UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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: 305-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. X Yes No
The number of shares outstanding of the registrant's
only class of Common Stock as of May 13, 1996 was 36,576,613.
Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II OTHER INFORMATION 17
Signature Page 18
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months
Ended
March April
31, 2,
1996 1995
Net sales:
Equipment $ 6,571 $ 5,611
Service 5,143 7,624
Total 11,714 13,235
Costs and expenses:
Cost of equipment sales 5,879 5,936
Cost of service sales 4,961 5,753
Research and development 8,264 8,949
Sales, general and Admin. 8,718 9,982
Total 27,822 30,620
Operating loss (16,108) (17,385)
Interest expense,
principally related parties (690) (1,828)
Interest income 41 34
Other income (expense),net (140) 70
Loss before income taxes (16,897) (19,109)
Provision for income taxes - 73
Net loss $ (16,897) $ (19,182)
Net loss per common share:
Net loss attributable to common
shareholders $ (22,851) $ (23,275)
Loss per common share $ (0.52) $ (0.56)
Weighted average shares
of common stock 43,714 41,540
The accompanying notes are an integral part of the
condensed consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Pro
Forma
March March December
31, 31, 31,
1996 1996 1995
ASSETS (See Note E)
Current assets:
Cash and cash equivalents $ 1,851 $ 1,851 $ 2,797
Accounts receivable,
less allowance 14,095 14,095 13,723
Inventories (Note B) 22,080 22,080 15,796
Prepaid expenses and
other current assets 1,658 1,658 1,353
Total current assets 39,684 39,684 33,669
Property and equipment, net 35,341 35,341 35,800
Capitalized software, net 1,695 1,695 2,258
Other assets 643 643 810
Total assets $ 77,363 $ 77,363 $ 72,537
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term
debt-other (Note D) $ 175 $ 175 $ 171
Accounts payable and accrued
liabilities (Note C) 36,511 34,371 28,008
Total current liabilities 36,686 34,546 28,179
Long term debt - related parties (Note D) 20,000 55,000 40,154
Long term debt - other (Note D) 612 612 658
Other liabilities 1,105 1,105 1,032
Total liabilities 58,403 91,263 70,023
Shareholders' equity (capital deficiency) :
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 1
6% Cumulative Series B Convertible
Preferred, issued 717,954 and
707,345 in 1996 and 1995, respectively
with an aggregate liquidation
preference of $71,795,400 and
$70,734,500 in 1996 and 1995, respectively 7 7 7
6% Cumulative Series D Convertible Preferred,
issued 1,098,596 and 1,082,362
shares in 1996 and 1995, respectively with an
aggregate liquidation preference
of $109,859,600 and $108,236,200 in
1996 and 1995, respectively 11 11 11
6% Cumulative Series E Convertible Preferred,
issued 1,122,938 and 1,106,343
shares in 1996 and 1995, respectively, with an
aggregate liquidation preference
of $112,293,800 and $110,634,300 in
1996 and 1995, respectively 11 11 11
6% Cumulative Series F Convertible
Preferred, issued 525,452 and 517,687
shares in 1996 and 1995, respectively, with an
aggregate liquidation preference
of $52,545,200 and $51,768,700 in 1996
and 1995, respectively 5 5 5
6% Cumulative Series G Convertible
Preferred, issued 563,832 and 555,500
shares in 1996 and 1995, respectively, with an
aggregate liquidation preference
of $56,383,200 and $55,550,000 in 1996
and 1995, respectively 6 6 6
6% Cumulative Series H Convertible
Preferred, issued 350,000
in 1996 with an aggregate liquidation
preference of $35,000,000 4 - -
Common stock, $.01 par value; authorized
200,000,000 shares; issued
36,554,857 and 36,067,792 in 1996
and 1995, respectively 366 366 361
Additional paid-in capital 446,210 413,354 412,876
Accumulated deficit (427,661) (427,661) (410,764)
Total shareholders' equity
