UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]
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:
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K [ X ].
Aggregate market value, as of April 12, 1996 of Common Stock held by
non-affiliates of the registrant: $80,082,970.
The number of shares outstanding of the registrant's only class of
Common Stock as of April 12, 1996 was 36,577,257.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF DOCUMENT I
IN WHICH INCORPORATED
Proxy Statement for the 1996 Annual Meeting of Shareholders
Part III, Items 10,11,12,13
A list of all exhibits to this Form 10-K is on Page 47.
PART I
Item 1 Business
(a) General Development of Business
Encore Computer Corporation ("Encore" or the "Company"), founded
in 1983, designs, manufactures, distributes and supports scalable
real-time data storage, data retrieval, and sharing technologies
for mixed platform processing environments. Headquartered in
Fort Lauderdale, Florida, the Company sells its products direct
and through distributors in the United States, Canada, Europe, and
the Far East.
In 1989, Encore acquired the assets and assumed the
liabilities of the Gould Electronics Inc. Computer Systems
Division (the "Computer Systems Business"), a business that was
significantly larger than the Company itself. Since the
acquisition, the Company has invested heavily in research and
development activities integrate both businesses'
technologies into a single, high performance open system
architecture.
This effort has most recently resulted in the announcement and
delivery of products such as the Infinity SP and R/T(Trademark).
The Company has invested heavily in research and
development of the Infinity SP(Trademark) 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. The Infinity SPTM is built around
Encore's patented Memory Channel/Reflective Memory
technology. The Infinity SPTM offers extremely competitive
application, connectivity, and performance advantages. In the
context of cross platform shared protected storage for open
systems and mainframes, the Infinity SPTM and the Infinity R/TTM
are technology leaders.
The Infinity SPTM storage systems were developed specifically
for the information systems storage market. These systems handle the
complex requirements of large on-line transaction processing
(OLTP), including IBM-compatible customer information control
systems (CICS), client server, relational data base management
systems (RDBMS), decision support systems (DSS) and interactive
information networks. These applications are primarily found
in the banking, brokerage, insurance, airline, electronic
publishing, information, telecommunications and data services
industries.
The newest real-time product is the Infinity R/TTM. The
performance features of the Infinity R/TTM, based on the Alpha
processor, along with the Company's reputation in real-time
computing have captured the attention of many of its traditional
customers. The Infinity R/TTM has significant price performance
advantages in the real-time market. This, coupled with Encore's
proprietary software, yields highly deterministic open systems
solutions. These solutions range from Encore's traditional
markets in simulation, energy, and data acquisition to newly
developed market opportunities in transportation and process
control. The Company's continued development of its patented
Reflective MemoryTM technology, integration capabilities and
"Hard Real-Time" software makes Encore a technology leader.
As more fully discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Notes B
and F of the Notes to Consolidated Financial Statements, since
the acquisition of the Computer Systems Business the Company's
results have been adversely affected by; (i) the termination of a
reseller agreement between the Company and Amdahl Corporation,
(ii) a slower than anticipated acceptance of the Company's new
open systems technology products in the information systems
marketplace, (iii) continued heavy investment in research and
development of its open systems architecture, and (iv) declining
equipment sales as certain of the Company's traditional real-time
products have reached the end of their product life cycle.
Approximately 24% of 1995 revenues were derived through sales to
various U.S. government agencies. Certain of theses 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 provided
by Gould Electronics Inc. ("Gould") and EFI International Inc.,
wholly owned subsidiaries of Japan Energy Corporation ("Japan
Energy"; a Japanese corporation with $20 billion in annual net
sales).
As of April 16, 1996, the Japan Energy Group beneficially owned 78%
of the Company's common stock assuming the full conversion of all
shares of its preferred stock. In light of U.S. limitations on
the ability of certain agencies to transact classified business
with foreign owned or controlled companies, Encore and the Japan
Energy Group have proactively worked to comply with all U.S.
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 occurring prior to April
16, 1996 and discussed in more detail in Notes J and M of Notes
to Consolidated Financial Statements, the Company requested the
United States Defense Investigative Service ("DIS") to review the
relationship between the Company, and the Japan Energy Group,
under government requirements relating to foreign ownership,
control or influence. DIS has not yet had an opportunity to
review the April 16,1996 transaction.
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 not aware 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.
(b) Financial Information About Industry Segments
The Company operates in a single industry segment as described
in Item 1(c) below. Certain required segment information related
to the Company's financial operations for the last three years is
included in Note K of Notes to Consolidated Financial Statements.
(c) Narrative Description of the Business
The Company operates in various market niches of a single
industry segment, the information technology industry, which
includes the design, manufacture, sale and service of storage and
computer systems, software, and other related equipment on a
worldwide basis.
Principal Markets
Within the information technology industry, Encore participates
in both the information processing and real-time computing
marketplaces.
Information Processing Markets
The Company has introduced its massively scalable, symmetric
multiprocessor-based open systems products into primarily four
information processing markets; (i) Cross Platform Enterprise
Data Storage, (ii) Mainframe Storage, (iii) On-Line Transaction
Processing (OLTP) and Decision Support Systems (DSS), and (iv)
Interactive Information Network Servers and Switches. Encore's
strategy is to provide a system that can continue to support a
user's existing critical applications while allowing the user to
reengineer some or all of those applications to run in an open
systems environment at a much lower cost than traditional
mainframes.
