UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______.
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 954-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
The number of shares outstanding of the registrant's only class of Common
Stock as of November 11, 1996 was 37,027,935.
Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidate
Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II OTHER INFORMATION 19
Signature Page 20
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
Sept 29, Oct 1, Sept 29, Oct 1,
1996 1995 1996 1995
Net sales:
Equipment $ 8,558 $ 3,727 $ 21,680 $ 13,604
Service 4,711 6,139 14,902 21,128
13,269 9,866 36,582 34,732
Costs and expenses:
Cost of equipment sales (Note B) 10,918 3,323 21,872 29,431
Cost of service sales 5,005 4,692 14,079 15,779
Research and development 7,866 8,216 23,807 25,665
Sales, General and Admin 7,760 8,005 24,292 26,026
Restruct costs (Note B) 0 0 0 4,499
Total 31,549 24,236 84,050 101,400
Operating loss -18,280 -14,370 -47,468 -66,668
Int exp, princ related parties -911 -380 -2,149 -2,590
Interest income 55 25 131 105
Other (expense)/income, net 87 -109 -171 66
Loss before income taxes -19,049 -14,834 -49,657 -69,087
Net loss $ -19,049 $ -14,781 $ -49,657 $ -69,274
Net loss per common share (Note A):
Net loss attributable to common
shareholders $ -25,707 $ -19,751 $ -68,311 $ -82,741
Loss per common share $ -0.58 $ -0.47 $ -1.55 $ -1.97
Weighted average shares
of common stock 44,373 42,447 44,068 42,010
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed Consolidated Balance Sheets
(in thousands except share data)
Unaudited
Sept 29, Dec 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 4,471 $ 3,490
Accounts receivable, less allowance 16,715 13,030
Inventories (Note C) 25,582 15,796
Prepaid expenses and other current assets 1,293 1,353
Total current assets 48,061 33,669
Property and equipment, net 33,843 35,800
Capitalized software, net 1,014 2,258
Other assets 775 810
Total assets $ 83,693 $ 72,537
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term debt-relat parties (Note E) $ 61,201 $ 0
Current portion of long term debt-other (Note E) 184 171
Accounts payable and accrued liabilities (Note D) 33,804 28,008
Total current liabilities 95,189 28,179
Long term debt-related parties (Note E) 0 40,154
Long term debt-other (Note E) 518 658
Other liabilities 1,201 1,032
Total liabilities 96,908 70,023
Shareholders' equity (Capital deficiency) (Notes E and F):
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred, issued
73,641 shares in 1996 and 1995 1 1
6% Cumulative Series B Convertible Preferred, issued
728,722 and 707,345 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $72,872,200
and $70,734,500 in 1996 and 1995, respectively. 7 7
6% Cumulative Series D Convertible Preferred, issued
1,115,074 and 1,082,362 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $111,507,400
and $108,236,200 in 1996 and 1995, respectively 11 11
6% Cumulative Series E Convertible Preferred, issued
1,139,782 and 1,106,343 in 1996 and 1995, with an
aggregate liquidation preference of $113,978,200 and
$110,634,300 in 1996 and 1995, respectively 11 11
6% Cumulative Series F Convertible Preferred, issued
533,333 and 517,687 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $53,333,300
and $51,768,700 in 1996 and 1995, respectively. 5 5
6% Cumulative Series G Convertible Preferred, issued
572,289 and 555,500 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $57,228,900
and $55,550,000 in 1996 and 1995, respectively. 6 6
6% Cumulative Series H Convertible Preferred, issued
350,000 in 1996 with an aggregate liquidation preference
of $35,000,000. 4 0
Common stock, $.01 par value; authorized 200,000,000 shares;
issued 37,022,985 and 36,067,792 in 1996 and 1995,
respectively. 370 361
Additional paid-in capital 446,791 412,876
Accumulated deficit -460,421 -410,764
Total shareholders' equity (Capital deficiency) -13,215 2,514
Total liab and shareholders' equity (Capital Deficiency)$ 83,693 $ 72,537
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Mos Nine Mos
Ended Ended
Sept 29, Oct 1,
1996 1995
Cash flows from operating activities:
Net loss $ -49,657 $ -69,274
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 8,510 8,773
Non cash compensation (Note F) 589 1,425
Inventory obsolescence and writedown to lower of cost
or market 3,395 12,097
Bad debt provision/(credit) -1 2,996
Restructuring charges 0 4,499
Net changes in operating assets and liabilities:
Accounts receivable -3,684 6,042
Inventories -13,181 -1,986
Prepaid expenses and other current assets 60 353
Other assets 35 618
