully in Note L, on March 17, 1995, the Company
and Gould agreed among other things to cancel $50,000,000 of
indebtedness owed by the Company to Gould under the revolving
loan agreement in exchange for the issuance of $50,000,000 of
Series F Convertible Preferred Stock to Gould.
Impact of Foreign Ownership
In connection with the various exchanges of indebtedness for
preferred stock discussed in Notes G and L of Notes to
Consolidated Financial Statements, the United States Defense
Investigative Service ("DIS") has indicated that it has no
objection to the relationships under the United States government
requirements relating to foreign ownership, control or influence
between Japan Energy Corporation (a Japanese corporation) and its
wholly owned subsidiaries (EFI and Gould) and the Company.
Shareholders' Agreement
In conjunction with the various exchanges of preferred stock for
indebtedness discussed in Notes G and L of the Notes to
Consolidated Financial Statements, the Company, Kenneth G.
Fisher, the Company's Chairman and Chief Executive Officer, and
Gould amended and restated an existing stockholders agreement.
The agreement provides that as long as any shares of Series A are
outstanding, Gould, in all elections of directors, will vote all
of its common stock pro rata in accordance with the votes of the
other shareholders of the Company. In addition, so long as the
revolving credit facility with Gould is in effect, should Gould
request it, Mr. Fisher has agreed to vote his common shares in
favor of expanding the Board of Directors and electing an
additional Gould representative to the Board. In connection with
the March 17, 1995 refinancing, the Company, Gould and Kenneth G.
Fisher further amended the agreement to delete the transfer
restrictions on Gould's shares of Company stock which, in general
had required the Company's prior approval of any share transfers
by Gould with certain exceptions.
Adjustment of Accrued Transaction Costs
In recording the various exchanges of preferred stock for
indebtedness, the Company had accrued the estimated transaction
costs of the exchanges. Actual costs incurred in connection with
the 1991 and 1994 exchanges were less than those initially
estimated and accrued. Accordingly, during 1994 and 1992, the
Company reduced the remaining accrued liability by $625,000 and
$900,000, respectively and increased additional paid-in capital.
Stock Option and Stock Purchase Plans
The Company had two stock option plans during the reporting
period, the 1983 Incentive Stock Option Plan (which expired in
1993) and the 1985 Non-Qualified Stock Option Plan. Under the
terms of the plans as amended a combined total of 24,000,000
shares of the Company's common stock were reserved for issuance
to officers, directors and employees.
Stock option activity for the 1983 Incentive Stock Option Plan
through its expiration in 1993 is as follows:
Shares Under Option
Shares Price
------ -----
Outstanding at December 31, 1991 88,880 $1.13
Fiscal 1992:
No Activity - -
------ -----
Outstanding at December 31, 1992 88,880 $1.13
Fiscal 1993:
Exercised (88,880) $1.13
------ -----
Outstanding at December 31, 1993 -
======
Options granted under the Incentive Stock Option Plan were
granted at exercise prices at least equal to the then current
fair market value of the Company's common stock, and were
immediately exercisable. Shares issued upon exercise of such
options are subject to the Company's repurchase rights which
expire ratably over three to five year periods from the date of
grant, or automatically upon death or disability. Shares subject
to such repurchase rights at the time of termination of
employment may be purchased by the Company at the optionee's
exercise price.
Stock Option activity for the 1985 Non-Qualified Stock Option
Plan ("the 1985 Plan") is as follows:
Shares Under Option
Shares Price
--------- --------------
Outstanding at December 31, 1991 5,232,823 $0.63 to $3.13
Fiscal 1992:
Granted 6,181,530 $0.94 to $1.00
Exercised (352,248) $0.63 to $1.63
Canceled (227,122) $0.63 to $3.13
--------- --------------
Outstanding at December 31, 1992 10,834,983 $0.63 to $2.31
Fiscal 1993:
Granted 592,500 $1.50 to $4.00
Exercised (927,717) $0.63 to $2.00
Canceled (473,437) $0.63 to $2.31
--------- --------------
Outstanding at December 31, 1993 10,026,329 $0.63 to $4.00
Fiscal 1994:
Granted 1,331,350 $3.25 to $4.19
Exercised (966,734) $0.63 to $2.00
Canceled (278,973) $0.81 to $2.00
--------- --------------
Outstanding at December 31, 1994 10,111,972 $0.63 to $4.19
========== ==============
Exercise rights for options granted under the 1985 Plan vest over
varying periods of up to four years and options to purchase
7,284,398 shares were exercisable at December 31, 1994. Options
granted under the 1985 Plan may be granted at an exercise price
of not less than 50% of the current fair market value of the
common stock. All options granted to date have been at the then
current fair market value.
During 1993, options granted in 1986 to Mr. Morley, an officer of
the Company, were scheduled to expire if not exercised. However,
at the time the options were scheduled to expire the Company's
policy on insider trading effectively prevented Mr. Morley from
exercising the options. Accordingly, the Board of Directors
approved an extension of the expiration date until such time as
the options could be exercised and the underlying shares sold in
accordance with Company policy. These options were exercised in
1994. 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 charge of $788,000 was
incurred in connection with the extension of the expiration date
of the stock options.
Employee Stock Purchase Plan
In 1990, the shareholders approved the Employee Stock Purchase
Plan and reserved 4,000,000 shares for issuance pursuant to
rights granted under the Plan. On September 9, 1993, the
shareholders voted to increase the number of shares reserved for
issuance under the plan from 4,000,000 to 8,000,000.
Substantially all employees are eligible to participate in the
Employee Stock Purchase Plan. The purchase price per share of
common stock in any offering under the Plan is the lower of (i)
85% of the closing price per share of common stock on the
commencement of the offering or (ii) 85% of the closing price of
a share of common stock on the termination of the offering. Each
offering is for a period of approximately six months. Under the
Plan, the Company issued 382,999 shares at a weighted average
price of $2.69 in 1994, 477,579 shares at a weighted average
price of $1.56 in 1993 and 815,411 shares at a weighted average
price per share of $.86 in 1992.
K. Segment Information
The Company operates in a single industry segment which includes
developing, manufacturing, marketing, installing and servicing
business information processing systems, principally in the
United States, Europe, the Far East, and Canada. In 1994, 1993,
and 1992, no single customer accounted for as much as 10% of
revenues. During 1994, 1993 and 1992 approximately 32%, 37% and
29%, respectively of its revenues were directly or indirectly
derived from U.S. Government agencies.
The Company maintains operations in Europe and Canada principally
through consolidated subsidiaries. Far East operations are
through joint ventures in Japan, Hong Kong and Malaysia and
distributors throughout the remainder of the region. Information
about the Company's operations for 1994, 1993, and 1992 is
presented below (in thousands). Inter-geographic net sales,
operating income and assets have been eliminated to arrive at the
consolidated amounts.
<TABLE>
<C> <S> <C> <S> <C>
Net Sales to Inter-
Unrelated Geographic Total Operating
Identifiable
Entities Net Sales Net Sales Income (loss)
Assets
--------- --------- --------- ------------ -----------
1994:
United States $ 42,613 $ 8,886 $ 51,499 $(55,133) $82,975
Europe 29,147 - 29,147 4,164 14,340
Other 4,790 - 4,790 72 2,352
--------- --------- --------- ------------ -----------
Geographic Total 76,550 8,886 85,436 (50,897) 99,667
Inter-Geographic - (8,886) (8,886) 49 (905)
--------- --------- --------- ------------ -----------
Total $ 76,550 $ - $ 76,550 $(50,848) $98,762
1993
United States $ 56,553 $ 11,664 $ 68,217 $(55,443) $67,928
Europe 34,769 - 34,769 (7,554) 16,409
Other 2,210 - 2,210 (724) 686
--------- --------- --------- ----------- -----------
Geographic Total 93,532 11,664 105,196 (63,721) 85,023
Inter-Geographic - (11,664) (11,664) 1,636 (953)
--------- --------- --------- ------------ -----------
Total $ 93,532 $ - $ 93,532 $(62,085) $84,070
1992:
United States $ 69,925 $ 24,232 $ 94,157 $(19,658) $84,931
Europe 58,311 - 58,311 (4,316) 23,186
Other 2,657 728 3,385 ( 527) 918
--------- --------- --------- ------------ -----------
Geographic Total 130,893 24,960 155,853 (24,501) 109,035
Inter-Geographic - (24,960) (24,960) 1,957 (3,349)
--------- --------- --------- ------------ -----------
Total $ 130,893 $ - $130,893 $ (22,544) $105,686
========== ========= ======== ============ ==========
</TABLE>
Inter-geographic net sales are recorded principally at 60% of
list price. Identifiable assets are all assets, including
corporate assets, identified with operations in each region.
L. Subsequent Events
On 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 exchange of indebtedness for preferred
stock, the Company reported a capital surplus. Accordingly,
dividends accumulated on January 16, 1995 were declared payable
on April 16, 1995.
Prior to the transaction, Japan Energy and its wholly owned
subsidiaries beneficially owned 71.1% of the Company's
outstanding common stock assuming the full conversion of all
outstanding shares of its preferred stock. Upon completion of
the transaction, their beneficial ownership increased to 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. On March 17, 1995, the Company
had incurred borrowings under the Credit Agreement of
$55,000,000 (see Note G.)
The Credit Agreement, as amended, matures on April 16, 1996.
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. In conjunction with the execution of the
Credit Agreement, Gould provided the Company with waivers of
compliance with certain terms contained in the agreement until
January 1, 1996.
The accompanying unaudited Pro Forma Consolidated Balance Sheet
as of December 31, 1994 is presented as if the transactions
described above had been consummated as of that date. Because of
the related party nature of the transaction, the difference
between the carrying amount of the indebtedness exchanged and the
fair value of the securities issued and other consideration
granted has been credited to additional paid in capital. A
summary of the financial effects of the transaction are as
follows (in thousands):
Reduction of debt $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 (3,699)
---------
Increase in additional paid in capital $ 45,696
=========
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. As
discussed in Note J, 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.
At December 31, 1994, the Company had not achieved those levels.
Accordingly, the holders of the Series B could elect a majority
of the directors of the Company. As part of the December 21,
1994 refinancing Gould provided the Company with a statement
affirming that they would not exercise such remedies until after
January 31, 1995. In connection with this transaction Gould
agreed to further 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.