During the 1960s, mainframe computers provided batch processing
solutions for its information system customers. In the 1970s,
minicomputers became the common computing paradigm. Then in the
1980s, the computing trend shifted towards PC's and workstations
with database management software. Because of the proliferation
of data from workstations and PC's, many large commercial
customers now require the immediate interactive processing of
available data for enterprise-wide computing rather than the
batch processing approach of traditional mainframes.
Accordingly, the market has begun to migrate to a client/server
processing model served by both; (i) mainframes and mainframe
alternatives for on-line transaction processing and database
applications, and (ii) massively parallel systems for numerically
intensive applications. The Company believes that the systems
sold in the second half of the 1990's will be characterized by
their ability to meet the user's increasing computational power
and I/O requirements as well as the ability to move customers
easily from a proprietary technology environment into an open
systems environment.
Data storage demands within the information processing market are
expanding due to increased requirements of capturing business
data as well as storing new forms of information (e.g. document
images, sound and video). Accordingly, the mainframe storage
marketplace is undergoing changes similar to those of the
information processing marketplace. These changes include the
need for faster, denser and more cost-effective storage solutions
to reduce demands on existing facilities and shrinking mainframe
data processing budgets. Today's data processing environments
have developed a strong strategic requirement to leverage
technology advances being applied to the open systems
environment.
Encore addresses the growing open data storage market by
providing the world's fastest Universal Storage Processors with
DataShareTM Facilities. From a storage perspective, the Infinity
SPTM supports multiple environments and cross-platform data
sharing between open systems and mainframe applications. This
means that with Encore's Mainframe DataShareTM Facility,
mainframe sequential datasets stored on the Infinity SPTM can be
read by attached open systems. Additionally Encore's Open Systems
DataShareTM Facility provides comparable support in the opposite
direction. Channel attached mainframes can read open systems
volumes stored on the Infinity SPTM. Businesses operating
applications on mainframes or in an open systems environment can
use the DataShareTM Facilities to significantly reduce the
elapsed time and effort required to migrate data between
platforms. The Infinity SPTM offers competitive applications,
connectivity, and performance advantages. In the context of cross
platform shared protected storage for open systems and
mainframes, the Infinity SPTM is a technology leader.
To market the new Storage Product, the Company has established an
aggressive direct distribution and OEM sales and marketing
campaign. As part of this campaign, the Company has recruited
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. The
successful acceptance in the marketplace of the new storage
products and their timely development and shipment will play a
key role in determining the Company's results of operations and
competitive strength in the future.
Real-Time Markets
The Company's real-time computer systems, the Infinity R/T(Trademark)
Family, the Encore 90(Trademark) Family and the Encore RSX(Trademark)
are used for
the acquisition, processing, and interpretation of data primarily
in three market niches; (i) simulation, (ii) energy, and (iii)
transportation.
Simulation is the Company's largest real-time market niche.
Encore products are widely used in simulators that
duplicate complex situations in controlled environments. The
Company's installed simulation systems are used to safely and
economically train commercial and military personnel to operate
and maintain complex systems such as space vehicles, aircraft,
weapons systems, ships, ground-based vehicles, and nuclear power
plants.
Encore also competes in the power and electric utility market
niches of the energy marketplace where the Company's real-time
systems typically acquire, monitor, and provide supervisory and
closed loop control in energy management, power plant
monitoring and control, and power plant simulation systems.
This is done at both nuclear and fossil fuel plants. The
Company's systems monitor the transmission and distribution of
electrical power from generation to substation to end use. The
system also facilitates the training of power plant operators by
putting them in simulated environments to prepare them for
emergency situations. Within the energy marketplace as a whole,
Encore systems provide the same real-time capability of data
acquisition and control to other market niches such as seismic,
oil exploration, and off-shore oil platforms.
Within the transportation market niche, the Company's products
are installed in a variety of rapid transit/metro rail and marine
transportation applications. Strategically, the Company is
focusing on other developing niches within this marketplace
including intelligent vehicular highway systems .
The Company's real-time customers include original equipment
manufacturers (OEMs) and systems integrators who combine Encore
products with other hardware and/or application software for
resale to end users. The Company also sells its products to end
users who require a compatible range of high performance systems
which are used as the basis for major internal installations.
The Encore customer base in both the information processing and
real-time marketplaces are technology and life-cycle cost driven
and constantly in need of increased performance at lower
costs. The Company's sales efforts in the real-time market are
concentrated on "program" business where typically large
contracts are awarded with multiple systems scheduled for
delivery over an extended period of years, including continued
demand for upgrades and spare parts as well as ongoing
maintenance. Sales efforts in the information processing markets
are focused more closely at value added resellers (VARs) whose
own sales forces have particular expertise in specific
applications within the information processing markets and who
can use the Company's product as a portion of a total package
designed to meet an end user's unique needs.