Accounts payable and accrued liabilities 3,042 -5,847
Other liabilities 169 0
Net cash used in operating activities -50,723 -40,304
Cash flows from investing activities:
Additions to property and equipment -5,309 -2,918
Capitalization of software costs 0 -1,231
Net cash used in investing activities -5,309 -4,149
Cash flows from financing activities:
Net borrowings under revolving loan agreements 56,047 43,585
Principal payments of long term debt -127 -154
Preferred stock dividends paid -2.00 -1.00
Issuance of common stock 1,095 1,464
Net cash provided by financing activities 57,013 44,894
Increase in cash and cash equivalents 981 441
Cash and cash equivalents, beginning 3,490 2,517
Cash and cash equivalents, ending $ 4,471 $ 2,958
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
Nine Mos Nine Mos
Ended Ended
Sept 29, Oct 1,
1996 1995
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for interest $ 78 $ 1,776
Cash paid during the period for income taxes 69 496
Non-cash investing and financing activity:
Indebtedness exchanged for preferred stock $ 35,000 $ 105,000
During the third quarter of 1995, the Company recorded a $400,000 adjustment
of estimated transaction costs related to Gould capital transactions.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D
Par Par Par
Shares Val Shares Val Shares Val
Bal Dec 31, 1995 73,641 1 707,345 7 1,082,362 11
Common stock options
exercised, $.69 to $2.00
per share
Shares issued through employee
stock purchase plan, at a price of
$1.9125 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 21,377 0 32,712 0
Extension of expiration date on outstanding
grant of common stock options
Net loss
Bal Sep 29, '96 73,641$ 1 728,722 $ 7 1,115,074$ 11
The accompanying notes are an intergral part of the consolidated
financial statements.
Preferred Stock
Series E Series F Series G Series H
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Bal Dec 31, 1995 1,106,343 $11 517,687 $5 555,500 $6 0 $0
Common stock options exercised,
$.69 to $2.00 per share
Shares issued through employee stock purchase
plan, at a price of $1.9125 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 33,439 0 15,646 0 16,789 0 0 0
Extension of expiration date on outstanding
grant of common stock options
Net loss
Bal Sep 29, 1996 1,139,782 $11 533,333 $5 572,289 $6 350,000 $4
Common Stock Shrhldrs'
Addt'l Eq
Par Paid-in Accum (Capital
Shares Val Capital Deficit Def)
Bal Dec 31, 1995 36,067,792 $361 $412,876 $-410,764 $2,514
Common stock options exercised, $.69
to $2.00/shar 769,261 7 732 0 739
Shares issued through employee
stock purchase plan, at a price of
$1.9125/share 185,932 2 354 0 356
Issuance of Series H Convertible Preferred
Stock (Note E) 0 0 32,242 0 32,246 0 0
Dividends issued to Preferred
Stockholders in shares of Series
B, D, E, F and G 0 0 -2 0 -2
Extension of expiration date on outstanding
grant of common stock
options 0 0 589 0 589
Net loss 0 0 0 -49,657 -49,657
Bal Sep 29, 1996 37,022,985 $370 $446,791 $-460,421 $-13,215
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements
are unaudited and have been prepared by Encore Computer
Corporation ("Encore" or the "Company") in accordance with
generally accepted accounting principles. Certain
information and footnote disclosures normally included in
the Company's annual consolidated financial statements have
been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in
conjunction with the audited consolidated financial
statements for the year ended December 31, 1995.
The condensed consolidated financial statements, in the
opinion of the Company, reflect all adjustments (including
normal recurring accruals) necessary for a fair statement of
the results for the interim periods. All adjustments made
during the interim periods are normal recurring adjustments.
The year-end condensed balance sheet data is derived from
audited financial statements but does not include all
disclosures required by generally accepted accounting
principles. Certain reclassifications have been made to
conform prior period data to current period presentation.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal years.
The accompanying financial statements have been prepared on
the basis of accounting principles that presume the
realization of assets and the settlement of liabilities in
the ordinary course of business. As discussed more fully in
Note E of Notes to Condensed Consolidated Financial
Statements, the principal source of financing for the
Company has been provided by Japan Energy Corporation
("Japan Energy"; a Japanese Corporation) and certain of its
wholly owned subsidiaries including Gould Electronics Inc.