In connection with this transaction, the United States Defense
Investigative Service ("DIS") has not indficated an objection to
the relationship between
the Company, Japan Energy Corporation (a Japanese corporation)
and its wholly owned subsidiaries (including Gould), under the
United States government requirements relating to foreign
ownership, control or influence.
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 will suffer a severe
liquidity crisis and it will have difficulties settling its
liabilities in the normal course of business.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Encore Computer Corporation:
We have audited the accompanying consolidated balance sheets of Encore
Computer Corporation and Subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, shareholders'
equity (capital deficiency), and cash flows for each of the three
years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining,on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note L to the consolidated financial statements,
Japan Energy Corporation and Gould Electronics Inc., a wholly
owned subsidiary of Japan Energy Corporation (collectively, the "Japan
Energy Group") have exchanged approximately $50 million of the
Company's outstanding indebtedness for preferred stock and have increased
the working capital facility by an additional $25 million. The
Company is dependent upon the support of the Japan Energy Group for its
financing requirements.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Encore Computer Corporation and Subsidiaries as of December
31, 1994 and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Miami, Florida
February 17, 1995 except for Note L as to
which the date is March 27, 1995.
<PAGE>
Market for Registrant's Common Equity and Related
Stockholder Matters
On March 18, 1994, the Company's commonstock was reinstated for
trading on the Nasdaq Stock Market under the symbol ENCC. Prior
to that time, Encore common stock traded on the OTC electronic
bulletin board also under the symbol ENCC. Daily statistics on
the Company's stock subsequent to March 18, 1994 can be found in
the Nasdaq National Market Issues listing of the newspaper's
stock listings.
The high and low closing sale prices of Encore's common stock
are shown for fiscal years 1994 and 1993 in the table below:
Fiscal 1994 Fiscal 1993 prices
High Low High Low
------ ----- --------- -------
1st Quarter $4 3/8 2 5/8 $ 1 15/16 $ 1 1/4
2nd Quarter 6 3/8 3 1/8 2 5/8 1 1/2
3rd Quarter 5 1/16 3 13/16 4 1/2 2 5/8
4th Quarter 5 9/16 3 4 1/4 2 3/4
The First National Bank of Boston is the stock transfer agent
and registrar of the Company's common stock, and maintains
shareholder records. The agent will respond to questions on
change of ownership, lost stock certificates, consolidation
of accounts, and change of address. Shareholder
correspondence on these matters should be addressed to:
The First National Bank of Boston
Shareholder Services Division
P.O. Box 644
Boston, Massachusetts 02109.
As of April 4, 1995, there were approximately 3,204 holders of
record of the Company's common stock. The Company has never
paid cash dividends on its common stock and does not
anticipate the payment of cash dividends in the foreseeable
future. Under the terms of the Company's current financing
agreements, the Company is prohibited from paying dividends on
its common stock.
General Counsel
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
Independent Accountants
Coopers & Lybrand L.L.P.
200 S. Biscayne Blvd.
Suite 1900
Miami, FL 33131
Annual Meeting
The Annual Meeting of Shareholders will be held at Encore
Computer Corporation, Building 7 Auditorium, 1800 N.W. 69th Avenue, Ft.
Lauderdale, Florida at 1:30 p.m.(local time), June 27, 1995. Shareholders of
record at the close of business on May 3, 1995 will be entitled
to notice of, and to vote at, the meeting. The Company's annual
report on Form 10-K as filed with the Securities and Exchange
Commission is available without charge upon written request
mailed to: Charles S. Anderson,
Vice President, Corporate Relations
Encore Computer Corporation
6901 W. Sunrise Boulevard
Ft. Lauderdale Florida 33313-4499
(305) 587-2900
<PAGE>
<Back Cover of Annual Report>
Board of Directors
Kenneth G. Fisher
Chairman
Chief Executive Officer
Encore Computer Corporation
Daniel O. Anderson, Retired
formerly, Executive Vice President
Chief Operating Officer
Harvard Community Health Plan
Robert J. Fedor
Senior Vice President
Corporate Development
Gould Inc.
C. David Ferguson
President
Chief Executive Officer
Gould Inc.
Rowland H. Thomas, Jr.
President
Chief Operating Officer
Encore Computer Corporation
Corporate Officers
Kenneth G. Fisher
Chairman
Chief Executive Officer
Rowland H. Thomas, Jr.
President
Chief Operating Officer
Charles S. Anderson
Vice President
Human Resources and
Corporate Relations
Ziya A. Aral
Vice President
Systems Engineering and
Chief Technology Officer
Robert A. DiNanno
Vice President and
General Manager
Worldwide Real-Time Operations
Charles S. Namias
Vice President,
Corporate Alliances
James C. Shaw
Vice President
Manufacturing Operations
George S. Teixeira
Vice President
Product Business Group
J. Thomas Zender
Vice President
Corporate Product Management
Compensation Committee
Kenneth G. Fisher
Daniel O. Anderson
C. David Ferguson
Audit Committee
Daniel O. Anderson
Robert J. Fedor
<PAGE>
- - - - - - - -------------------------------------------------------
NOTE: The following is the Company's Proxy Statement
- - - - - - - ---------------------------------------------------------
ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
Notice of Annual Meeting of Stockholders
To Be Held on June 27, 1995
The Annual Meeting of Stockholders of Encore Computer
Corporation (the "Company") will be held at Encore Computer
Corporation, Building No. 7 Auditorium, 1800 N.W. 69th
Avenue, Fort Lauderdale, Florida on Tuesday, June 27, 1995,
at 1:30 p.m. (local time) to consider and act on the
following matters.
1. To fix the number of directors at five (5) and to elect
five (5) directors to hold office for the ensuing year.
See pages 4 through 6 of the Proxy Statement.
2. To amend the Company's Certificate of Incorporation to
increase the number of shares of authorized Common Stock
to 200,000,000 shares from the current authorization of
150,000,000 shares. See pages 19 through 21 of the Proxy
Statement.
3. To approve the adoption of the Company's 1995 Long Term
Performance Plan. See pages 21 through 24 of the Proxy
Statement.
4. To approve the selection by the Board of Directors of
Coopers & Lybrand L.L.P. as the Company's independent
auditors for the fiscal year ending December 31, 1995.
See page 25 of the Proxy Statement.
5. To transact such other business as may properly come
before the meeting or any adjournment or postponements of
the meeting.
Stockholders of record at the close of business on May 3,
1995 will be entitled to notice of, and to vote at, the
meeting. The stock transfer books of the Company will remain
open. All shareholders are cordially invited to attend the
meeting.
By order of the Board of Directors
T. MARK MORLEY
T. Mark Morley, Secretary
May 13, 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE
REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES.
<PAGE>
ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
Proxy Statement for Annual Meeting of Stockholders
June 27, 1995
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Encore
Computer Corporation (the "Company") for use at the Annual
Meeting of Stockholders to be held on June 27, 1995, at 1:30
p.m. (Local Time) and at any adjournment or postponement of
that meeting. All proxies will be voted in accordance with
the instructions contained in the proxy, and if no choice is
specified, the proxies will be voted in favor of the
proposals set forth in the Notice of Meeting. Any proxy may
be revoked by a shareholder at any time before it is
exercised by filing a later dated proxy or a written notice
of revocation with T. Mark Morley, Secretary of the Company,
or by voting in person at the meeting.
The Board of Directors has fixed May 3, 1995 as the record
date for determination of shareholders entitled to vote at
the Annual Meeting. At the close of business on May 3, 1995,
there were outstanding and entitled to vote 34,671,626
shares, $0.01 par value, of the Company's Common Stock.
Each share of Common Stock is entitled to one vote. The
affirmative vote of the holders of a majority of the
outstanding Common Stock is required to approve the
amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock.
The election of three of the five directors at the meeting
shall be determined by a plurality of the votes cast in
person or by proxy at the meeting by the holders of the
Common Stock. With respect to the election of those three
directors, the 3,935,900 outstanding shares of Common Stock
held by Gould Electronics Inc. ("Gould") will be voted pro
rata in accordance with the votes of the other holders of
Common Stock, as provided by a shareholders agreement among
Gould, the Company and Kenneth G. Fisher, the Company's
Chairman. The holders of the Company's Series A Convertible
Participating Preferred Stock (the "Series A Stock"), voting
as a separate class, are entitled to elect the other two
directors. Gould holds all the outstanding shares of Series
A Stock and has indicated it will elect Mr. Ferguson and Dr.
Fedor (see "Election of Directors"). With respect to each
other matter to be submitted to the shareholders at the
Annual Meeting, the affirmative vote of the holders of a
majority of the Common Stock present or represented at the
meeting and voting on such matter is required for approval.
Broker non-votes (a broker holding shares in "street name"
which has no authority to vote on a particular matter) and
abstentions on any matter are not included in the number of
shares voted on that matter. An automated system
administered by the Company's transfer agent tabulates the
votes.
The Company's Annual Report for the year ended December 31,
1994 is being mailed to shareholders at the same time as
this Proxy Statement. The Company's audited financial
statements for the year ended December 31,1994, included in
the Annual Report, and certain other information included in
the Annual Report is incorporated by reference in this
Proxy Statement (See "Information Incorporated By
Reference"). The date of mailing of this Proxy Statement
and related proxy is expected to be on or about May 15,
1995.