Principal Products
Encore offers four principal families of storage and computer
systems targeted at the niches within the information processing
and real-time computing marketplaces of the information
technology industry discussed above. These product families are;
(i) the Infinity SP Storage Processors, (ii) the Infinity R/T
Series, and (iii) the Encore RSX. Additionally, the Company
continues to support its prior generation CONCEPT/32(Trademark) real-time
computer product line.
Infinity SP
The Infinity SP Series Universal Storage Processors with
DataShare(Trademark) Facilities are designed to concurrently address the
mixed storage needs of IBM and plug compatible mainframes, SCSI
attached hosts, and network attached clients under a common,
versatile platform. In order for the Infinity SPTM to support
simultaneously all of these roles, Encore developed a set of
three software products, Mainframe DataShareTM, Open Systems
DataShareTM, and Backup/Restore DataShareTM . These products
enable mainframe and open systems data stored on the Infinity
SPTM to be shared at disk speeds, thereby significantly narrowing
the information gap. The Mainframe DataShareTM Facility allows
MVS IBM mainframe sequential datasets (QSAM) stored on an
Infinity SPTM to be read by a SCSI attached Open System Platform.
The Open System DataShareTM Facilities allows selected SCSI
attached volumes stored on an Infinity SPTM to be read by an IBM
compatible mainframe running MVS with no special software running
on the mainframe. The Backup/Restore DataShareTM Facility allows
an Infinity SPTM to backup and restore SCSI attached and network
attached volumes from an IBM compatible mainframe running MVS
with existing mainframe resident backup utilities.
The Infinity SP fulfills the diverse storage requirements of
legacy and open enterprises by eliminating the overlaps and
hidden costs of multiple conventional fixed function storage
products. Infinity SP storage subsystems are capable of
delivering storage solutions from 48 gigabytes to multiple
terabytes. Encore believes the Infinity SP provides the world
of increasingly heterogeneous computing components simpler and
cost effective solutions.
Infinity Gateway TM
The Encore Infinity Gateway(Trademark), the lowest priced member of the
Infinity SPTM family provides mainframes and open systems
concurrent access to shared datasets in real-time. The Infinity
Gateway utilizing DataShareTM Facilities provides a disk-based
high-speed/low latency interchange path between MVS, UNIX, and
other operating platforms. For example, mainframe data sets
stored on the Infinity Gateway as IBM 3390 volumes are
immediately accessible from SCSI and network attached hosts
without file duplication. Such direct data sharing technology
bypasses lengthy file transfers and laborious tape handling
currently employed to exchange data between dissimilar systems.
Similarly, open systems may store files on the Infinity Gateway
for direct access by mainframes.
Infinity R/T
The Encore Infinity R/T offers high performance real-time
solutions with the latest in RISC technology. The Infinity R/T
is specifically designed to incrementally migrate CONCEPT/32
applications to an open systems environment while maintaining
object code and bus compatibility with Encore's CONCEPT/32 and
SelCONNECTION Series Systems.
The Infinity R/T 300 series combines the latest in RISC
technology, the Alpha AXP processor combined with a 6u VME bus
interface, supporting VME-64 transfer rates of up to 60 MB per
second. It offers customers the ability to connect the Alpha
AXP based real-time servers together via Encore's patented
Reflective Memory technology to form deterministic clusters for
high performance, or high availability real-time applications.
Encore RSX
The Company's Encore RSX products provide performance, high
aggregate computational power and high system throughput
required to process the demands associated with today's real-time
applications.
Because all of the Company's real-time products are object code
compatible, a customer's original investment in Encore software
and specialized hardware is preserved as he migrates his
installation to the newer technology of RSX. The Company also
continues to offer support for its installed base of prior
generation CONCEPT/32 products. These flexible products were
designed for OEM system integration, as embedded systems in
customer supplied cabinets or as complete distributed processing
systems for the most complex real-time tasks.
Customer Service
Service and support are critical elements in maintaining customer
satisfaction. The Company offers its customers a variety of
service and support programs for both hardware and software
products principally through its own customer service
organization supplemented by third party maintenance partners
with locations throughout the world. The Company also offers
maintenance service for selected third party equipment.
Specific service and support programs include preventive
maintenance, resident labor service, customer training and
education, logistics support programs, data facility management
and custom technical and consulting services. In addition, the
Company provides a dial in hotline as well as remote diagnostic
capabilities to allow problem resolution from Encore's home
office.
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, may extend three years.
Sales and Distribution
Encore uses multiple channels of distribution to sell its
products. The primary channel for computer system sales has been
its direct sales force, consisting of approximately 27
salespersons located throughout the United States, Canada and
Western Europe. The Company also has joint venture operations in
Japan, and various other arrangements with distributors
throughout the world.
The Company is expanding its utilization of systems integrators,
value-added resellers (VARs) and independent software vendors
(ISVs) in its distribution network particularly after the
termination of the Amdahl Reseller Agreement discussed in Note B
of Notes to Consolidated Financial Statements. The Company's
strategy is to continue to expand its distribution channels
through the establishment of marketing alliances with other
industry leaders. 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.
The Company's ability to increase sales and improve operating
results for future periods is dependent upon the acceptance of
its Storage Products in the marketplace, and the timely and
successful introduction of additional functions and features for
these products. 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. 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 the products of other larger, better known companies.