("Gould") and EFI International, Ltd. ("EFI") (collectively,
the "Japan Energy Group"). Based on the Company's cash flow
projections, management believes the amounts currently
available under its credit agreement with Gould should be
sufficient to meet its needs through year end. The Company
is in the process of developing alternative financing sources.
Should the Japan
Energy Group withdraw its' financial support before the
Company returns to profitability and alternative financing
sources are not obtained, the Company will suffer a severe
liquidity crisis and it will have difficulties settling its
liabilities in the normal course of business.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock
equivalents outstanding. In fiscal periods which report net
losses, the calculation does not include the effect of
common stock equivalents such as stock options since the
effect on the amounts reported would be antidilutive.
Series A Convertible Participating Preferred Stock ("Series
A") has been considered common stock (on an assumed
converted basis) for purposes of all income (loss) per share
calculations. All other series of preferred stock 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.
Net loss per common share was determined by dividing the net
loss, as adjusted, by applicable shares outstanding. The
loss was adjusted by the aggregate amount of dividends on
the Company's preferred stock. Preferred stock dividends
amounted to $6,658,400 and $18,654,700 for the three and
nine month periods ended September 29, 1996, respectively.
For the three and nine month periods ended October 1, 1995,
preferred stock dividends amounted to $4,970,100 and
$13,466,900, respectively. As of March 31, 1996, the
Company reported a capital deficiency and was precluded from
paying dividends on its preferred stock outstanding.
Accordingly, the normal quarterly dividends payable April
15, 1996 for the period January 15, 1996 to April 15, 1996
on the Series B, D, E, F and G amounting to $6,042,800 were
accumulated by the Company. On April 16, 1996, the Company
completed an exchange of Series H Convertible Preferred
Stock ("Series H") for indebtedness owed. Following the
exchange, the Company had a capital surplus and therefore,
was able to pay the accumulated dividends on the preferred
shares. Dividends payable July 15, 1996 and October 15,
1996 of $6,658,400 and $6,758,300, respectively for the
periods April 15, 1996 to July 15, 1996 and July 16, 1996 to
October 15, 1996 have been accumulated. All dividends
accumulated during 1995 were paid in 1995.
B. Termination of Amdahl Reseller Agreement
During 1994, the Company and Amdahl Corporation ("Amdahl")
entered into a five year reseller agreement (the "Amdahl
Reseller Agreement") which granted Amdahl the exclusive
right to distribute the Company's Infinity Storage Products
under the Amdahl brand. The Amdahl Reseller Agreement, as
amended, established procurement schedules, which if certain
product requirements were met, would have required Amdahl to
purchase a significant amount of product from the Company.
Sales under the Amdahl Reseller Agreement were anticipated
to have significant sales volumes in the first half of 1995.
However, certain significant contractual issues arose
delaying the sale of products and on June 8, 1995, Encore
announced that the Amdahl Reseller Agreement had been
terminated.
Due to the termination of the Amdahl Reseller Agreement,
product sales fell well short of expectations and all
elements of the Company's results of operations were
adversely affected. As a result of these events, during the
second quarter of 1995, the Company charged operations
$19,241,000, consisting of $11,442,000 charged to cost of
sales to reduce inventory carrying amounts to estimated net
realizable value, as well as $2,800,000 charged to cost of
sales for uncollected Amdahl accounts receivable, $500,000
charged to research and development to write down
capitalized software projects in process, and a $4,499,000
charge to restructuring costs.
C. Inventories
Inventories consist of the following (in thousands):
September 29, December 31,
1996 1995
Purchased parts $ 8,317 $ 9,161
Work in process 11,901 4,570
Finished goods 5,252 1,799
Loaned computer equipment
and consignment inventory 112 266
$ 25,582 $ 15,796
Storage Product inventory amounted to $19,409,000 and
$11,139,000 at September 29, 1996 and December 31, 1995,
respectively. The Company is expanding its programs to
market the Storage Product through various channels,
including direct, distributor and OEM sales and marketing
campaigns. The Company has acquired significant
inventories, provided customers with product on a trial
basis and continues to improve the product features and
functionality. The Company was unsuccessful in negotiating
an OEM agreement in the third quarter of 1996, but continues
to discuss possible agreements with several potential OEM's.