(capital deficiency) 18,960 (13,900) 2,514
Total liabilities and
shareholders' equity (capital deficiency) $ 77,363 $ 77,363 $ 72,537
The accompanying notes are an integral part of the
condensed consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months
Ended
March April
31, 2,
1996 1995
Cash flows from operating activities:
Net Loss $ (16,897) $ (19,182)
Adjustments to arrive at net cash used in
operating activities:
Depreciation and amortization 2,899 2,985
Net changes in operating assets and liabilities:
Accounts receivable (372) 264
Inventories (6,284) (1,743)
Prepaid expenses and other current assets (305) (27)
Other assets 167 123
Accounts payable and accrued liabilities 6,363 (533)
Other liabilities 73 309
Net cash used in operating activities (14,356) (17,804)
Cash flows from investing activities:
Additions to property and equipment (1,877) (632)
Capitalization of software costs - (564)
Net cash used in investing activities (1,877) (1,196)
Cash flows from financing activities:
Net borrowings under revolving loan
agreements 14,846 17,481
Principal payments of long term debt (42) (52)
Issuance of common stock 483 1,617
Net cash provided by financing activities 15,287 19,046
Increase (decrease) in cash and cash equivalents (946) 46
Cash and cash equivalents, beginning 2,797 2,517
Cash and cash equivalents, ending $ 1,851 $ 2,563
The accompanying notes are an integral part of the
condensed consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Three Months
Ended
March April
31, 2,
1996 1995
Cash paid during the period for interest $ 105 $ 554
Cash paid during the period for income taxes - -
Supplemental schedule of non cash investing and financing activities:
A On March 17, 1995, the Company exchanged $50,000,000
of indebtedness for preferred stock.
The accompanying notes are an integral part of the
condensed consolidated financial statements.
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D
Par Par Par
Shares Value Shares Value Shares Value
Balance December 31, 1995 73,641 $ 1 707,345 $ 7 1,082,362 $ 11
Common stock options
exercised,
$.81 to $2.00 per share
Dividends issued to Preferred
Stockholders
in shares of Series B,
D, E, F, and G 10,609 - 16,234 -
Net loss
Balance March 31, 1996 73,641 $ 1 717,954 $ 7 1,098,596 $ 11
Preferred Stock
Series E Series F Series G
Par Par Par
Shares Value Shares Value Shares Value
Balance December 31, 1995 1,106,343 $ 11 517,687 $ 5 555,500 $ 6
Common stock options
exercised,
$.81 to $2.00 per share
Dividends issued to Preferred
Stockholders
in shares of Series B,
D, E, F, and G 16,595 - 7,765 - 8,332 -
Net loss
Balance March 31, 1996 1,122,938 $ 11 525,452 $ 5 563,832 $ 6
Shareholder's
Common Stock Additional Equity
Par Paid-in Accumulated (Capital
Share Value Capital Deficit Deficiency)
Balance December 31,
1995 36,067,792 $ 361 $ 412,876 $ (410,764) $ 2,514
Common stock options
exercised,
$.81 to $2.00 per share 492,065 5 478 483
Dividends issued to Preferred
Stockholders
in shares of Series B, -
D, E, F, and G
Net loss (16,897) (16,897)
Balance March 31,
1996 36,559,857 $ 366 $ 413,354 $ (427,661) $ (13,900)
The accompanying notes are an integral part of the
consolidated financial statements.
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
Notes D and 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"). The Company is dependent on the
continued long term financial support of the Japan Energy
Group. Should the Japan Energy Group withdraw its financial
support at any time prior to the time the Company returns to
profitability by failing to provide additional credit as
needed, the Company anticipates it will not be able to
secure financing from other sources. In such a case, the
Company would suffer a severe liquidity crisis and it would
have difficulty settling its liabilities in the ordinary
course of business.