The Company's general policy is to sell rather than lease its
products. The Company generally has a policy of no returns and
does not typically extend payment terms beyond those prevalent in
the computer industry. A significant portion of the Company's
sales typically occur in the last month of a fiscal quarter, a
pattern that is not uncommon in the computer industry. The
Company seeks to minimize the time from receipt of a purchase
order for a computer system to delivery of the system.
Accordingly, the Company does not believe backlog reported at any
point in time aids materially in the overall understanding of the
business. Encore's business is not subject to pronounced
seasonal fluctuations.
During the years reported, the Company has not been dependent
upon any one customer for a material part of its business with
no single customer accounting for more than 10% of its sales.
However, in fiscal 1995, 1994 and 1993, approximately 24%, 32%,
and 37%, respectively, of its sales were derived either directly
or indirectly from various United States government agencies.
None of the Company's contracts with United States government
agencies are subject to the renegotiation of profits or
termination at the election of the government.
Research and Development
In fiscal 1995, Encore spent $33,249,000 (67% of total net sales),
on research and development (R&D) activities. In fiscal 1994 and
1993, research and development spending was $30,339,000 (40% of net
sales) and $23,331,000 (25% of net sales), respectively. Despite
reduced revenues, fiscal 1995 research and development expenses
were $2,910,000 higher than 1994 and $9,918,000 higher than 1993.
The increase is attributable to the costs to develop new products
for the storage and open systems markets. The Company's products
are characterized by rapid technological advances which necessitate
frequent product introductions and enhancements. The Company 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.
In 1995, 1994 and 1993, capitalized software development costs
were $673,000, $2,467,000 and $2,142,000, respectively, and
customer sponsored engineering activities were $0, $1,041,000,
and $1,187,000 respectively.
Encore's research and development expenditures have focused on
establishing technical expertise in four critical technologies;
DataShareTM Facilities, parallel processing, the UNIX
environment and real-time and shared memory distributed systems.
The Company's primary emphasis has been to build upon these
established technologies and couple the best features of each
into its new generation of products, the Infinity SPTM Series,
and the Infinity RTTM Series. In order to minimize its
development cycle, development efforts may be subcontracted to
third parties with particular required technological expertise.
While this increases the Company's reliance on the performance of
others and could result in unplanned delays in the product
development process, the Company employs business practices
designed to significantly reduce this risk. At this time, Encore
has no reason to believe any of its subcontractors present a
serious business risk to the Company.
Manufacturing and Raw Materials
The Company's manufacturing operation is ISO 9002 certified and
consists primarily of the assembly and integration of purchased
parts, components, and subassemblies into computer and data
storage systems. Printed circuit boards are assembled using
surface mount technology and automatic placement equipment while
substantially all peripherals are purchased from third party
vendors. Extensive testing and burn in is performed at the
board, component and sub assembly level and at final systems
integration.
Encore's products are comprised of a wide variety of electronic
and mechanical components, raw materials and supplies. The
Company relies heavily on external sources of supply for these
items as well as for other supplies and services. Neither the
Company's customers nor its vendors require Encore to carry
significant amounts of inventory to meet rapid delivery
requirements or to assure itself of a continuous allotment of
goods from suppliers. The Company has developed multiple
commercial sources for most components and raw materials used in
the manufacture of its computer systems. However, because of the
attractiveness of employing the latest technology in its product
line, Encore does utilize several single source vendors for
certain critical components in the Infinity SPTM product line.
While delays in delivery of such single source components could
cause unplanned delays in the shipment of certain products, at
this time, the Company has no reason to believe any of its single
source vendors present a serious business risk to the Company.
The Company believes that its manufacturing facilities are
sufficient to meet its requirements for three years.
Competition
The computer storage industry is intensely competitive and is
characterized by rapid technological advances, decreasing product
life cycles, and price reductions. The principal competitive
factors in the Company's markets are total system performance and
functionality, quality, reliability, price,
compatibility/connectivity to other vendors' systems, along with
long term service and support.
Within the storage product marketplace, the Company's competition
includes EMC, International Business Machines (IBM), Hitachi Data
Systems and Storage Technology. The primary competitors in the
Company's real-time markets are also established companies, such
as Concurrent Computer Corporation, Silicon Graphics and Harris
Corporation. Competitors in the information processing market
include established companies like Digital Equipment Corporation,
IBM, Hewlett Packard Company (HP) and Sequent Computer Systems.
Many of Encore's competitors have greater financial, technical,
and marketing resources than Encore. In some cases, this places
the Company at a disadvantage. However, the Company considers
its level of experience and general understanding of its computer
architecture and real-time applications and its current parallel
processing and UNIX technology position, combined with
DatashareTM to be positive competitive factors.
Patents and Licenses
Encore owns a number of patents, copyrights, and trademarks
relating to its products and business. While valuable to Encore,
management believes that because of the rapid change in
technology such patents, copyrights, and trademarks are of less
significance to its success than other factors such as
innovation, technical skills, and management ability and
experience.