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the
Company, the beneficial owners of 5% or more of the
Company's outstanding Common Stock and equivalents as of
March 17, 1995:
<TABLE>
<S> <C> <S> <C> <S> <C>
Percentage of
Shares Common Stock Percentage of
Name and Address Beneficially and Equivalents Common Stock
of Beneficial Owner Owned Outstanding (1) Outstanding(7)
- - - - - - - ---------------------- ----------- --------------- -----------------
Gould Electronics Inc.(2) (5) 83,456,500 55.0% 11.5%
35129 Curtis Boulevard
Eastlake, OH 44095
EFI International Inc. (3) 28,734,743 19.0% 0.0%
35129 Curtis Boulevard
Eastlake, OH 44095
Japan Energy Corporation (2) (3) 112,191,243 74.0% 11.5%
10-1, Toranomon 2-chome, (5) (6)
Minato-ko, Tokyo, Japan
Kenneth G. Fisher(4) 7,239,619 4.7% 17.2%
6901 West Sunrise Blvd.
Fort Lauderdale, FL 33313-4499
Chestnut Hill
Management Corporation 1,882,000 1.2% 5.5%
One Boston Place
Boston, MA 02108
</TABLE>
(1)For purposes of computing the percentage of Common Stock and
equivalents outstanding, the 7,364,100 shares of Common
Stock issuable upon conversion of the outstanding shares
of Series A Stock, the 21,126,022 shares of Common Stock
issuable upon conversion of the outstanding shares of
Series B Convertible Preferred Stock ("Series B Stock"),
the 32,326,438 shares of Common Stock issuable upon
conversion of the outstanding shares of Series D
Convertible Preferred Stock ("Series D Stock"), the
33,042,653 shares of Common Stock issuable upon conversion
of the outstanding shares of Series E Convertible
Preferred Stock ("Series E Stock"), and the 15,384,615
shares of Common Stock issuable upon conversion of the
outstanding shares of Series F Convertible Preferred Stock
("Series F Stock") have been included as well as shares
issuable upon exercise of options exercisable within 60
days after March 17, 1995 which any person may own.
(2)Includes 79,520,600 shares of Common Stock issuable upon
conversion of the shares of Series A Stock, Series B
Stock, Series D Stock, Series E Stock and Series F Stock
held by Gould. The Series D, Series E, and Series F Stock
is convertible only by a United States citizen or a
corporation or other entity owned in the majority by a
United States shareholder or in connection with an
underwritten public offering. Gould is a wholly owned
subsidiary of Japan Energy Corporation ("Japan Energy")
which is a Japanese corporation.
(3)Consists of Common Stock issuable upon conversion of Series
D Stock held by EFI International Inc. ("EFI").
Conversion of the Series D Stock is restricted as
described in (2) above. EFI is a wholly owned subsidiary
of Japan Energy.
(4)Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii)
2,100,000 shares which may be acquired by Mr. Fisher within
60 days after March 17, 1995 by exercise of stock options
and (iii) 4,097,370 shares of Common Stock and 973,876
shares of Common Stock issuable upon conversion of the
shares of Series B Stock each held by Indian Creek
Capital, Ltd., a limited partnership of which Mr. Fisher
is the managing general partner.
(5)Gould as the sole holder of the Series A Stock is entitled
to elect two directors to the Board of Directors. The
remaining three directors are elected by the holders of
Common Stock. With respect to the election of those three
directors, the 3,935,900 outstanding shares of Common
Stock held by Gould will be voted pro rata in accordance
with the votes of the other holders of Common Stock as
provided by a shareholders agreement among Gould, the
Company and Mr. Fisher.
(6) Japan Energy may be deemed to be the beneficial owner of
the shares owned by Gould and EFI.
(7) For purposes of computing the percentage of Common Stock
outstanding, the 34,255,299 shares of Common Stock
outstanding as of March 17, 1995 and, with respect to Mr.
Fisher, 2,100,000 shares of Common Stock issuable upon the
exercise of options exercisable within 60 days after March
17, 1995 have been included.
ELECTION OF DIRECTORS
The persons named in the proxy will vote, as permitted by the By-
Laws of the Company, to fix the number of directors at five and
to elect as directors Messrs. Fisher, Anderson and Thomas unless
authority to vote for the election of directors is withheld by
marking the proxy to that effect or unless the proxy is marked
with the names of directors as to whom authority to vote is
withheld. The proxy may not be voted for more than three
directors. Mr. Ferguson and Dr. Fedor, the other two nominees
named below, will be elected by Gould as the holder of all the
outstanding Series A Stock pursuant to the terms of the Series A
Stock.
Each director will be elected to hold office until the next
annual meeting of shareholders and until his successor is elected
and qualified. If one of the three nominees to be elected by the
holders of Common Stock becomes unavailable, the person acting
under the proxy may vote the proxy for the election of a
substitute. It is not presently contemplated that any of the
nominees will be unavailable.
The following table sets forth the name of each nominee and the
positions and offices held by him, his age, the year in which he
became a director of the Company, his principal occupation and
business experience for at least the last five years, the names
of other publicly-held companies in which he serves as a
director, the number of shares of Common Stock and equivalents of
the Company, including shares which may be acquired within sixty
days after March 17, 1995 by exercise of outstanding stock
options, which he reported were beneficially
owned by him as of March 17, 1995, and the percentage of all
outstanding shares of Common Stock and equivalents owned by him
on such date.
Common Stock Percentage of
Name, Age, Principal and Equivalents Common Stock
Occupation, Business Beneficially and Equivalents
Experience and Directorships Owned Outstanding(1)
- - - - - - - ------------------------------ ------------ ----------------
Kenneth G. Fisher, age 64 7,239,619(2) 4.7%(2)
Mr. Fisher is a founder of the Company and has served as a
Director, Chairman and Chief Executive Officer of the Company
since the Company's inception in May 1983. He was the Company's
President from its inception until December 1985 and also served
in that capacity from December 1987 to January 1991. From January
1982 until May 1983, Mr. Fisher was engaged in private venture
transactions. From 1975 to 1981, Mr. Fisher was President and
Chief Executive Officer of Computervision (formerly Prime
Computer, Inc.). Before joining Computervision, Mr. Fisher was
Vice President of Central Operations for Honeywell Information
Systems, Inc.
Rowland H. Thomas, Jr., age 59 1,750,375(4) 1.1%(4)
Mr. Thomas has been a member of the Board of Directors since
December 1987 and Chief Operating Officer since June 1989. He
presently serves as President of the Company, a position to which
he was appointed in January 1991. From June 1989 to January 1991,
Mr. Thomas served as Executive Vice President of the Company. In
February 1988, he was named President and Chief Executive Officer
of Netlink Inc. Prior to joining Netlink, Mr. Thomas was Senior
Executive Vice President of National Data Corporation ("NDC"), a
transaction processing company, a position he held from June 1985
to February 1988. From May 1983 through June 1985, Mr. Thomas was
Executive Vice President and Senior Vice President at NDC.
Daniel O. Anderson, age 67 105,200(3) 0.7%(3)
Mr. Anderson has been a member of the Board of Directors since
May 1987. In 1991, Mr. Anderson retired as Executive Vice
President and Chief Operating Officer of the Harvard Community
Health Plan for New England, a position he held from November
1986. From October 1984 until July 1986, Mr. Anderson served as
Vice President and Chief Financial Officer of Guilford
Transportation Industries, a railroad holding company. From
November 1975 until April 1984, Mr. Anderson held various
executive positions with Itek Corporation, most recently as a
Director and President of Itek Graphics Systems. Prior to his
employment with Itek Corporation, Mr. Anderson was Vice
President, Finance and Administration, North American Operations,
for Honeywell Information Systems, Inc.
Robert J. Fedor, age 54 10,000(5) *(5)
Dr. Fedor has been a member of the Board of Directors since July
1992. He is presently Senior Vice President Corporate Development
at Gould, a position he has held since July 1992. From December
1989 to July 1992 he was Vice President, Corporate Business
Development at Gould. Prior to assuming that position, Dr. Fedor
was General Manager of Gould's U.S. and Far East Foil Business
since 1985. Since joining Gould in 1964, he has served in various
senior marketing and research positions. Dr. Fedor holds a Ph.D.
in Metallurgical Engineering from Case Western Reserve
University.
C. David Ferguson, age 53 12,304(5) *(5)
Mr. Ferguson has been a member of the Board of Directors since
April 1989. He is presently the President and Chief Executive
Officer and a director of Gould, a position he has held since
October 1988. Prior to such time, he served as Executive Vice
President, Materials and Components, at Gould's Foil Division
from 1986 until October 1988. He transferred to the Foil Division
in 1967 from the Gould Engine Parts Division where he began his
career in 1963.
______________
*Less than 0.1%.
(1)For purposes of computing the percentage of Common Stock and
equivalents outstanding, the 7,364,100 shares of Common
Stock issuable upon conversion of the outstanding shares of
Series A Stock, the 21,126,022 shares of Common Stock
issuable upon conversion of the outstanding shares of Series
B Stock, the 32,326,438 shares of Common Stock issuable upon
conversion of the outstanding shares of Series D Stock, the
33,042,653 shares of Common Stock issuable upon conversion
of the outstanding shares of Series E Stock, and the
15,384,615 shares of Common Stock issuable upon conversion
of the outstanding shares of Series F Stock have been
included as well as shares issuable upon exercise of options
exercisable within 60 days after March 17, 1995 which any
person may own.
(2)Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii)
2,100,000 shares which may be acquired by Mr. Fisher within
60 days after March 17, 1995 by exercise of stock options
and (iii) 4,097,370 shares of Common Stock and 988,485
shares of Common Stock issuable upon conversion of the
shares of Series B Stock each held by Indian Creek Capital,
Ltd., a limited partnership of which Mr. Fisher is the
managing general partner.
(3) Includes 200 shares owned by Mr. Anderson's wife and 85,000
shares which may be acquired by Mr. Anderson within 60 days
after March 17, 1995, by exercise of stock options.
(4) Includes 500 shares owned by Mr. Thomas' wife and 1,715,625
shares which may be acquired by Mr. Thomas within 60 days
after March 17, 1995, by exercise of stock options.
(5) Mr. Ferguson is an officer and a director, and Dr. Fedor is
an officer, of Gould which beneficially owns 83,456,500
shares or 55.0% of the Company's outstanding Common Stock
and equivalents.
During the fiscal year ended December 31, 1994, the Board of
Directors held six meetings. All directors attended 100% of the
aggregate number of meetings of the Board of Directors and the
committees of which they were members except for Dr. Fedor who
missed one meeting.
The Board of Directors has a standing Audit Committee, the
membership of which currently consists of Mr. Anderson and Dr.
Fedor. The principal functions of the Audit Committee are to make
recommendations to the Board of Directors as to the selection of
the Company's independent auditors, to act as liaison between the
Board of Directors and the firm so selected and, on advice of
such firm or otherwise, to recommend institution or modification
of accounting procedures employed by the Company. The members of
the Audit Committee are not employees of the Company and are, in
the opinion of the Board of Directors, free from any relationship
that would interfere with their exercise of independent judgment
as Audit Committee members. The Audit Committee met on January
18, 1995 in connection with the Company's audit for the fiscal
year ended December 31, 1994. During the fiscal year ended
December 31, 1994, the Audit Committee held four meetings.