As a result of lower than expected sales, the Company
charged equipment cost of sales $2,584,000 during the three-
month period ended September 29, 1996, increasing
obsolescence reserves for Storage Product inventory. Total
inventory reserves were approximately $24,618,000 and
$21,249,000 at September 29, 1996 and December 31, 1995,
respectively.
D. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of
the following (in thousands):
September 29, December 31,
1996 1995
Accounts payable $ 7,462 $ 7,339
Accrued salaries and benefits 5,195 4,261
Accrued restructuring costs 347 1,566
Accrued interest-related parties 10,339 5,921
Accrued taxes 3,812 4,045
Deferred income,
principally maintenance contracts 1,537 827
Other accrued expenses 5,112 4,049
$ 33,804 $ 28,008
Accrued interest of $8,902,000 and $5,215,000 was payable to
Gould at September 29, 1996 and December 31, 1995,
respectively. The balance of accrued interest to related
parties is being amortized over the term of the credit
agreement.
E. Debt
Debt consists of the following (in thousands):;
September 29, December 31,
1996 1995
Debt to unrelated parties:
Mortgages payable $ 702 $ 829
Current portion of debt (184) (171)
Total long term debt to
unrelated parties $ 518 $ 658
Debt to related parties:
Credit Agreement with
Gould Electronics Inc. $ 61,201 $ 40,154
Current portion of debt (61,201) -
Total long term debt to
related parties $ - $ 40,154
The Japan Energy Group is a related party due to the
significant financial interests of Gould and EFI in the
Company. Assuming full conversion of preferred stock
holdings as of September 29, 1996, the Japan Energy Group
beneficially owns 78% of the Company's common stock.
On April 16, 1996, Gould as authorized by Japan Energy
Corporation canceled $35,000,000 of indebtedness pursuant to
a Revolving Credit Agreement ("Credit Agreement") which was
scheduled to mature on that date, in exchange for 350,000
shares of the Company's Series H Convertible Preferred Stock
("Series H") as discussed in more detail in Note F of Notes
to Condensed Consolidated Financial Statements.
In addition to the exchange of indebtedness for Series H,
Gould amended the Credit Agreement in order to provide the
Company with a committed borrowing facility of $65,000,000.
Gould also has allowed the Company to borrow additional
funds in excess of the maximum limit. As of November 12,
1996, the Company owed to Gould $65,744,351 under the Credit
Agreement, plus $9,751,000 in accrued interest.
The credit facility bears interest at the prime rate plus 2%
(10.25% at September 29, 1996). As of December 31, 1995,
the Company owed Gould $40,154,000 under the Credit
Agreement bearing interest at the prime rate plus 2% (10.50%
at December 31, 1995). Borrowings are collateralized by
substantially all of the Company's tangible and intangible
assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible
net worth ratios and limitations on capital expenditures,
dividend payments and additional indebtedness.
Gould extended the maturity date of the Credit Agreement to
April 30, 1997, and waived compliance with certain financial
covenants contained in the agreement until January 1, 1997.
The Series B Convertible Preferred Stock ("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 and the Company fails to pay cash
dividends for eight consecutive quarters. Gould has agreed
it would not vote its shares of the Series B or take any
other action as a holder of the Series B to elect a majority
of the directors of the Company until at least December 31,
1996.
Certain of the Company's operations relate to classified U.
S. Government contracts. Accordingly, the United States
Government has previously reviewed 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 Corporation, a foreign corporation. In
connection with the various exchanges of indebtedness for
preferred stock, 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 the Japan Energy Group and the Company.
The DIS has not yet reviewed the effect this exchange of
indebtedness for Series H combined with the expansion of the
credit facility has on the relationship between the Company,
Japan Energy Corporation and its wholly owned subsidiaries
(Gould and EFI).
Since 1989, the principal source of financing for the
Company has been provided by Japan Energy Group. The
Company is in the process of developing alternative financing
sources. Should
the Japan Energy Group withdraw its' financial support
before the Company returns to profitability and alternative
financing sources are not obtained, the Company will suffer
a severe liquidity crisis and it will have difficulties
settling its liabilities in the normal course of business.