From time to time, companies in the industry have claimed that
certain products and components manufactured by others are
covered by patents held by such companies. It may, therefore, be
necessary or desirable for Encore to obtain additional patent
licenses. Management believes that such licenses could be
obtained on terms which would not have a material adverse effect
on the Company's financial position or the results of its
operations.
Encore has entered into licensing agreements with several third
party software developers and suppliers. The licenses generally
allow for use and sublicense of certain software provided as part
of the computer systems marketed by the Company. Encore is
licensed by UNIX Systems Laboratories Inc. to use and sub license
their UNIX operating system in the Company's computer systems.
As discussed in Note I of Notes to Consolidated Financial
Statements, in connection with its recapitalization in January
1991, the Company licensed substantially all of its intellectual
property to Gould on a royalty free basis. Under the
terms of the agreement, and in combination with certain
extensions granted by Gould, Encore retained the exclusive use of
the intellectual property through December 31, 1995. Those
extensions have expired and effective January 1, 1996, both Gould
and Encore have the option to use the Encore intellectual
property.
While the Company maintains the legal right to terminate the
Gould license under certain conditions, the Company does not
currently have the financial capability to do so. Gould has
stated it has no immediate plans to utilize the technology
to compete with the Company in which it has as a very
substantial investment in the Company.
Environmental Matters
Compliance with Federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials
into the environment, or otherwise relating to the protection of
the environment are not expected to have a material effect on the
capital expenditures, operations or competitive posture of the
Company or its subsidiaries.
Employees
As of December 31, 1995, Encore had 694 full-time employees
engaged in the following activities:
Employees
Customer Service 133
Manufacturing 113
Research and Development/Custom Products 232
Sales and Marketing 155
General and Administrative 61
----
Total 694
===
The Company's future success will depend in large part on its
ability to attract and retain highly skilled and motivated
personnel, who are in great demand throughout the industry.
None of the Company's domestic employees are represented by a
labor union.
Executive Officers of the Company
The names of the Company's executive officers and certain information
about them are set forth below.
Name Age Position with Company
Kenneth G. Fisher 65 Chairman of the Board
and Chief Executive Officer
Rowland H. Thomas, Jr. 60 President
and Chief Operating Officer
Charles S. Anderson 66 Vice President,
Corporate Relations
Ziya Aral 43 Vice President, Systems Engineering
and Chief Technology Officer
Robert A. DiNanno 49 Vice President and General Manager,
Real-Time Operations
Charles S. Namias 37 Vice President,
Corporate Alliances
James C. Shaw 48 Vice President,
Manufacturing Operations
George S. Teixeira 39 Vice President,
Product Business Group
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.
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 elected 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.
Mr. Anderson, joined the Company in 1985. From 1984 until
joining the Company, Mr. Anderson served as Director of
Human Resource Operations at Data General Corporation. Before
joining Data General, Mr. Anderson was with Honeywell
Information Systems, Inc. serving in various management positions
since 1970, most recently as Director of Employee Relations.
Mr. Aral joined the Company in 1987 and was appointed to his
present position of Chief Technology Officer in 1993. Since
1987, he has held various positions of increasing responsibility
within the Company including Vice President of Systems
Engineering and Senior Technology Consultant. Prior to joining
Encore, Mr. Aral was employed by the Reed-Prentice Division of
PMCo. in a variety of software engineering positions.
Mr. DiNanno joined the Company in July 1986. Until June 1992,
Mr. DiNanno served as Vice President and General Manager,
Operations. At that time, he was appointed Vice President and
General Manager, Real-Time Operations. Prior to joining the
Company, he served as Vice President, Manufacturing at Adage,
Inc. from November 1983 to June 1986. Mr. DiNanno also held
domestic and international management assignments with Honeywell
Information Systems, Inc. from June 1979 until November 1983.
Mr. DiNanno has experience with military and commercial flight
simulations acquired during his tenure at Singer Link.
Mr. Namias joined the Company in 1983 as Director of Processor
Engineering. From 1986 to 1989 he held direct sales and several
field sales management positions. In 1990, he was promoted to
Director, Strategic Business Alliances and in 1992 promoted to
Vice President, Business Development. In 1993, Mr. Namias was
appointed Vice President, Corporate Alliances and an officer of
the Company. Prior to joining the Company, Mr. Namias was
employed by Digital Equipment Corporation and Raytheon Missile
Systems.
Mr. Shaw joined the Company in 1989 as Vice President,
Manufacturing Operations. In November 1992, he was appointed an
officer of the Company. From 1985 to 1989 he served as Senior
Director, Manufacturing for Modicon, Inc. Prior to that time, he
was Vice President, Manufacturing for Chomerics, Inc., a position
he held from 1980 to 1985.
Mr. Teixeira assumed his present position in 1994. From 1991 to
1994, he held the position of Vice President, Product
Development. Prior to 1991, Mr. Teixeira held the positions of
Vice President of Marketing and Vice President of Product
Management. Mr. Teixeira was Director of Product Marketing
and Management for the Computer Systems Business of Gould
Electronics Inc. which the Company acquired in 1989. Prior to
1989 he held several progressively more responsible positions
since joining Gould Electronics Inc. in 1981.