The Board of Directors also has a Compensation Committee, which
committee presently consists of Messrs. Fisher, Anderson and
Ferguson. The principal responsibilities of the Compensation
Committee are to (i) function as a stock option committee with
respect to the Company's stock option and stock purchase plans,
except for the granting of options to officers who are also
Directors, which is administered by the Directors Options
Committee (presently consisting of Messrs. Anderson and
Ferguson), and (ii) make recommendations with respect to
implementation of present compensation programs and adoption of
future compensation programs.
The Board of Directors does not have a Nominating Committee.
Compensation Committee Interlocks and Insider Participation
As discussed above, Mr. Fisher, Mr. Anderson and Mr. Ferguson
served as members of the Compensation Committee during 1994.
Mr. Fisher, in addition to his position as Chairman of the Board,
is the Company's Chief Executive Officer. Mr. Ferguson, in
addition to being a director of the Company, is a director and
President and Chief Executive Officer of Gould, the beneficial
owner of 55.0% of the Company's Common Stock and equivalents. As
described in more detail below under the caption of "Certain
Relationships and Related Transactions", since 1989 Gould has
provided the Company with its revolving line of credit and at
times has entered into exchanges of indebtedness owed to it by
the Company for various series of the Company's Preferred Stock.
EXECUTIVE COMPENSATION
Total compensation paid or accrued for services rendered during
the three most recent fiscal years for the Chief Executive Officer
and the four other most highly compensated executive officers of
the Company for the year ended December 31, 1994 was as follows:
<TABLE>
<C> <S> <C> <S> <C>
Summary Compensation Table
Annual Compensation Long Term
Compensation
Awards
Other Number of Shares All
Name and Annual Underlying Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation(2)
- - - - - - - -------------------- ---- -------- ------- ------------- ------------- --------------
Kenneth G. Fisher 1994 $340,001 $0 $0 103,300 $1,234
Chairman of the 1993 341,963 0 0 0 0
Board and Chief 1992 332,677 0 0 1,300,000 0
Executive Officer
Rowland H. Thomas 1994 $264,617 $36,833 $0 59,600 $728
President and 1993 256,167 33,250 0 0 0
Chief Operating 1992 248,330 46,000 0 1,300,000 94,250
Officer
T. Mark Morley 1994 $180,001 $54,174 $0 30,000 764
Vice President, 1993 180,111 18,300 61,353 280,000 (3) 102,318
Finance and Chief 1992 175,597 21,500 0 486,400 0
Financial Officer
Robert A. DiNanno 1994 $175,000 $39,644 $0 20,000 $676
Vice President and 1993 175,535 29,865 0 0 0
General Manager, 1992 172,174 45,785 0 486,000 0
Real-Time Operations
Charles S. Namias 1994 $136,154 $70,844 $4,800 105,000 $608
Vice President, 1993 102,429 50,000 4,800 40,000 0
Corporate Alliances 1992 97,031 55,000 4,800 125,000 0
</TABLE>
(1) Amounts paid to the Mr. Morley during 1993 consist of the
payment of taxes on relocation expense reimbursements. Amounts
paid to Mr. Namias consist entirely of an allowance for
business-related automobile expenses.
(2) All Other Compensation for 1994 consists of earnings
associated with the individual's participation in a company-
paid sales award trip. In 1993 and 1992, All Other
Compensation consists entirely of reimbursement for relocation
expenses .
(3) These options were originally granted in 1986 and were
scheduled to expire in 1993 if not exercised. However, at the
time the options were scheduled to expire the Company's policy
on insider trading effectively prevented Mr. Morley from
exercising the options. Accordingly, the Board of Directors
approved an extension of the expiration date until the options
could be exercised and the underlying shares sold in accordance
with Company policy. The extension has been treated as a
cancellation of the old options and a grant of new options in
the same amount at the same exercise price. Said options were
exercised during 1994.
The following table sets forth the number of shares of Common
Stock and equivalents of the Company, including shares which
may be acquired within sixty days after March 17, 1995 by
exercise of outstanding stock options, which are beneficially
owned by executive officers of the Company named in the
Summary Compensation Table and all directors and executive
officers of the Company as a group as of March 17, 1995 along
with the percentage of all outstanding shares of Common Stock
and equivalents owned by each executive officer and director on
such date.
<TABLE>
<S> <C> <S> <C> <S>
Common Stock Percentage of
and Equivalents Common Stock
Beneficially and Equivalents
Name Owned Outstanding(1)
- - - - - - - -------------------- ------------ --------------
Kenneth G. Fisher 7,239,619(2) 4.7%
Chairman of the Board and
Chief Executive Officer
Rowland H. Thomas 1,750,375(3) 1.1%
President and
Chief Operating Officer
T. Mark Morley 827,479(4) 0.5%
Vice President Finance and
Chief Financial Officer
Robert A. DiNanno 571,830(5) 0.4%
Vice President and General Manager
Real-Time Operations
Charles S. Namias 194,773(6) 0.1%
Vice President
Corporate Alliances
Total directors and executive officers as
a group (13 people) 12,352,959(7) 7.8%
</TABLE>
(1)For purposes of computing the percentage of Common Stock
and equivalents outstanding, the 7,364,100 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series A Stock, the 21,126,022 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series B Stock, the 32,326,438 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series D Stock, the 33,042,653 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series E Stock, and the 15,384,615 shares of
Common Stock issuable upon conversion of the outstanding
shares of Series F Stock have been included as well as
shares issuable upon exercise of options exercisable
within 60 days after March 17, 1995 which any person may
own.
(2)Includes: (i) 53,764 shares owned by Mr. Fisher's wife,
(ii) 2,100,000 shares which may be acquired by Mr.
Fisher within 60 days after March 17, 1995 by exercise
of stock options and (iii) 4,097,370 shares of Common
Stock and 988,485 shares of Common Stock issuable upon
conversion of the shares of Series B Stock each held by
Indian Creek Capital, Ltd., a limited partnership of
which Mr. Fisher is the managing general partner.
(3)Includes 500 shares owned by Mr. Thomas' wife and
1,715,625 shares which may be acquired by Mr. Thomas
within 60 days after March 17, 1995, by exercise of
stock options.
(4)Includes 782,025 shares which may be acquired within 60
days after March 17, 1995, by exercise of stock options.
(5)Includes 569,240 shares which may be acquired within 60
days after March 17, 1995, by exercise of stock options.
(6)Includes 151,625 shares which may be acquired within 60
days after March 17, 1995, by exercise of stock options.
(7)Includes 6,979,390 shares which may be acquired within 60
days after March 17, 1995, by exercise of stock options
and 988,485 shares of Common Stock issuable upon
conversion of the shares of Series B Stock held
beneficially by Mr. Fisher.
The following table shows, as to those executive officers named
in the Summary Compensation Table on page 8, the number, exercise
price and expiration date of options to acquire Common Stock
granted under the Non-qualified Stock Option Plan during fiscal
1994, and the potential realizable value of those shares
assuming certain annual rates of appreciation in the price of
the Company's stock.
<TABLE>
<S> <C> <S> <C> <C>
Option Grants for the year ended December 31, 1994
Potential realizable
values at assumed annual
rates of stock price
appreciation for the
Individual Grants option term
%
Number of of total
shares options
underlying granted Share
Options in fiscal Exercise Price on Expiration
Name Granted year price/share Grant Date Date 5% 10%
- - - - - - - --------------- ------ ------- --------- --------- --------- -------- -------
Kenneth G. Fisher 103,300 7.8% $3.9375 $3.9375 6/27/2004 $255,799 $648,245
Rowland H. Thomas 59,600 4.5% 3.9375 3.9375 6/27/2004 147,586 374,012
Robert A. DiNanno 20,000 1.5% 3.9375 3.9375 6/27/2004 49,525 125,507
T. Mark Morley 20,000 1.5% 3.9375 3.9375 6/27/2004 49,525 125,507
10,000 0.8% 4.1250 4.1250 10/18/2004 25,942 65,742
Charles S. Namias 75,000 5.6% 3.2500 3.2500 2/25/2004 153,293 388,475
20,000 1.5% 3.9375 3.9375 6/27/2004 49,525 125,507
10,000 0.8% 4.1250 4.1250 10/18/2004 25,942 65,742
</TABLE>
The following table provides information on option exercises in
1994 by the named executive officers and the value of such
officers' unexercised options as of December 31, 1994.
Aggregated Option Exercises in the year ended December 31, 1994
and Option Values as of December 31, 1994
<TABLE>
<S> <C> <S> <C> <S> <C>
Number of Value of
Shares Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Number of 12/31/94 12/31/94
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- - - - - - - ------------------ --------------- --------- --------------- ----------------
Kenneth G. Fisher 250,000 $ 546,875 1,884,200/ $3,271,688/
319,100 472,063
Rowland H. Thomas 0 0 1,511,825/ 3,343,969/
284,775 483,782
T. Mark Morley 280,000 972,891 701,282/ 1,554,406/
120,118 188,344
Robert A. DiNanno 131,000 487,945 469,747/ 1,048,977/
138,243 268,031
Charles S. Namias 4,000 15,000 118,500/ 252,781/
167,500 122,656
</TABLE>
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
ENCORE COMPUTER CORPORATION.
Executive Compensation Philosophy
It is the goal of the Compensation Committee of the Board of
Directors to provide compensation to executives of the Company in
accordance with the following considerations:
*To provide compensation that is competitive with other high
technology companies that are of similar size to Encore with
similar products and markets;
*To provide compensation that will attract, retain and reward
superior, industry-knowledgeable executives who can manage the
shareholders' short and long-term interest;
*To provide total compensation wherein the majority of value to
be delivered is based on the financial performance of the Company
and the appreciation of the Company's stock.
To meet these goals, the Committee establishes, administers, and
reviews several programs for the Company. These programs are
designed to address the above considerations and consist of three
major components.
Base Salary
For executives of the Company, base salary is determined by the
level of job responsibility and overall competitive practices in
the labor market for the Company's executive talent. The
Committee recognizes that there is a scarcity of executive talent
with the technical capabilities that are critical to the
Company's long-term success. The Committee also considers the
Company's location outside of traditional labor markets for
technical talent to be a considerable factor for base salary
positioning. As such, the Committee positions the Company's
executives' base salaries at the 75th percentile of the
competitive market and generally believes that this base salary
posture is an essential factor in maintaining a highly skilled
executive team. The Committee derives competitive data
representing the high technology and computer products sectors
from an independent compensation consultant, Towers Perrin. The
Committee believes that most of the companies in the S & P
Computer Systems Index which is used as the Company's industry
comparison line in the performance graph appearing on page 16, are
represented in the various surveys used by the compensation
consultant.