F. Shareholders' Equity
On April 16. 1996, Gould canceled $35,000,000 of
indebtedness in exchange for Series H with a liquidation
preference of $35,000,000. The Series H carries a 6%
cumulative annual dividend requirement payable quarterly
which the Company can accumulate or pay in additional shares
of preferred stock (valued at its liquidation preference)
until the Company's shareholders' equity exceeds
$50,000,000. The Series H 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 Series H 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 Preferred Stock would be converted, or (b) a
buyer is contractually committed to purchase for at least
$3.50 per share at least 75% of the shares into which all
outstanding Preferred Stock would be converted. The Series
H is senior in liquidation priority to all other classes of
the Company's preferred and common stock and is redeemable
by the Company at any time for cash equal to the liquidation
preference plus accumulated dividends. Because of the
related party nature of the transaction, the difference
between thecarrying amount of the indebtedness exchanged and
the par 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 $35,000
Par value of shares issued (4)
Accrued estimated transaction costs (200)
Reversal of accrued interest on previous recapitalization 111
Accrued interest on the remaining Gould indebtedness for
the remaining term of the agreement (2,665)
Increase in additional paid in capital $ 32,242
During the nine months ended September 29, 1996 and October
1, 1995, options granted to certain officers and employees
of the Company were scheduled to expire if not exercised.
However, at the time the options were scheduled to expire
the Company's policy on insider trading effectively
prevented the officers from exercising the options.
Accordingly, the Board of Directors approved an extension of
the expiration date until January 21, 2000 for the 1996
extension and September 7, 1996 for the 1995 extension. The
extensions were treated as a cancellation of the old options
and a grant of new options in the same amounts at the same
exercise prices. Non-cash non-recurring compensation
charges of $589,000 and $1,425,000 were recorded in the nine-
month periods ended September 29, 1996 and July 2, 1995,
respectively, in connection with the extension of the
expiration dates of the stock options.
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three and Nine Months Ended September 29, 1996
Compared to the
Three and Nine Months Ended October 1, 1995
The following is management's discussion and analysis of the
financial condition and the results of operations of Encore
Computer Corporation ("Encore" or the "Company") for the
three and nine-month periods ended September 29, 1996
compared to the three and nine-month periods ended October
1, 1995. The Company's net loss for the three and nine-
month periods in 1996 was $19,049,000 and $49,657,000,
respectively, compared to the net loss for the same periods
of 1995 of $14,781,000 and $69,274,000, respectively. As
discussed in Note B of the Notes to Condensed Consolidated
Financial Statements, during the second quarter of 1995 the
Company recorded a charge to operations totaling $19,241,000
which related to the termination of the reseller agreement
between Encore and Amdahl Corporation.
RESULTS OF OPERATIONS:
Total net sales for the three and nine-month periods of 1996
were $13,269,000 and $36,582,000, respectively, compared to
net sales for the three and nine-month periods of 1995 of
$9,866,000 and $34,732,000, respectively. For the nine-
month period ended September 29, 1996, domestic sales of
$15,857,000 decreased 8%, while international sales of
$20,725,000 increased 18% from the same period in 1995.
Equipment sales increased by 130% to $8,558,000 and by 59%
to $21,680,000 during the three and nine-month periods ended
September 29, 1996, respectively, when compared to the same
periods of the prior year. Domestic equipment sales
increased 28% to $10,079,000 for the nine months ended
September 29, 1996 and international equipment sales
increased 102% to $11,601,000 compared to the same period in
1995. Sales of the Company's Storage Products were
$3,035,000 and $5,960,000 for the three and nine month
periods ending September 29, 1996, respectively. In the real-
time market, RSX sales continue to offset declines in other
end-of-life products, while the new Alpha-based real-time
product is planned to extend the Company's presence in the
marketplace.
The following table illustrates equipment cost of sales for
the three and nine months ended September 29, 1996 and
October 1, 1995:
THREE MONTHS NINE MONTHS ENDED
ENDED
Sep-29 Oct-1 Sep-29 Oct-1
1996 1995 1996 1995
Equipment Sales $8,558 $3,727 $21,680 $13,604
Equipment Cost of
Sales $10,918 $3,323 $21,872 $29,431
Restructuring ($14,242)
Additional ($2,584) ($2,584)
Obsolescence
Adjusted Cost of $8,334 $3,323 $19,288 $15,189
Sales
Adjusted Cost as % 97% 89% 89% 112%
of Revenue
During the second quarter ended July 2, 1995, the Company
charged equipment cost of sales $14,242,000 as a result of
the termination of the Amdahl Agreement, as discussed in
Note B of the Notes to Condensed Consolidated Financial
Statements.