(d) International Operations
The Company maintains sales and service operations in Europe and
Canada through wholly-owned subsidiaries. In the Far East, sales
and service operations are performed through a joint venture in
Japan, and distributor agreements throughout the remainder of the
Pacific Rim. In fiscal 1995, approximately 51% of consolidated
net sales were derived from foreign operations. The Company
believes that its overall profit margins with respect to foreign
sales are not materially different from profit margins from
domestic sales. In view of the locations and diversification of
its foreign activities, the Company does not believe that there
are any unusual risks beyond the normal business risks attendant
to activities abroad. Encore attempts to limit its foreign
currency denominated assets and liabilities to reduce its
exposure to foreign currency fluctuations. Additional
information relating to the Company's international operations,
including financial information segregated by major geographic
area, is contained in Note K of the Notes to Consolidated
Financial Statements.
Item 2 Properties
Listed below are the Company's principal facilities as of
December 31, 1995.
Owned or Square Feet
Location Principal Use Leased Approximately
Ft.Lauderdale, FL Administrative/ Owned 232,000
Development/
Marketing
Melbourne, FL Manufacturing Owned 137,000
Paris, France Sales/Service Leased 47,000
London, England Sales/Service Leased 35,000
In addition to the facilities listed above, Encore also leases
space in various other domestic and foreign locations for use as
sales and service offices. The Company's owned facilities are
encumbered by various mortgages, including mortgages which
collateralize the Gould loan agreements (See Note G of Notes to
the Consolidated Financial Statements).
Item 3 Legal Proceedings
During 1994, the Company and Amdahl Corporation ("Amdahl")
entered into a five year reseller agreement (the "Amdahl
Reseller Agreement") which granted Amdahl the right to distribute
the Company's Infinity Storage Products under the Amdahl brand.
The agreement provided that Amdahl would receive marketing and
distribution rights to the product. 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
begin in the second half of 1994 with significant sales volumes
scheduled in the first half of 1995.
After entering into the agreement certain significant contractual
issues arose delaying the sale of products. In February 1995,
the Company notified Amdahl of its intent to terminate the Amdahl
Reseller Agreement; however, Amdahl filed suit in the Delaware
Chancery Court on March 29, 1995, seeking to prevent the Company
from terminating the agreement. On March 30, 1995, the Company
and Amdahl entered in to a "Stand-Still" Agreement to preserve
the status quo until the companies could more thoroughly discuss
the contractual issues. On April 24, 1995, the companies jointly
announced that they had reached an agreement in principle as to
the existing issues and the Stand-Still agreement had been
extended to allow sufficient time to document those agreements.
However, the companies were unable to reach a final agreement.
On June 8, 1995, Encore announced that the Amdahl Reseller
Agreement had been terminated. The suit filed by Amdahl was
dismissed without prejudice on September 19, 1995.
The Company is also subject to legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of
management, the amount of the ultimate liability with respect to
these actions will not materially affect the financial position
of the company.
Item 4 Submissions of Matters to a Vote of Security Holders
No items were submitted to a vote of the security holders during
the fiscal quarter ended December 31, 1995.
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters The Company's common stock is traded on the
NASDAQ Stock Market under the symbol ENCC.
The high and low closing sale prices of Encore's common stock are
shown for fiscal years 1995 and 1994 in the table below:
Fiscal 1995 Fiscal 1994 prices
High Low High Low
1st Quarter 3 9/32 1 23/32 4 3/8 2 5/8
2nd Quarter 3 1 1/16 6 3/8 3 1/8
3rd Quarter 2 19/32 1 1/16 5 1/16 3 13/16
4th Quarter 2 3/4 1 1/2 5 9/16 3
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 2, 1996, there were approximately 2,907 holders
of record of the Company's common stock. The Company has never
paid cash dividends on its common stock and under the terms of
the Company's current financing agreements, the Company is
prohibited from paying such dividends.
Item 6 Selected Financial Data
(in thousands except Pro Forma ---for the year ended December 31---
per share data) 1995(2) 1995 1994 1993 1992 1991
Net sales $49,328 49,328 $76,550 $93,532 $130,893 $153,302
Operating loss (77,796) (77,796) (50,848)(62,085) (22,544) (54,938)
Net loss (81,354) (81,354)(54,556)(69,565) (32,522) (65,388)
Net loss per
common share (1) (2.37) (2.37) (1.68) (2.01) (.98) (1.87)
Weighted average
shares ofcommon stock
outstanding (1) 42,287 42,287 40,755 39,273 37,899 36,466
Working capital 5,288 5,490 20,237 3,499 14,270 16,014
Total assets 72,537 72,537 99,021 84,070 105,686 121,186
Long term debt 5,812 40,812 89,249 112,919 66,413 106,588
Redeemable preferred
stock - - - - - 4,246
Shareholders' equity
(capital deficiency) 37,312 2,514 (22,040) (66,560) 508 (42,137)
(1) During 1995, 1994 and 1993, preferred stock dividends
amounted to $19,061,600, $13,986,600 and $9,184,700
respectively.
(2) Presents the pro forma
effect on April 16, 1996 of an exchange of $35,000,000
indebtedness for preferred stock between Gould Electronic's and
the Company as if such transaction had occurred on December 31, 1995.