Per Share Data
Per share data is calculated based upon the weighted average
number of shares of common stock and common stock
equivalents outstanding. In fiscal periods which report net
losses, the calculation does not include the effect of
common stock equivalents such as stock options since the
effect on the amounts reported would be antidilutive. Series
A Convertible Participating Preferred Stock ("Series A") has
been considered common stock (on an assumed converted basis)
for purposes of 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 $5,953,500, and $4,092,700 for the three month
periods ended March 31, 1996 and April 2,1995, 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 $5,953,500 were accumulated by the
Company.
B. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
1996 1995
Purchased parts $ 9,525 $ 9,161
Work in process 4,878 4,570
Finished goods 7,608 1,799
Loaned computer equipment
and consignment inventory 69 266
$ 22,080 $15,796
Storage Product inventory amounted to $19,521,000 and
$11,139,000 at March 31, 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. No estimate can be made of a range of amounts of
loss that are reasonably possible should the program not be
successful.
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of
the following (in thousands):
March 31, December 31,
1996 1995
Accounts payable $ 10,618 $ 7,339
Accrued salaries and benefits 5,106 4,261
Accrued restructuring costs 1,393 1,566
Accrued interest-related parties 6,506 5,921
Accrued taxes 4,399 4,045
Deferred income,
principally maintenance contracts 1,771 827
Other accrued expenses 4,578 4,049
$ 34,371 $ 28,008
D. Debt
Debt consists of the following (in thousands):
(See Note E)
Pro Forma
March 31, March, 31, December 31,
1996 1996 1995
Debt to unrelated parties:
Mortgages payable $ 787 $ 787 $ 829
Current portion of debt (175) (175) (171)
Total long term debt to
unrelated parties $ 612 $ 612 $ 658
Debt to related parties:
Credit Agreement with
Gould Electronics Inc. 20,000 55,000 40,154
Total long term debt to
related parties $ 20,000 $ 55,000 $ 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 March 31, 1996, the Japan Energy Group
beneficially owns 77% of the Company's common stock. Since
1989, Gould has provided the Company with its revolving line
of credit, entered into certain borrowing agreements and
certain exchanges of equity for indebtedness.
As of March 31, 1996, the Company had borrowed $55,000,000
from Gould pursuant to a Revolving Credit Agreement ("Credit
Agreement") which was scheduled to mature on April 16, 1996.
The credit facility bears interest at the prime rate plus 2%
(10.25% at March 31, 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% (10.5% 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.
As discussed more fully in Note E of Notes to Condensed
Consolidated Financial Statements, on April 16, 1996, Gould
agreed to cancel $35,000,000 of indebtedness under the
Credit Agreement in exchange for convertible preferred stock
and to provide a committed borrowing facility of $65,000,000
under the agreement. Gould also agreed to extend the
maturity date of the Credit Agreement to April 30, 1997 and
waive compliance with certain financial covenants until
January 1, 1997. In light of this recapitalization and
refinancing, the borrowings at March 31, 1996 have been
considered long-term obligations.
E. Subsequent Events
On April 16, 1996, Gould, as authorized by Japan Energy
Corporation agreed to cancel $35,000,000 of indebtedness
owed to it by the Company under the Credit Agreement for
350,000 shares of the Company's Series H Convertible
Preferred Stock ("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. Upon completion of the transaction, the Japan
Energy Group's beneficial ownership interest, assuming the
full conversion of Preferred Stock holdings, will increase
from 77.0% to 78.0%.
In addition to the exchange of indebtedness for Series H,
Gould has agreed to amend the Credit Agreement in order to
provide the Company with a committed borrowing facility of
$65,000,000. As of May 13, 1996, the Company has
$32,300,000 available under the Credit Agreement.
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 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.
The accompanying unaudited Pro Forma Condensed Consolidated
Balance Sheet as of March 31, 1996 is presented as if the
transaction 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 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 (2,051)
Increase in additional paid in capital $ 32,856
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
the 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 Preferred Stock combined with the
expansion of the credit facility has on the relationship
between the Company, Japan Energy Corporation and its wholly
owned subsidiaries (including Gould).