During the first nine months of 1996, the Company has made a
substantial effort to expand programs to market the Storage
Product through various channels, including direct,
distributor and OEM sales and marketing campaigns. Sales of
this product are increasing, however, to date have not met
management's expectations. The Company has acquired
significant inventories, provided product to customers on a
trial basis, and continues to improve product features and
functionality. The Company was unsuccessful in negotiating
an OEM agreement in the third quarter of 1996, but continues
to discuss possible agreements with several potential OEM's.
As a result of lower than expected sales, the Company
charged equipment cost of sales $2,584,000 during the three
month period ending September 29, 1996, increasing
obsolescence reserves for Storage Product inventory. As of
September 29, 1996, total reserves for Storage Product
inventory were $18,749,000 or 49% of gross inventory of
$38,158,000.
Adjusted cost of sales as a percentage of revenue for the
nine-month period ended September 29, 1996 was 89% versus
112% for the comparable period in 1995. This decrease is
attributed to an improvement in efficiency and manufacturing
variances due to the maturing of the Storage Product
manufacturing process. However, during the three-month
period ended September 29, 1996, adjusted cost of sales as a
percentage of revenue increased to 97% from 89% for the same
period in 1995. During the third quarter of 1996, the
Company discounted Storage Products in order to penetrate
the marketplace and establish reference accounts. Storage
product warranty costs were also higher in the period due to
the effect of engineering changes on current installations
and spare part inventory.
Service sales continue to decline. For the three and nine-
month periods ending September 29, 1996, service sales
decreased $1,428,000 or 23% and $6,226,000 or 30% compared
to the same periods in 1995. For the nine-month period,
domestic service revenues declined 38% and international
service revenues declined 23%. Continued declining service
revenues reflect the effect on the service business of; (i)
the Company's prolonged decline in equipment sales, (ii) the
price competitiveness of the marketplace, (iii) the
completion of long running government programs and
subsequent deinstallation of systems and (iv) longer
warranty periods for equipment sales required to compete in
the storage marketplace. The Company expects this trend to
continue.
The following table illustrates service gross margins for
the three and nine month periods ended September 29, 1996
and October 1, 1995:
THREE MONTHS NINE MONTHS ENDED
ENDED
Sep-29 Oct-1 Sep-29 Oct-1
1996 1995 1996 1995
Service Sales $4,711 $6,139 $14,902 $21,128
Cost of Service 5,005 4,692 14,079 15,779
Sales
Gross Margin ($294) $1,447 $823 $5,349
Gross Margin as % of (6%) 24% 6% 25%
Sales
All service sales are derived from installed real-time
products and the cost structure within the service
department is highly variable due to the utilization of
service partners. Therefore, as revenues decline, costs
decline as well. Moreover, management continues to reduce
fixed costs on an ongoing basis. However, the Company
continues its investment in various programs and
infrastructure necessary to support the Storage Product
line. Cost of service sales for the three and nine month
periods ended September 29, 1996, increased $313,000 or 7%
and decreased $1,700,000 or 11%, respectively, when compared
to the same periods in 1995. Storage product support costs
for the three and nine month periods of 1996 were $2,113,000
and $4,879,000, respectively, and included an adjustment to
obsolescence reserves for spare parts of $600,000. For the
three and nine month periods ended October 1, 1995, Storage
Product support costs totaled $968,000 and $2,844,000,
respectively. Excluding the cost associated with Storage
Products, gross margin as a percentage of customer service
revenue was 39% and 38% during the three and nine month
periods ended September 29, 1996, respectively, versus 39%
for the same periods of 1995.
Research and development costs for the three and nine month
periods ended September 29, 1996, decreased from the
comparable periods of 1995 by $350,000 or 4% and $1,858,000
or 7%, respectively. However, during the second quarter of
1995 the Company charged research and development $500,000
for the write down of capitalized software projects as
discussed in Note B of the Notes to Condensed Consolidated
Financial Statements. Excluding this charge, spending
decreased $1,358,000 or 5% for the nine month period ended
September 29, 1996, when compared to 1995. This decrease is
due to the continued effect of headcount reductions taken in
the second quarter of 1995. As a percentage of net sales,
research and development expenses decreased to 59% and 65%,
respectively, for the three and nine month periods of 1996,
from 83% and 72% exclusive of the $500,000, respectively,
for the same periods in 1995. The Company plans to continue
high levels of research and development expenditures in
order to become the market leader in the storage
marketplace. The Company expects research and development
spending in the fourth quarter of 1996 to remain relatively
constant.