Item 7 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 than the
Company and one which for over twenty-five years provided real-
time computer systems solutions to the simulation,
transportation, 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
targeted its research and development efforts towards programs to
develop a new generation of open system computers. Since the
beginning of 1993, the Company has spent approximately
$87,000,000 in research and development activities. This has
resulted in the current availability of a family of storage
systems and open system computers including; (i) the Infinity
SPTM Storage Processor with DataShare FacilitiesTM, and (ii) the
Infinity R/TTM. In light of this new technology the Company has
targeted the multibillion dollar storage market as a strategic
growth market. This will be a new market for the Company and is
intended to replace the declining revenues from the real-time
market. The Company's real-time market revenues have decreased
from $153,302,000 in 1991 to $49,328,000 in 1995 and as a result
the Company has incurred significant net losses during this
period. The Company expects the Infinity SPTM to penetrate the
storage market and establish market presence. The acceptance of
Encore's Infinity SP Universal Storage Processor with DataShareTM
Facilities in the market place, and the timely and successful
introduction of additional functions and features for these
products will determine the Company's future results.
To market the new storage product, the Company has developed a
direct distribution and OEM sales and marketing strategy. The
Company has recruited industry knowledgeable sales people from
leading storage vendors and expanded its sales offices around the
world. 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. The Company expects future sales volumes to increase
as the sales campaign ramps up. 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 the products of other larger and
more financially resourceful companies.
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 , eliminating organizational redundancies
and consolidating certain facilities to eliminate excess
capacity. In connection with the restructuring activities, the
Company also recognized the impairment in value of certain long-
lived assets including capitalized software products. As a
result of these actions, the Company recorded restructuring
charges of $27,764,000 over the three year period ended December
31, 1995. The Company's future success will be dependent on
research and development activities. Accordingly, the Company
plans to continue to invest heavily in this area.
With the net losses incurred in the three years ended December
31, 1995, the Company has not generated sufficient levels of cash
flow to fund its operations. During this period of time the
principal source of financing has been provided by the Japan
Energy Group. During the three years ended December 31, 1995,
the Company and the Japan Energy Group have also entered into a
series of financing transactions involving the cancellation of
$205,000,000 of indebtedness in exchange for the issuance of
various classes of the Company's Preferred Stock.
Comparison of Calendar 1995, 1994 and 1993.
Net sales for 1995 were $49,328,000 compared to net sales for
1994 and 1993 of $76,550,000 and $93,532,000, respectively. The
1995 revenue decline is due to both lower equipment and service
sales. In 1995, equipment sales decreased to $22,005,000 from
$38,412,000 and $43,622,000 in 1994 and 1993, respectively.
Service revenues for 1995, 1994, and 1993 were $27,323,000,
$38,138,000 and $49,910,000, respectively.
Equipment sales as a percentage of total net sales in 1995, 1994
and 1993 were 45%, 50%, and 47%, respectively. The decrease is
primarily due to; (i) the delay in the acceptance of the Company's
new technology products in the storage information systems
marketplace, (ii) the decline in real-time and open system
computer sales, and (iii) the adverse effects from the
termination of the Amdahl Reseller Agreement.
Reflecting the Company's declining system sales as well as
continued price competitiveness in the marketplace, service
revenues have declined from the prior years by 28% and 24% in
1995 and 1994, respectively. Since 1990 approximately 25% of
each year's existing service contracts have not been renewed with
the Company. However, as a percentage of total net sales,
service revenues have remained fairly constant.
The decline in net sales has occurred in both the domestic and
international markets, although international sales declined at
a slower rate. International sales in 1995, 1994 and 1993 were
$25,277,000, $33,937,000 and $36,979,000 or 51%, 44%, and 39%,
respectively of total net sales.
During the three years ended December 31, 1995, 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 24%, 32% and 37% of net sales in 1995,
1994 and 1993, 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. The Company believes the
expansion into non traditional, high growth storage markets with
the Infinity SPTM, and the Infinity R/TTM Family of products will
mitigate potential risk.
Total cost of sales decreased in 1995 to $55,693,000, from
$60,907,000 in 1994 and $65,831,000 in 1993. 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 1993, combined manufacturing and customer
service headcount has been reduced by approximately 35%, certain
customer service field operations have been closed or scaled
down, and manufacturing operations have been consolidated in
Melbourne, Florida.
In 1995, gross margins on equipment sales were a loss
12,970,000 or (-59%) of net sales compared to gross profit
of $3,360,000 (9%)
and $14,041,000 (32%) in 1994 and 1993, respectively. The
decreases in 1995 and 1994 were due principally to the charges
associated with the termination of the Amdahl Reseller Agreement
and the negative effect of the under utilization of manufacturing
capacity. As discussed in Note B of Notes to Consolidated
Financial Statements, in 1995 and 1994, the Company recorded
charges of $14,242,000 and $8,960,000 respectively, in connection
with the termination of the Amdahl Reseller Agreement.