1994 executive base salaries were in accord with the above
policy. One named executive's base salary and incentive were
increased during the year when he became an officer and member of
senior management.
Annual Incentives
All executive officers are eligible to receive incentives which
are based on the short-term performance of the Company. The
program is intended to highlight critical business goals and
reward the achievement of these goals through individual and team
contributions. Target incentive opportunities typically range
from 15% to 45% of executives' base salaries and are based on
median bonus levels observed in other high technology and
computer related companies. Target award levels are structured
so that at target award levels, executives' total cash
compensation (base salary plus annual incentive) would be
comparable to the 75th percentile total cash compensation of the
competitive market as discussed earlier.
The specific performance criteria used for incentive compensation
goals include the attainment of profit before tax objectives,
achievement of quarterly financial plans and subjective
functional and teamwork goals as determined by management.
Functional goals include activities aimed at achieving revenue,
bookings, expenses, schedule targets, etc. Teamwork goals
include joint, cross functional activities and projects. The
relative weighting of each factor depends on the executive's
position within the Company's organizational structure.
Typically, profit before tax objectives and quarterly financial
plan targets account for 60% to 100% of the named executives'
incentives; functional and teamwork goals account for 25% to 40%
of the total incentive. In 1994, the Company did not achieve its
profit before tax objective and therefore no incentive payments
were made that were based on the Company's profit performance.
Incentive payments that were made to certain named executives in
1994 reflect the attainment of individual functional and teamwork
goals, and in the case of two named executives, include an
extraordinary incentive payment for sales results.
Long-Term Incentives
The Committee believes that stock-based incentives provide the
strongest link between the rewards earned by executives and the
returns generated for shareholders. The Committee also believes
that providing the potential for significant share ownership
helps focus executive behavior on the long-term growth and
strength of the organization. As such, the Committee has made
significant stock option grants throughout the Company to focus
all recipients on long-term growth and the enhancement of
shareholder value. The Committee has generally observed that
stock option grants comprise a significant portion of executive
compensation in the high technology and computer related
industries. Stock options represent the right to purchase the
Company's stock at the fair market value of the Company's stock
on the date of grant. Since the value ultimately realized from
the option depends entirely on the future success of the Company
and the growth of the stock price, an option serves to provide an
incentive to the executive for years after it has been awarded.
The Committee has adopted formal stock option grant guidelines
which will base annual option grants on the executive's base
salary grade and individual performance factors. This practice
will ensure that executives at similar organizational levels will
have equal long-term incentive opportunities while allowing the
Committee some discretion to augment awards as it feels
appropriate to recognize significant individual accomplishments.
In 1994, the Board granted 222,900 options to the named
executives in accordance with the pre-established guidelines.
The Committee granted one named executive an additional stock
option award in recognition of his exceptional sales performance
before his promotion to officer status. This same named
executive and another named executive were each awarded an
additional grant by the Committee to reward special achievement.
The Committee feels that executives act in the best interests of
shareholders when they have a significant portion of their own
wealth invested in the Company. As such, the Committee has also
adopted formal stock ownership guidelines for the CEO and other
executive officers who report directly to the CEO. The Committee
believes that requiring executives to maintain a certain
ownership interest in the Company complements the existing long-
term incentive program in that once stock options are exercised,
there is an added emphasis on retaining exercised shares and
further enhancing shareholder value. The specific guidelines
require that, by the end of 1996, the CEO acquire and maintain
ownership of Company stock with a value equal to two times his
current base salary; executives reporting directly to the CEO are
required to acquire and maintain ownership of Company stock with
a value equal to at least one-half their current base salaries.
The committee is pleased to report that at the end of 1994 the
CEO has far exceeded his ownership requirement, two named
executives have met the requirement and two have made progress
toward the goal.
Compensation for Mr. Fisher
Mr. Fisher's base salary was not increased in 1994. The
Committee has positioned Mr. Fisher's base salary slightly above
the market average of other high technology and computer related
companies of similar size to the Company. The Committee intends
to deliver most of Mr. Fisher's compensation in the form of
annual cash-based incentives and long-term stock-based incentives
that will deliver significant value to Mr. Fisher if and only if
the Company achieves positive returns and the stock price
appreciates over time.
To focus Mr. Fisher on the attainment of short-term financial
results, the Committee awards a bonus equal to 5% of the
Company's profit before taxes to Mr. Fisher as an incentive award
on a quarterly basis. This formula approach ensures shareholders
that an incentive payment will be made to Mr. Fisher only if the
Company is profitable. In addition, this approach provides a
consistent incentive to maximize profit each quarter. In 1994 no
incentive payments were made to Mr. Fisher.
The Committee granted 103,300 stock options to Mr. Fisher in 1994
in accord with the Board's established annual guidelines. Mr.
Fisher continues to have a significant portion of his personal
wealth invested in the Company and he is well motivated to
increase the overall value of the Company and to generate returns
on behalf of all shareholders.
Other Compensation Matters
The Committee continues to evaluate the potential impact of the
$1 million dollar deduction limitation set forth in Section 162(m) of the
Internal Revenue Code of 1986, as amended, on executive pay which
was implemented as part of the Omnibus Budget Reconciliation Act
of 1993. The 1995 Long Term Performance Plan approved by the
Board and being submitted for shareholder approval at the 1995
annual meeting is a performance-based plan, and therefore, any
gains on stock options should not be subject to the $1 million
dollar limit. The Committee believes this action adequately
protects the deduction for executive compensation. However, the
Committee will continue to evaluate the Company's potential
exposure to the deduction limitation on an annual basis.
In conclusion, the Committee feels that all pay programs are
reasonable and appropriate given the Company's industry, size and
organizational structure. Base salary and incentive programs
provide features to attract, retain and motivate executives to
enhance the performance of the Company from year to year. The
stock option grants provide a significant incentive to executives
to undertake policies and actions to enhance the overall value of
the organization well into the future.
The Compensation Committee
of the Board of Directors
D. O. Anderson, Chairman
C. D. Ferguson
K. G. Fisher
The following chart depicts the Company's performance for the
five year period ending December 31, 1994, as measured by total
shareholder return on the Company's Common Stock compared with
the total return of the Standard & Poors 500 Composite Index,
and the Standard & Poors Computer Systems Index.
!-------------------------------------------------------------------------- !
!NOTE: In the Company's printed version of the Proxy, a graph !
!is included in this space portraying the Company's common stock performance!
!versus the performance of the S&P 500 and the S&P Computer Systems Index !
!The graph is based on the following data points: !
! !
! !
! 1989 1990 1991 1992 1993 1994 !
! -------- ------ -------- ------- ------- ------ !
!Encore Computer !
! Corporation $100.00 $ 27.99 $ 37.13 $ 60.01 $165.68 $142.82 !
!S&P 500 Index 100.00 93.44 118.02 123.29 131.99 129.96 !
!S&P Computer !
! Systems Index 100.00 109.07 93.28 65.76 67.06 85.68 !
! !
! !
! * This chart assumes the investment of $100 in the Company's !
! Common Stock, the S&P 500 Index and the S&P Computer Systems !
! Index on December 31, 1989. !
!---------------------------------------------------------------------------!
The Report of the Compensation Committee on Executive Compensation and
Comparison of Five Year Cumulative Total Shareholder Return above
shall not be deemed to be "soliciting material" or incorporated by
reference into any of the Company's filings with the Securities and
Exchange Commission.
Directors' Compensation
The Board of Directors has fixed the compensation of
non-officer directors at $2,500 per board meeting attended
in person. No compensation is paid for meetings held by
telephone conference. A total of $10,000 was paid to Mr.
Anderson for meetings attended during fiscal 1994. Mr.
Ferguson and Dr. Fedor have waived payment to them of fees
for attendance at board meetings. Directors who are also
officers of the Company receive no compensation for serving
as directors. During the past fiscal year, the Company has
also reimbursed certain of its directors for reasonable
out-of-pocket expenses relating to attendance at Board and
Committee meetings.
Certain Relationships and Related Transactions
Financing by Gould
During 1993, the Company recorded significant quarterly operating
losses and as a result reported a capital deficiency throughout
the year. Additionally, due to the operating losses incurred,
the Company was unable to generate sufficient levels of cash
through operating activities to fund the business. Cash
requirements were provided by additional borrowings made under a
revolving credit facility with Gould. Gould has provided the
Company with its revolving loan facility since 1989. On October
3, 1993, the Company's borrowings under the agreement exceeded
the maximum allowed by the terms of the agreement. Subsequent to
October 3, 1993, Gould allowed the Company to borrow funds in
excess of the agreement's maximum limit to fund its daily
operations and during the fourth fiscal quarter the Company began
negotiations with Gould to significantly recapitalize the
Company. At December 31, 1993, borrowings were $26,924,000 in
excess of the loan's maximum borrowing limit.
On February 4, 1994, the Company and Gould agreed to exchange
indebtedness owed by the Company to Gould for Series E Stock.
The indebtedness exchanged was the $50,000,000 term loan and
$50,000,000 borrowed under the revolving credit agreement. Upon
completion of the exchange, borrowings under the revolving loan
agreement were $19,134,000, or $15,866,000 below the maximum
borrowing limit of the credit facility.
In exchange for cancellation of indebtedness, the Company issued
to Gould 1,000,000 shares of Series E Stock. Terms of the Series
E Stock are included in Note J of Notes to Consolidated Financial
Statements and incorporated herein by reference. As a result of
this transaction, (i) the Company reduced debt by $100,000,000
and related interest expense by approximately $7,000,000 per year
and (ii) the beneficial ownership position of Gould and EFI
changed from 34.4% and 27.6%, respectively to 50.3% and 20.9%,
respectively.
Further, on April 11, 1994, the Company and Gould agreed to amend
and restate the existing revolving loan agreement by increasing
the maximum borrowing limit of the agreement to $50,000,000 and
extending its maturity date to April 16, 1996. The terms and
conditions of the agreement are essentially unchanged except
certain financial covenants contained in the agreement were
modified to more closely reflect the Company's then current
financial position.