Selling, general and administrative expenses decreased by
$245,000 and $1,734,000, respectively for the three and nine
month periods of 1996 when compared to 1995. The decrease
is attributable to cost reduction actions taken in the
second quarter of 1995 to adjust expenses to levels more
consistent with the declining revenue base. During the
three-month period ending September 29, 1996, the Company
spent $765,000 to launch a new marketing campaign aimed at
the storage marketplace and focusing on the Infinity SP and
its' innovative DataShare Facility. Additionally, the
Company incurred charges of $589,000 related to the
extension of stock options for certain officers and
employees as discussed in Note F of the Notes to Condensed
Consolidated Financial Statements. As a percentage of net
sales, selling, general and administrative costs were 59%
and 66%, respectively, for the three and nine-months ended
September 29, 1996 compared to 81% and 75%, respectively,
for the comparable three and nine month periods of 1995. An
increase in sales, general and administrative expenses is
expected in the near term as the Company expands its sales
and marketing efforts for the Storage Product.
During the second quarter of 1995 management evaluated the
Company's latest financial projections, and concluded; (i)
the termination of the Amdahl contract resulted in a
significant delay in the realization of product revenues,
(ii) the rate of decline in real-time equipment and service
revenues had exceeded its previous estimates and (iii) the
rate of worldwide sales growth anticipated in newer product
lines remained significantly below projected levels. In
light of these conclusions, management restructured its
operations and recorded a charge to operations of
$4,499,000. The most significant of these restructuring
actions were; (i) a 95 person reduction in workforce
primarily in manufacturing and development, resulting in a
severance charge of $1,335,000, (ii) a write down of
$782,000 in the carrying value of the equipment used in the
support of the Amdahl Agreement and (iii) the write off of
$1,123,000 of capitalized software assets relating to the
Company's UNIX based product lines.
Interest expense for the three month period ended September
29, 1996 was $911,000 versus $380,000 for the same period in
1995. Interest expense primarily reflects interest charges
under the Gould Credit Agreement. For the nine-month period
ended September 29, 1996 interest expense decreased $441,000
to $2,149,000 when compared to the nine month period ended
October 1, 1995. This decrease is due to various exchanges
of indebtedness for preferred stock.
Other expense primarily consists of foreign exchange gain or
loss. The Company realized gains in the nine month period
ending October 1, 1995 and losses in the comparable period
in 1996. The foreign exchange effect on the Company's
financial results is minimal over time.
Income taxes for the three and nine month periods of 1995
related to profitable operations of certain foreign
subsidiaries. For the comparable three and nine month
periods of 1996 the Company has not recorded a provision for
income taxes as a result of losses incurred and large net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES:
Since 1989, the primary source of financing for the Company
has been provided by Japan Energy Corporation and its wholly
owned subsidiaries, Gould Electronics, Inc. and EFI, Inc.
(the "Japan Energy Group"). The Japan Energy Group has
provided the Company with its revolving credit facility,
loan guarantees, refinanced subordinated debentures and
entered into various exchanges of indebtedness for the
Company's preferred stock. As of September 29, 1996,
assuming full conversion of its holdings in the Company's
preferred stock, the Japan Energy Group beneficially owns
78% of the Company's common stock.
During the past five years, the Company has incurred
significant operating losses and has been unable to generate
cash flows from operating activities. As of September 29,
1996, the Company had a capital deficiency of $13,215,000.
Cash used in operating activities for the nine month period
ended September 29, 1996 amounted to $50,723,000 compared to
$40,304,000 for the same period in 1995. Among the
significant uses of cash in the nine months of 1996 were;
(i) the net loss for the period of $49,657,000 and (ii)
inventory acquisitions of $13,181,000, primarily related to
the Storage Product. Non cash expenses included; (i)
depreciation and amortization of $8,510,000, (ii) increased
obsolescence reserves of $3,395,000 and (iii) non cash
compensation of $589,000 as discussed in Note F of the Notes
to Condensed Consolidated Financial Statements. Increased
accounts receivable of $3,684,000 were partially offset by
increased accounts payable and accrued liabilities of
$3,042,000.
During the nine-month periods ended September 29, 1996 and
October 1, 1995, expenditures for property and equipment
were $5,309,000 and $2,918,000, respectively while
expenditures for capitalized software were $0 and
$1,231,000, respectively. Purchases of Customer Service
spare parts in support of the Storage Product acccounted for
46% of total spending for property and equipment in the nine-
month period ended September 29, 1996.