Since 1989, the principal source of financing for the
Company has been provided by Japan Energy Group. The
Company is dependent on the continued long term financial
support of the Japan Energy Group. Should the Japan Energy
Group withdraw its financial support at any time prior to
the time the Company returns to profitability by failing to
provide additional credit as needed, the Company anticipates
it will be unable to secure financing from other sources.
In such a case, the Company will suffer a severe liquidity
crisis and will have difficulties settling its liabilities
in the normal course of business.
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three Months Ended March 31, 1996
Compared to the Three Months Ended April 2, 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 three
month period ended March 31, 1996 compared to the three
month period ended April 2, 1995. The Company's net loss
for three months ended March 31, 1996 was $16,897,000 an
improvement of $2,285,000 or (12%) compared to the net loss
for the same period of 1995 of $19,182,000. The improvement
is primarily due to actions in the second quarter of 1995 to
restructure the organization to levels more consistent with
the declining size of the Company.
RESULTS OF OPERATIONS:
Total net sales for the three month period of 1996 were
$11,714,000 compared to net sales for the three month period
of 1995, of $13,235,000. The decline in net sales was
slightly faster in the international markets. International
sales for the three months ended March 31, 1996 were
$5,190,000, or 44%, of total net sales as compared to
$6,763,000 or 51% for the same period in 1995.
During the three month period ended March 31, 1996,
equipment sales increased $960,000 or 17% from the same
period of 1995. In the first quarter the Company recognized
$1,400,000 of revenue from Storage Product as compared to $0
in the previous quarter ended April 2, 1995. However, the
increase in Storage Product revenue was offset by a larger
decrease in real-time sales.
For the three month period ended March 31, 1996, service
sales have declined $2,481,000, or 33% from the same period
of 1995. This decrease is due to the Company's continued
decline in its service base as well as continued price
competitiveness in the marketplace. Also, since 1990
approximately 25% of each year's existing service contracts
have not been renewed with the Company.
The Company has continued its heavy investment in the
research and development of its open systems architecture.
This effort has most recently resulted in the announcement
and delivery of products such as the Infinity SP and the
Infinity R/TTM. The Company continues to invest heavily in
research and development of the Infinity SP Universal
Storage Processor with DataShareTM Facilities to establish
its presence in the multibillion dollar storage marketplace.
Although the storage marketplace is new to Encore, the
Company believes the Infinity SPTM product will be a market
leader. From a storage perspective, the Infinity SPTM
supports multiple environments and cross platform data
sharing between open systems and mainframe applications and
is built around Encore's patented Memory Channel/Reflective
Memory technology.
To market the new Storage Product, the Company continues
its direct distribution and OEM sales and marketing
campaign. As part of this campaign, the Company continues
to recruit industry knowledgeable sales people from leading
storage vendors. Additionally, Encore continues to seek out
strategic distribution partners whose industry presence,
expertise and sales channels will allow it to more
efficiently bring the Company's leading edge open system and
Storage Product offerings to market. Examples of the
Company's efforts were the signing of distribution
agreements with Memorex Telex Sweden, Italy, Spain, and the
United Kingdom. These distributors will sell the Infinity
SPTM products to mainframe, midrange, and open systems
markets. Also, on April 10, 1996, Digital Equipment
Corporation and Encore announced an agreement under which
the companies will jointly market Encore's Infinity Gateway
for Digital's open, 64-bit AlphaServer 8000 RISC. This
solution fulfills the recurring need for AlphaServer
customers to extract large amounts of information from IBM
mainframes. Using the Infinity Gateway, AlphaServer
customers can read IBM and plug-compatible mainframe data as
if it were located on local disks. Encore's Infinity
Gateway is the lowest priced member of the Infinity SPTM
family which provides mainframes and open systems concurrent
access to shared datasets in real-time.