The February 4, 1994 exchange of equity for indebtedness
eliminated the Company's capital deficiency and provided tangible
net worth in excess of minimum requirements for inclusion into
the Nasdaq National Market. On March 18, 1994, Encore was
reinstated into the system and the Company's common stock began
trading under the symbol ENCC.
Due to continued operating losses since February 4, 1994 and the
need to increase its investment in working capital for the
introduction of 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,
the Company and Gould entered into an Uncommitted Loan Agreement.
Under this agreement Gould may provide the Company with up to
$55,000,000 of additional borrowings to be used for among other
things the repayment of principal and interest incurred under the
revolving loan agreement. Upon completion of the agreement, the
Company used the facility to repay those borrowings in excess of
the revolving loan agreement's maximum. At December 31, 1994,
borrowings under the revolving loan agreement and uncommitted
loan agreement were $50,000,000 and $38,421,000, respectively.
The terms of the uncommitted loan are included in Note G of Notes
to Consolidated Financial Statements and incorporated herein by
reference.
In conjunction with the uncommitted loan agreement, Gould
provided the Company with statements affirming they would not
exercise certain remedies with respect to various defaults: (i)
under the Amended and Restated Loan Agreement dated March 31,
1992, (ii) under the terms of the Series B Convertible Preferred
Stock and (iii) under the terms of the Intellectual Property
License dated January 28, 1991, until after January 31, 1995.
As of March 17 1995, Gould cancelled $50,000,000 of indebtedness
owed to it by the Company under the revolving loan agreement in
exchange for 500,000 shares of the Company's Series F Stock with
a liquidation preference of $50,000,000. The terms of the
Series F Stock are included in Note L of Notes to Consolidated
Financial Statements and incorporated herein by reference.
In conjunction with the above described exchange, the Company and
Gould also entered into an Amended and Restated Credit Agreement
(the "Credit Agreement"). The Credit Agreement provides the
Company with an additional committed borrowing facility of
$25,000,000. The amendment increases the maximum committed
borrowing limit under the Credit Agreement from $55,000,000 to
$80,000,000. On the Closing Date, the Company had incurred
borrowings under the Agreement of $55,000,000 and had available a
committed, unused credit facility of $25,000,000.
The Credit Agreement matures on April 16, 1996. 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 is 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 180 days. In conjunction with the
execution of the Credit Agreement, Gould provided the Company
with waivers of compliance with certain terms contained in the
agreement until January 1, 1996.
In addition to the above described events, the Company and Gould
also agreed to the following: (i) the Encore period of exclusive
use under the Intellectual Property License shall not terminate
prior to June 30, 1995, and (ii) Gould shall 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
before September 30, 1995. A complete discussion of the
agreement to extend the Encore exclusive use period under the
terms of the Intellectual Property License is included in Note I
of Notes to Consolidated Financial Statements and incorporated
herein by reference. A discussion regarding the Series B Stock
is included in Note L of Notes to Consolidated Financial
Statements and incorporated herein by reference.
The following tables display the beneficial ownership of Japan
Energy Corporation through its wholly owned subsidiaries Gould
and EFI in the Company before the March 17, 1995 transaction as
of December 31, 1994 and on a pro forma basis after the
transaction as of December 31, 1994:
Before the Exchange of
Indebtedness for Series F
as of December 31, 1994
Debt (1) Beneficial Ownership (2)
($000's) % of total Shares % of total
--------- --------- ----------- --------
Gould $ 88,421 98.9% 67,232,892 49.9%
EFI(3) - - 28,310,092 21.0
Other 1,023 1.1 39,224,705 29.1
-------- ------ ----------- ------
Total $ 89,444 100.0% 134,767,689 100.0%
======== ====== =========== =======
After the Exchange of Indebtedness for Series F
Pro Forma as of December 31,1994
Debt (1) BeneficialOwnership (4)
($000's) % of total Shares % of total
--------- -------- ---------- ---------
Gould $ 38,421 97.4% 82,617,508 55.0%
EFI(3) - - 28,310,092 18.9
Other 1,023 2.6 39,224,705 26.1
-------- ------ ----------- -------
Total $ 39,444 100.0% 150,152,305 100.0%
======== ====== =========== ======
(1) Includes both current and long-term portion of debt.
(2) Includes 92,580,961 shares of Common Stock issuable upon
full conversion of all outstanding Series A Stock, Series B
Stock, Series D Stock and Series E Stock after payment of
all dividends payable through January 15, 1995 as well as
shares which may be acquired within sixty days after December
31, 1994 by exercise of outstanding stock options.
(3) EFI, like Gould, is a wholly owned subsidiary of Japan
Energy Corporation. Its ownership consists solely of Series
D Stock whose conversion to common stock is limited by the
terms of the stock as discussed in Note (4) below.
(4) Includes 107,965,576 shares of Common Stock issuable upon
full conversion of all outstanding Series A Stock, Series B
Stock, Series D Stock, Series E Stock, and Series F Stock as
well as shares which may be acquired within sixty days after
December 31, 1994 by exercise of outstanding stock options.
The Series D, Series E, and Series F Stock are convertible by only a
United States citizen or a corporation or other entity owned
in the majority by a United States shareholder or in
connection with an underwritten public offering.
In connection with the exchange of indebtedness for both the
Series E and Series F Stock by Gould the United States Defense
Investigative Service ("DIS") has not indicated an objection to the
relationships under the United States government requirements
relating to foreign ownership, control or influence between the
Company, Japan Energy (a Japanese corporation) and its wholly
owned subsidiaries (EFI and Gould).
Since 1989, Japan Energy and its wholly owned subsidiaries, Gould
and EFI, have been the principal source of the Company's
financing by either directly providing or guaranteeing the
Company's loans. Each of the Company's debt agreements with
Japan Energy and its wholly owned subsidiaries have contained
various covenants including maintenance of cash flow, leverage,
and tangible net worth ratios and limitations on capital
expenditures, dividend payments and additional indebtedness.
Currently and at various times in the past, the Company has been
in default of certain covenants contained in the debt agreements
but waivers of compliance with those covenants have been obtained
and, generally, the Company has been able to successfully
renegotiate favorable terms with its creditor. To continue
operating in the normal course of business, the Company is and
will remain dependent on the continued financial support of Japan
Energy and its subsidiaries. Until such time as the Company
returns to a state of sustained profitability, Encore will be
unable to secure funding from other parties and/or generate
sufficient levels of cash through operations to meet the needs of
the business.
APPROVAL OF AMENDMENT TO ARTICLE FOURTH
OF THE COMPANY'S CERTIFICATE OF INCORPORATION
On April 20, 1995, the Board of Directors voted to propose and
declare advisable an amendment to Article FOURTH of the Company's
Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 150,000,000 shares to
200,000,000 shares.
As of December 31, 1994, there were (i) 34,076,124 shares of
Common Stock issued and outstanding (ii) 4,545,719 shares of
Common Stock reserved for issuance under the Company's stock
purchase plan, (iii) 10,111,972 shares reserved for issuance on
the exercise of outstanding stock options as well as 9,251,331
shares reserved for issuance on the exercise of stock options to
be granted in future periods, (iv) 7,364,100 shares reserved for
issuance upon conversion of the outstanding shares of Series A
Stock, (v) 20,506,246 shares reserved for issuance upon
conversion of the outstanding shares of Series B Stock, (vi)
31,378,062 shares reserved for issuance upon conversion of the
outstanding shares of Series D Stock (vii) 32,073,262 shares
reserved for issuance upon conversion of the outstanding shares
of Series E Stock, and (viii) 16,423,626 shares allocated for
issuance upon conversion of additional outstanding shares of
Preferred Stock which may be issued as dividends through 1998.
Additionally, as of March 17, 1995 the Company and Gould agreed
among other things to exchange $50,000,000 of indebtedness owed
to Gould by the Company for 500,000 shares of the Company's
Series F Stock with a liquidation preference of $50,000,000.
The terms of the Series F Stock require the Company to reserve
sufficient shares of Common Stock to allow for the potential
conversion of the Series F Stock at a price of $3.25 per share of
Common Stock. In this connection, the Company has reserved
15,384,615 shares for issuance upon conversion of the Series F.
See "Certain Relationships and Related Transactions" and
"Information Incorporated by Reference" for further details of
this transaction. Completion of this transaction was neither
contingent nor conditional upon shareholder approval of the
increase in the number of authorized shares of Common Stock.
These reservations of shares, together with the shares of Common
Stock already outstanding, would exceed the currently authorized
shares of Common Stock by 31,115,057 shares.
The Board of Directors has determined that an increase in
authorized shares of Common Stock is necessary in order to meet
the commitments and plans described above and to enhance the
Company's flexibility in connection with possible future actions,
such as stock dividends, financings, corporate mergers,
acquisitions of property and services, use in employee benefit
plans or other corporate purposes. The shares would be available
for issuance without further action by the holders of Common
Stock. The Company has no present intention, however, of issuing
the increased number of authorized shares of Common Stock other
than in connection with the commitments and plans described
above. The amendment would increase the number of shares of
Common Stock available for issuance by the Company but would have
no effect on the terms of the Common Stock or the rights of the
holders of the Common Stock. Shareholders do not have and will
continue not to have pre-emptive rights. The amendment would not
affect the number of authorized shares of the Company's Preferred
Stock.
Although management is not currently aware of any effort by any
person to gain control of the Company, in the event of such an
effort, the authorized but unissued shares of Common Stock could
be used to make a change in control of the Company more
difficult. Under certain circumstances such shares could be used
to create voting impediments to deter persons seeking to effect a
takeover or otherwise gain control of the Company. Such shares
could be sold in public or private transactions to purchasers who
might side with the Board of Directors in opposing a takeover bid
which the Board of Directors determines not to be in the best
interests of the Company and its shareholders. The amendment
might have the effect of discouraging an attempt by another
person, through the acquisition of a substantial number of shares
of the Company's Common Stock, to acquire control of the Company
with a view to imposing a merger, sale of all or any part of the
Company's assets or a similar transaction, since the issuance of
new shares could be used to dilute the stock ownership of such
person or entity.