Cash provided by financing activities for the nine-month
periods ended September 29, 1996 and October 1, 1995
amounted to $57,013,000 and $44,894,000, respectively. The
principal source of financing has been through various loan
agreements provided by Japan Energy Group. On April 16,
1996 the Japan Energy Group continued its support as
discussed in Note E of the Notes to Condensed Consolidated
Financial Statements by; (i) accepting Preferred Series "H"
Stock in exchange for $35,000,000 of debt and (ii) providing
a $65,000,000 line of credit. Gould also has allowed the
Company to borrow additional funds in excess of the maximum
limit. As of November 12, 1996, Encore owed to Gould
$65,744,351 in debt, plus $9,751,000 in accrued interest.
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.
Based on the Company's cash flow projections,
management believes the amounts currently available under
its credit agreement with Gould should be sufficient to meet
its needs through year end. The Company is in the process
of developing alternative financing sources.
Should the Japan Energy Group
withdraw its' financial support before the Company returns
to profitability and alternative financing sources are not
obtained, the Company will suffer a severe liquidity crisis
and it will have difficulties settling its liabilities in
the normal course of business.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation
of per share earnings. See page 21.
Exhibit No. 27 - Financial Data Schedule. See page 22.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 29, 1996.
Encore Computer Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
Encore Computer Corporation
Date:November 13, 1996
KENNETH G. FISHER EDWARD J. BAKER
_________________ _______________
Kenneth G. Fisher Edward J. Baker
Chairman of the Board Corporate Controller
and Chief Executive Officer Secretary
Chief Accounting
Officer
Computation of Loss per Share Exhibit No. 11
(unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
Sept 29, Oct 1, Sept 29, Oct 1,
Primary 1996 1995 1996 1995
Net Loss $ -19,049 $ -14,781 $ -49,657 $ -69,274
Series B, D, E, F and G Preferred
Stock Dividends 0 -4,970 -11,996 -13,467
Series B, D, E, F, G and H Accumulated
Preferred Stock Dividends -6,658 0 -6,658 0
Net loss attributable to
common shareholders $ -25,707 $ -19,751 $ -68,311 $ -82,741
Weighted average common
shares outstanding 37,009 35,083 36,704 34,646
Series A assumed converted 7,364 7,364 7,364 7,364
Weighted avg shares outstand 44,373 42,447 44,068 42,010
Net loss per share $ -0.58 $ -0.47 $ -1.55 $ -1.97
Assuming Full Dilution
Net loss $ -19,049 $ -14,781 $ -49,657 $ -69,274
Wghtd avg common shares outstand 37,009 35,083 36,704 34,646
Series A assumed converted 7,364 7,364 7,364 7,364
Series B assumed converted 22,707 21,401 22,373 21,082
Series D assumed converted 34,745 32,747 34,234 32,259
Series E assumed converted 35,515 33,473 34,993 32,974
Series F assumed converted 16,618 15,663 16,374 11,272
Series G assumed converted 17,832 8,555 17,570 2,790
Series H assumed converted 10,906 0 6,633 0
Exercise of options reduced by
the number of shares purchased
with proceeds -6,796 -7,571 -6,165 -7,313
175,900 146,715 170,080 135,074
Net loss per share -0.11 -0.10 -0.29 -0.51
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Financial Data Schedule
(Unaudited)
(in thousands)
For the nine months ended September 29, 1996
Cash and cash items 4,349
Marketable securities 122
Notes and accounts receivable-trade 17,741
Allowances for doubtful accounts -1,026
Inventory 25,582
Total current assets 48,061
Property, plant and equipment 100,022
Accumulated depreciation -66,179
Total assets 83,693
Total current liabilities 95,189
Bonds, mortgages and similar debt 518
Preferred stock mandatory redemption 0
Preferred stock no mandatory redemption 45
Common stock 370
Other stckhldrs' eq (Cap'l deficiency) -13,630
Total liabilities & equity 83,693
Sales of tangible products 21,680
Total revenues 36,582
Cost of tangible goods sold 21,872
Total costs applicable to revenues 35,951
Other costs and expenses 171
Provision for doubtful accounts and notes -1
Interest and amortization of debt discount 2,018
Income before taxes and other items -49,657
Income tax expense 0
Income/loss from continuing operations -49,657
Discontinued operations 0
Extraordinary items 0
Cumulative effect of accounting changes 0
Net income or loss -49,657
Earnings per share-primary -1.55
Earnings per share-fully diluted -0.29
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