The Company expects future sales volumes to increase as its
sales campaign ramps up. However, there can be no assurance
that the Company's products which are in the early stage of
market introduction will achieve or sustain market
acceptance or successfully compete against other larger and
more financially resourceful companies' products.
Cost of equipment sales for the three month period of 1996
slightly decreased from the three month comparable period of
1995 by $57,000. As a percentage of net equipment sales,
1996 cost of equipment sales for the three month period was
90% compared to 106% for the three month period of 1995.
The 16% decrease in the cost of equipment sales for the
three months is primarily attributable to lower warranty
expense on the Infinity SPTM product line and an improvement
in efficiency and manufacturing variances due to the
maturing of the Storage Product manufacturing process. The
Company expects that if future sales volumes increase, gross
margins should continue to improve.
Cost of service sales for the three month period ended March
31, 1996 decreased from the comparable period of 1995 by
$792,000 or 14%. The 1996 decrease for the three month
period 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. However, during
the three month period ended March 31, 1996, the Company
invested $1,900,000 in various programs and infrastructure
necessary to support the launch of the Storage Product line.
Accordingly, gross margins for three months ended March 31,
1996 were 4%, as compared 25% for the three month period of
1995.
Research and development costs for the three month period
ended March 31, 1996, decreased from the comparable period
of 1995 by $685,000 or 8% . The decrease in 1996 spending
is attributable to cost reduction actions taken in the
second quarter of 1995 which included a reduction in
headcount. However, as a percentage of net sales, research
and development expenses were 71% for the three month period
ended March 31, 1996 compared to 68% for the comparable
period of 1995. The Company's products are characterized by
rapid technological advances which necessitate frequent
product introductions and enhancements. In order to meet
the market's demand the Company continues to invest heavily
and plans to continue high levels of research and
development expenditures to remain competitive in the
marketplace. The Company expects research and development
spending in the near term, to remain relatively constant.
Selling, general and administrative expenses decreased by
$1,264,000 or 13% for the three month period 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 decline
in the overall business. As a percentage of net sales,
selling, general and administrative costs continue to remain
high, 74% for the three months ended March 31, 1996 compared
to 75% for the comparable period of 1995, because reductions
in SG&A spending have been more than offset by declines in
net sales. Management expects sales, general and
administrative expenses to increase in the second quarter as
the Company continues to expand its sales force and
continues to aggressively market the Storage Product.
Interest expense for the three month period ended March 31,
1996 decreased from 1995 levels by $1,138,000, reflecting
the Company's lower debt level during the first quarter of
1996 due to the timing of the recapitalizations that
occurred in 1995.
Other income for the three month period of 1996 decreased
from 1995 by $210,000 due to higher foreign exchange losses.
No income taxes are provided for the period ended March 31,
1996 as a result of the losses incurred and large net
operating loss carryforwards. The provision for the three
month period ended April 2, 1995 of $73,000 was related to
profitable foreign operations.
LIQUIDITY AND CAPITAL RESOURCES:
During the past five years, the Company has incurred
significant operating losses and has been unable to generate
cash flows from operating activities. Cash used in
operating activities for the first quarter of 1996 amounted
to $14,356,000 compared to $17,804,000 for the same period
in 1995.
During the three month period ended March 31, 1996, cash used
in operating activities decreased by $3,448,000. The
improvement in cash flows from operating activities reflects
the decrease in net loss of $2,199,000, as adjusted by non
cash items coupled with an increase in accounts payable and
accrued expenses of $6,896,000. These improvements were
partially offset by the Company's increased investment in
inventory and accounts receivable of $636,000 and,
$4,541,000, respectively. The increase in inventory of
$4,541,000 is attributable to the Company's efforts to build-
up Storage Product availability.
Expenditures for property and equipment for the three months
ended March 31, 1996 and April 2, 1995 were $1,877,000 and
$632,000, respectively, while expenditures for capitalized
software during the same periods were $0, and $564,000,
respectively. As of March 31, 1996, there were no material
commitments for capital expenditures.