The Board of Directors recommends a vote "FOR" this proposal. It
is intended that the enclosed proxy will be voted "FOR" this
proposal (unless the proxy indicates to the contrary) and in
favor of adjournment of the Annual Meeting in order to permit
further solicitation of proxies with respect to the proposed
amendment if sufficient votes in favor of the amendment have not
been received.
The affirmative vote of the holders of a majority of the
outstanding shares of the Company's Common Stock is required for
the approval of the amendment to Article Fourth of the Company's
Certificate of Incorporation.
APPROVAL OF THE LONG TERM PERFORMANCE PLAN
In order to create incentives for superior performance, to link
compensation to total stockholder returns and to facilitate the
retention by the Company and its subsidiaries of valued
directors, consultants, executive officers and other key
employees, on January 19, 1995 the Board adopted the Company's
1995 Long Term Performance Plan (the "Performance Plan"), subject
to the approval of the stockholders of the Company.
The Performance Plan is intended to provide for a community of
interest between the Company's directors, certain consultants and
key employees and the Company's stockholders and enable the
Company to attract and retain individuals of outstanding ability.
The Performance Plan has been adopted to replace (a) the
Company's 1983 Incentive Stock Option Plan, as amended (the "ISO
Plan"), which, prior to its expiration (except as to the
administration of outstanding option grants) in 1993, provided
for the grant of options to purchase Common Stock to employees
which were intended to qualify as "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and (b) the
Company's 1985 Nonqualified Stock Option Plan (the "NQO Plan"
and, together with the ISO Plan, the "Prior Plans") which
provides for the grant of options to purchase Common Stock which
do not qualify as ISOs ("NQOs") to employees, directors, and
consultants to the Company. Following and contingent upon
approval of the Performance Plan by stockholders, no further
grants of NQOs shall be made under the NQO Plan The shares of
Common Stock currently reserved for issuance under the Prior
Plans will be reserved for issuance under the Performance Plan.
No additional shares are currently being reserved.
Stockholder approval of the Performance Plan is required by the
terms of the plan and is sought to meet the stockholder approval
requirement of Rule 16b-3 under the Securities Exchange Act of
1934, as amended, which, in the case of certain stock plans which
have been approved by stockholders, prevents the grant of options
to directors, officers and certain other affiliates from being
deemed "purchases" for purposes of the profit recapture
provisions of Section 16(b) of the Exchange Act.
The Board recommends a vote "FOR" this proposal because it
believes that stock-based incentives are an effective means of
attracting, retaining and rewarding directors, consultants,
officers and other key employees and closely aligning their
interests with those of the stockholders. It is intended that
shares represented by the enclosed proxy will be voted (unless
the proxy indicates to the contrary) to approve the Performance
Plan and may be voted to approve adjournment of the meeting in
order to permit further solicitation of proxies with respect to
the proposal, if sufficient votes approving the Performance Plan
have not been received.
The affirmative vote of the holders of a majority of the Common
Stock present or represented at the meeting and voting on such
matter is required for approval of the 1995 Long term Performance
Plan.
A summary description of the 1995 Long Term Performance Plan is
as follows:
All directors (currently five), executive officers (currently
ten), and other executives and selected employees (now
approximately 837) will be eligible to participate in the
Performance Plan. The Performance Plan provides that only a
committee consisting of "disinterested directors" (within the
meaning of Exchange Act Rule 16b-3) and/or "outside directors"
(within the meaning of Code Section 162(m)), as applicable, may
select, and grant stock options or other awards under the
Performance Plan to participants who are subject to Section 16 of
the Exchange Act and/or who are "covered employees" within the
meaning of Section 162(m) of the Code. The current Compensation
Committee (to which the Board has delegated all authority to
administer the Performance Plan with respect to all persons who
are not directors of the Company) and current Directors Option
Committee (to which the Board has delegated all authority to
administer the Performance Plan with respect to all persons who
are directors of the Company, including directors who are also
executive officers) satisfy these requirements.
The Compensation Committee of the Board will review and act on
all Performance Plan grants and awards for executive officers who
are not also directors (those subject to Section 16 of the
Exchange Act) and the Compensation Committee may delegate to the
chief executive officer and to other senior officers of the
Company the authority to make grants and awards under the
Performance Plan to other eligible employees. The term
"Committee" where used below without further identification means
the applicable committee designated to administer the Performance
Plan with respect to a particular class of participants and
awards granted thereto under the Performance Plan.
In administering the Performance Plan, the Committee has the
power to interpret its provisions and to promulgate, amend, and
rescind rules and regulations for its administration. The powers
of the Committee include designating participants and awards
made, establishing performance goals and plans, determining
vesting and exercisability restrictions and waiving any or all
restrictions which may initially attach to any award. The Board
is authorized to amend the Performance Plan, except that it may
not increase the maximum number of shares for which awards may be
made without stockholder approval or make other specified
amendments. Awards of stock may be subject to restrictions
established by the Committee.
The Performance Plan permits the grant of any form of stock
option, stock appreciation right, or other stock award whether
granted singly or in combination. One or more stock options can
be granted to any participant. No individual participant may
receive, under the Performance Plan, stock options or stock
appreciation rights ("SARs") the aggregate of which shall exceed
1,200,000 shares. ISOs will be granted at not less than 100% of
the value of the Common Stock on the date of grant as determined
in accordance with procedures established in good faith by the
Committee and in compliance with Section 422 of the Code ("fair
market value"). It is expected that options and SARs will be
granted for periods of 10 years or less and can continue in
effect after termination of employment in certain specified
circumstances. Up to $100,000 of ISOs based on fair market value
on date of grant may become exercisable for the first time in a
calendar year, per optionee, in compliance with Section 422 of
the Code.
The Performance Plan also provides for annual formula grants of
stock options to each member of the Board who is not an employee
of the Company or any of its affiliates (the "Non-Employee
Directors"). On the first business day following the annual
stockholders meeting each year, commencing with the 1995 annual
meeting of stockholders, each Non-Employee Director shall receive
an option exercisable for the purchase of 5,000 shares of Common
Stock at a price equal to 100% of the fair market value on the
date of grant and subject to such other terms and conditions, not
inconsistent with the terms of the Performance Plan, as the
Committee shall include in an award agreement.
In addition to the foregoing types of awards, the Performance
Plan permits the Committee to grant such other award forms as
shall be consistent with the purposes of the plan within the
limits of the plan. The duration of the Performance Plan will be
ten years, subject to earlier termination by the Board.
If approved by stockholders, the Board has authorized for
issuance under the Performance Plan the number of shares of the
Common Stock (the "Share Limit") which is equal to 24,000,000
shares (the total number of shares authorized for issuance under
either of the Prior Plans as approved by the stockholders) less
the number of shares issued or reserved for issuance under
options granted pursuant to the Prior Plans plus any shares
subject to outstanding options under the Prior Plans which are
terminated or expire unexercised. As 4,387,617 shares had been
issued pursuant to options granted under the Prior Plans as of
December 31, 1994, the maximum number of shares of Common Stock
which could thereafter be issued under the Performance Plan
assuming all shares subject to options issued pursuant to the
Prior Plans were either cancelled or expired unexercised, is
19,612,383 shares, which is 57.6% of the shares of the Common
Stock outstanding on December 31, 1994. The closing bid for the
Common Stock on the Nasdaq National Market on that date was
$3.0625 per share. Included in the Share Limit are shares of
Common Stock withheld by the Company in connection with the
exercise of any stock option or other award to satisfy tax
withholding requirements or to pay the exercise price of stock
options or awards. Stock related to awards that are forfeited,
terminated, expire unexercised, or settled in cash in lieu of
stock or in such manner that all or some of the shares covered by
an award are not issued to a participant, or exchange awards that
do not involve stock, shall immediately become available for
awards and will not be included within the Share Limits,
provided, in the case of shares reacquired by the Company
pursuant to a repurchase right, the holder thereof did not
receive any benefits with respect to the ownership thereof other
than voting rights. All stock-based awards and awards
denominated in stock (whether payable in stock or cash) are
subject to these limits.
No other benefit or amounts have been allocated under the
Performance Plan, nor are such benefits or amounts now
determinable, other than the formula annual option grants to Non-
Employee Directors described above and as set forth in the
following table:
Name Dollar Value (1) Number of Shares
- - - - - - - ------------------ ---------------- -----------------
Daniel O. Anderson $0 5,000
(1) Stock options to be granted during 1995 will be granted at
the then market value of the underlying common stock.
Accordingly, no benefit shall be realized at the time of
issuance.
For comparison purposes, please refer to the grants and awards
that were made under the Company's Prior Plans in the last
completed fiscal year, shown in the Option Grants for the Year
Ended December 31, 1994 table set forth above.
There is currently no accounting charge to the income of the
Company in connection with the grant or exercise of a stock
option; most other Performance Plan awards do require such a
charge. Stock Appreciation Rights ("SAR") result in such a
charge when the market value of the shares to which the SAR
grants relate exceeds the exercise price at which the SARs were
granted. Charges for awards other than stock options are not
expected to be a material expense to the Company.
The Performance Plan has been designed to meet the requirements
of Section 162(m) of the Code for stock options and SARs and to
provide flexibility for certain other awards to so qualify.
Under the Code, as presently in effect, an optionee will not be
deemed to receive any income for federal income tax purposes at
the time an option, a purchase authorization or SAR is granted or
a restricted stock award is made, nor will the Company be
entitled to a tax deduction at that time. However, when any part
of an option, a purchase authorization or SAR is exercised, when
restrictions on restricted stock lapse, or when an unrestricted
stock award is made, the federal income tax consequences may be
summarized as follows:
1. In the case of an exercise of a NQO or purchase
authorization, the optionee will recognize ordinary income in an
amount equal to the difference between the option price and the
fair market value of the shares on the exercise date.
2. In the case of an exercise of an SAR, the optionee will
recognize ordinary income on the exercise date in the amount
equal to any cash and unrestricted shares, at fair market value,
received.
3. In the case of an exercise of an option or SAR payable
in restricted stock, or in the case of an award of restricted
stock, the immediate federal income tax effect for the recipient
will depend on the nature of the restrictions. Generally, the
fair market value of the stock will not be taxable to the
recipient as ordinary income until the year in which his or her
interest in the stock is freely transferable or is no longer
subject to a substantial risk of forfeiture. However, the
recipient may elect to recognize income when the stock is
received, rather than when his or her interest in the stock is
freely transferable or is no longer subject to a substantial risk
of forfeiture. If the recipient makes this election, the amount
taxed to the recipient as ordinary income is determined as of the
date of receipt of the restricted stock.