Cash used in operating and investing activities during the
three month period of 1996 and 1995 was principally offset
by cash provided through financing activities of $15,287,000
and $19,046,000, respectively. The principal source of
financing has been through various agreements provided by
the Japan Energy Group. As discussed in Note E of Notes to
Condensed Consolidated Financial Statements, on April 16,
1996, Gould, agreed to cancel $35,000,000 of indebtedness
owed to it by the Company under the Credit Agreement in
exchange for 350,000 shares of the Company's Series H
Convertible Preferred Stock ("Series H") with a liquidation
preference of $35,000,000. In addition to the exchange of
indebtedness for Series H, Gould agreed to amend the Credit
Agreement in order to provide the Company with a committed
borrowing facility of $65,000,000 and extended the maturity
date to April 30, 1997.
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
the Gould Credit Agreement will be sufficient to meet such
needs through December 31, 1996. 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
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 19.
Exhibit No. 27 - Financial Data Schedule. See page
20.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended March 31, 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: May 14, 1996
KENNETH G. FISHER KENNETH S. SILVERSTEIN
__________________ ______________________
Kenneth G. Fisher Kenneth S. Silverstein
Chairman of the Board Corporate Controller
and Chief Executive Officer Chief Accounting Officer
ENCORE COMPUTER CORPORATION
Computation of Loss per Share Exhibit 11
(in thousands except per share data)
Three Months Ended
March 31, April 2,
Primary 1996 1995
----------- -------------
Net loss $ (16,897) $ (19,182)
Series B, D, E, F and
G Preferred Stock Dividends (5,954) (4,093)
------------- -------------
Net loss attributable to
common shareholders $ (22,851) $ (23,275)
============ ============
Weighted average common
shares outstanding 36,350 34,176
Series A assumed converted 7,364 7,364
----------- ------------
Weighted average shares
outstanding 43,714 41,540
Loss per common share $ (.52) $ (.56)
============ =============
Assuming Full Dilution
Net loss $ (16,897) $ (19,182)
Weighted average common
shares outstanding 36,350 34,176
Series A assumed converted 7,364 7,364
Series B assumed converted 21,551 20,801
Series D assumed converted 33,783 31,840
Series E assumed converted 33,708 32,535
Series F assumed converted 12,622 0
Series G assumed converted 6,587 0
Exercise of options reduced by
the number of shares purchased
with proceeds 4,212 4,624
----------- -------------
Weighted average shares
outstanding 156,177 131,340
=========== ===========
Loss per common share: $ (.11) $ (0.15)
=========== ============
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
ENCORE COMPUTER CORPORATION
Exhibit 27
Financial Data Schedule
(in thousands except for per share data)
for the three months ended March 31,
1996
CASH $ 1,851
SECURITIES
ACCOUNTS RECEIVABLES 15,834
ALLOWANCES FOR
DOUBTFUL ACCOUNTS (1,739)
INVENTORY 22,080
CURRENT ASSETS 39,684
PP&E 89,578
DEPRECIATION (54,237)
TOTAL ASSETS 77,363
CURRENT LIABILITIES 34,546
BONDS 787
COMMON STOCK 366
PREFERRED MANDATORY
REDEEMABLE STOCK 0
PREFERRED STOCK 41
OTHER SHAREHOLDERS EQUITY ( 14,307)
TOTAL LIABILITY AND EQUITY 77,363
SALES 6,571
TOTAL REVENUES 11,714
COST OF GOODS SOLD 5,879
TOTAL COSTS 10,840
OTHER EXPENSES 140
BAD DEBT EXPENSE 177
INTEREST EXPENSE 649
INCOME PRETAX (16,897)
INCOME TAX 0
INCOME FROM CONTINUING
OPERATIONS (16,897)
DISCONTINUED OPERATIONS 0
EXTRAORDINARY GAIN/LOSS 0
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 0
NET INCOME (16,897)
EPS-PRIMARY (.52)
EPS-FULLY DILUTED (.11)
</TABLE>