4. In the case of ISOs, there is no tax liability at time
of exercise. However, the excess of the fair market value of the
stock on the exercise date over the option price is included in
the optionee's income for purposes of the alternative minimum
tax. If no disposition of the ISO stock is made before the later
of one year from the date of exercise and two years from the date
of grant, the optionee will realize a long-term capital gain or
loss upon a sale of the stock, equal to the difference between
the option price and the sale price. If the stock is not held
for the required period, ordinary income tax treatment will
generally apply to the amount of any gain at sale or exercise,
whichever is less, and the balance of any gain or any loss will
be treated as capital gain or loss (long-term or short-term,
depending on whether the shares have been held for more than one
year).
5. Upon exercise of a NQO, a purchase authorization or SAR,
the award of stock, or the recognition of income on restricted
stock, the Company will generally be allowed an income tax
deduction equal to the ordinary income recognized by the
employee. The Company does not receive an income tax deduction
as a result of the exercise of an ISO, provided that the ISO
stock is held for the required period as described above. When a
cash payment is made pursuant to the Award, the recipient will
recognize the amount of the cash payment as ordinary income, and
the Company will generally be entitled to a deduction in the same
amount.
6. The Company may not deduct compensation of more than
$1,000,000 that is paid in a taxable year to an individual who,
on the last day of the taxable year, is the Company's chief
executive officer or among one of its four other highest
compensated officers for that year. The deduction limit,
however, does not apply to certain types of compensation,
including qualified performance-based compensation. The Company
believes that compensation attributable to stock options and
stock appreciation rights granted under the Performance Plan will
be treated as qualified performance-based compensation and
therefore will not be subject to the deduction limit.
The foregoing is a general summary of federal income tax
considerations only and does not purport to be complete.
References are made to the applicable sections of the Internal
Revenue Code.
APPROVAL OF AUDITORS
The Board of Directors has selected the firm of Coopers & Lybrand
L.L.P., independent public accountants, as auditors of the
Company for the year ending December 31, 1995, and is submitting
the selection to the shareholders for approval. The Board of
Directors recommends a vote "FOR" this proposal. It is intended
that the shares represented by the enclosed proxy will be voted
(unless the proxy indicates to the contrary) to approve such
selection.
Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the Annual Meeting of Stockholders. They will have an
opportunity to make a statement if they desire to do so and will
also be available to respond to appropriate questions from
shareholders.
OTHER MATTERS
The Board of Directors does not know of any other matters that
may come before the meeting. However, if any other matters are
properly presented at the meeting, it is the intention of the
persons named in the accompanying proxy to vote, or otherwise to
act, in accordance with their judgment on such matters.
All costs of solicitation of proxies will be borne by the
Company. In addition to solicitations by mail, the Company's
directors, officers and regular employees, without additional
remuneration, may solicit proxies by telephone and personal
interviews. Brokers, custodians and fiduciaries will be required
to forward proxy soliciting material to the owners of stock held
in their names, and the Company will reimburse them for their
out-
of-pocket expenses in this regard.
PROPOSALS FOR 1996 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 1996
Annual Meeting of Stockholders must be received by the Company at
its principal office in Fort Lauderdale, Florida, Attention: T.
Mark Morley, Secretary, not later than January 12, 1996, for
inclusion in the proxy statement for that meeting.
By order of the Board of Directors
T.MARK MORLEY
T. Mark Morley, Secretary
May 13, 1995
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE
MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY FACILITATE
ARRANGEMENTS FOR THE MEETING, AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR
STOCK PERSONALLY EVEN THOUGH THEY HAVE RETURNED THEIR PROXIES.
Information Incorporated by Reference
The following Information is incorporated by reference in
this Proxy Statement from the Company's 1994 Annual Report,
which accompanies this Proxy Statement:
(1) the Company's Consolidated Financial Statements,
including the Notes thereto and the Report of Independent
Accountants;
(2) the Selected Financial Data; and
(3) Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE>
- - - - - - - -------------------------------------------------------------------------
!NOTE: THE FOLLOWING ARE THE PROXY CARDS WHICH WILL BE USED BY !
! THE COMPANY IN ITS MAILING TO SHAREHOLDERS. THERE IS ONE CARD !
! WHICH WILL BE USED FOR GOULD INC. AND ONE CARD WHICH WILL !
! BE USED FOR ALL OTHER SHAREHOLDERS !
!-----------------------------------------------------------------------!
(Front of Card)
P SOLICITED BY THE BOARD OF DIRECTORS
R
O ENCORE COMPUTER CORPORATION
X
Y ANNUAL MEETING OF STOCKHOLDERS - June 27, 1995
The undersigned hereby appoints Kenneth G. Fisher and
Rowland H. Thomas, Jr., and each of them, with power of
substitution, proxies for the undersigned and authorizes
them, and each of them, to represent and vote, as
designated, all of the shares of Common Stock of the Company
which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders to be held at Encore Computer
Corporation, Building No. 7 Auditorium, 1800 N. W. 69th
Avenue, Fort Lauderdale, Florida at 1:30 P.M. (local time)
on Tuesday, June 27, 1995 and at any adjournments or
postponements of such meeting, for the following purposes
and with discretionary authority as to any other matters
that may properly come before the meeting, all in accordance
with and as described in the Notice and accompanying Proxy
Statement. If no direction is given, this proxy will be
voted FOR proposals 1, 2, 3 and 4.
IMPORTANT - TO BE SIGNED AND DATED ON REVERSE SIDE
(SEE REVERSE SIDE)
(Back of Card)
_X_ Please mark votes as in this example.
The Board recommends a vote FOR proposals 1 through 4.
1. To fix the number of directors at five (5) and to elect
three (3) directors. (Under the Company's Certificate of
Incorporation, Gould Electronics, Inc., as the holder of
all the outstanding Series A Convertible Participating
Preferred Stock of the Company, is entitled to elect the
other two directors.) See pages 4 through 7 of the Proxy
Statement.
Nominees: Kenneth G. Fisher, Daniel O. Anderson and Rowland
H. Thomas, Jr.
FOR ALL WITHHELD FROM ALL
___________ NOMINEES ______________NOMINEES
_____
|____|
_______________________________________________________
(Instruction: To withhold authority for a specific nominee,
mark box on the line above and write the nominee's name in
the space provided.)
2.To amend the Company's Certificate of Incorporation
to increase the number of shares of authorized Common
Stock to 200,000,000 shares from the current
authorization of 150,000,000 shares. See pages 19
through 21 of the Proxy Statement.
_______________FOR _______________AGAINST___________ABSTAIN
3. To approve the adoption of the 1995 Long Term
Performance Plan. See page 21 through 24 of the Proxy
Statement.
_______________FOR _______________AGAINST___________ABSTAIN
4. To approve the selection by the Board of Coopers &
Lybrand L.L.P. as the Company's independent auditors for its
fiscal year ending December 31, 1995. See page 23 of the
Proxy Statement.
_______________FOR _______________AGAINST___________ABSTAIN
MARK HERE _____FOR ADDRESS CHANGE AND NOTE AT RIGHT________________________
Please sign exactly as your name appears
on your stock certificate. Signature:____________________Date_______
If you are signing on behalf of a
corporation as an officer,or as a
general partner of a partnership,
or acting as attorney,executor, Signature:____________________Date_______
trustee, fiduciary, administrator,
guardian or in any other
representative capacity,
sign name and title.
PROXY FOR GOULD ELECTRONICS INC.
SOLICITED BY THE BOARD OF DIRECTORS
ENCORE COMPUTER CORPORATION
ANNUAL MEETING OF STOCKHOLDERS - June 27, 1995
The undersigned hereby appoints Kenneth G. Fisher and
Rowland H. Thomas, Jr., and each of them, with power of
substitution, proxies for the undersigned and authorizes
them, and each of them, to represent and vote, as
designated, all of the shares of Common Stock and Series A
Convertible Participating Preferred Stock of the Company
which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders to be held at Encore Computer
Corporation, Building No. 7 Auditorium, 1800 N. W. 69th
Avenue, Fort Lauderdale, Florida at 1:30 P.M. (local time)
on Tuesday, June 27, 1995 and at any adjournments or
postponements of such meeting, for the following purposes
and with discretionary authority as to any other matters
that may properly come before the meeting, all in accordance
with and as described in the Notice and accompanying Proxy
Statement.
1. To vote all shares of the Company's Series A
Convertible Participating Preferred Stock held by the
undersigned to elect C. David Ferguson and Robert J.
Fedor directors of the Company.
____________FOR _______________AGAINST __________ABSTAIN
2. To fix the number of directors at five (5) and
elect three (3) directors for the ensuing year, to vote
all shares of the Company's Common Stock owned by the
undersigned pro rata in accordance with the votes cast
by the other stockholders at the Annual Meeting. See
pages 4 through 7 of the Proxy Statement.
____________FOR _______________AGAINST __________ABSTAIN
3. To amend the Company's Certificate of Incorporation
to increase the number of shares of authorized Common
Stock to 200,000,000 shares from the current
authorization of 150,000,000 shares, to vote all shares
of the Company's Common Stock owned by the undersigned
pro rata in accordance with the votes cast by the other
stockholders at the Annual Meeting. See pages 19
through 21 of the Proxy Statement.
____________FOR _______________AGAINST __________ABSTAIN
4. To approve the adoption of the 1995 Long Term
Performance Plan, to vote all shares of the Company's
Common Stock owned by the undersigned pro rata in
accordance with the votes cast by the other
stockholders at the Annual Meeting. See page 21
through 24 of the Proxy Statement.
____________FOR _______________AGAINST __________ABSTAIN
5. To approve the selection by the Board of Coopers &
Lybrand L.L.P. as the Company's independent auditors
for its fiscal year ending December 31, 1995, to vote
all shares of the Company's Common Stock owned by the
undersigned pro rata in accordance with the votes cast
by the other stockholders at the Annual Meeting. See
page 23 of the Proxy Statement.
_______________FOR _______________AGAINST _________ABSTAIN
GOULD ELECTRONICS INC.
Dated:______________,1995 By:___________________________
Title:____________________________