In 1995, gross margins on service sales were $6,605,000 or (24%),
compared to $12,283,000 (32%) and $13,660,000 (27%) in 1994 and
1993, respectively. For 1995 and 1994, service margins were
reduced for costs incurred in preparing the customer service
organization for Storage Product maintenance. Customer service
margins are expected to continue to deteriorate due to a declining service
base and costs required to support the storage product
maintenance. The 1995 rate of decline is expected to
be slower in the international market because of limited
competition. While management has taken cost reduction actions,
the rate of decline in service expenses lagged service revenues.
Among the most significant of these actions occurred during the
fourth quarter of 1993 when the Company entered into an
agreement with a third party service provider 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. Among the principal cost reductions
achieved in 1993 were lower employee costs of approximately
$5,500,000 due to reduced headcount, and the closing of field
offices.
Research and development expenses in 1995 were $33,249,000
compared to $30,339,000 and $23,331,000 in 1994 and 1993,
respectively. Research and development expenses as a percentage
of net sales in 1995 increased to 67% from 40% and 25% in 1994
and 1993, respectively. The percentage increase is a result of
both lower net sales and higher expense levels. Over the three
year period, management increased expenditures on those strategic
product offerings necessary for 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 if 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 1995 were
$33,683,000 compared to $36,152,000 and $43,190,000 in 1994 and
1993, respectively. In 1995, SG&A expenses decreased in part due
to lower commissions on the year's lower sales as well as
management's actions taken to minimize headcount, close or
consolidate marginally profitable field offices and to more
effectively focus its advertising programs. These reductions
were partially offset by a non cash compensation charge of
$1,424,000 in connection with the extension of the expiration
date of certain individual stock option grants. In 1994, SG&A
expenses decreased as compared to 1993 in part due to lower sales
commissions and an approximate 20% reduction in headcount.
These reductions were partially offset by increased consulting
expenses related, in part, to the introduction of the Infinity
SPTM. As a percentage of net sales, SG&A expenses were 68%, 47%
and 46% in 1995, 1994 and 1993, respectively. This reflects the
fact that reductions in SG&A spending have been more than offset
by declines in net sales.
In 1995 and 1993, the Company took actions to restructure its
operations to levels more consistent with the then expected
levels of future revenues. As discussed in Note F of Notes to
Consolidated Financial Statements, 1995 and 1993 operating
expenses include restructuring charges of $4,499,000 and
$23,265,000, respectively.
In the second quarter of 1995 management evaluated the Company's
latest financial projections, and concluded; (i) the termination of
the Amdahl Reseller Agreement 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
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 Reseller Agreement, and (iii) the
write off of $1,624,000 of capitalized software assets relating to
the Company's UNIX based product lines. Management will continue
to assess its cost structure and the carrying value of its assets
in light of expected future business. While there are no existing
plans to take any additional actions, should future conditions
require, management could approve additional plans to further
reduce its cost base or recognize the impairment in value of long
lived assets.
During 1993, the Company recorded a restructuring charge of
$23,265,000. The Company reduced its workforce by approximately
12%, and wrote down the carrying values of long-lived assets by
$13,171,000.
Interest expense decreased to $2,957,000 in 1995 from $3,363,000
in 1994 and $6,380,000 in 1993. Since February 4, 1994, Encore
has completed a series of refinancing agreements with the Japan
Energy Group resulting in conversions of $205,000,000 of debt to
preferred stock. These conversions served to reduce the
Company's annual interest expense by approximately $17,700,000 in
1995 and $8,500,000 in 1994.
Other expense, net was higher in 1993 than in 1995 and 1994 due
principally to higher foreign exchange losses in 1993.
Income taxes provided in 1995, 1994, and 1993 relate to taxes
payable by foreign subsidiaries (see Note H of the Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
Because of the continuing operating losses incurred for the five
years ended December 31, 1995, the Company has been unable to
generate cash from operating activities. In 1995, 1994, and
1993, the Company used cash in operating activities of
$50,462,000, $64,504,000, and $34,883,000, respectively.
Cash used in 1995 operating activities decreased by $14,042,000
from 1994 reflecting working capital changes which resulted
principally from the Amdahl Reseller Agreement and its
termination. During 1994 the Company significantly increased
its investment in accounts receivable and inventories as a
result of the acceleration of activities under the Amdahl
Reseller Agreement. With the termination of this agreement in
1995, the Company's related working capital investment was
significantly reduced. Accordingly, net changes in accounts
receivable and inventories amounted to $3,213,000 in 1995, an
improvement of $18,920,000 as compared to 1994. These
improvements were partially offset by the increase in the 1995
net loss of $5,485,000, as adjusted by noncash items.
From 1993 to 1994, cash used in operating activities increased by
$29,621,000 reflecting the working capital investment required as
a result of the acceleration of activities under the Amdahl
Reseller Agreement and a higher net cash loss. For 1994, the net
cash used to increase accounts receivable and inventories was
$15,707,000, a change of $24,470,000 from 1993. Additionally,
for 1994, the net loss, as adjusted for non cash items, exceeded
the 1993 net loss by $9,240,000.
Expenditures for property and equipment during 1995, 1994 and
1993 were $7,335,000, $13,089,000, and $11,780,000, respectively.
Expenditures for capitalized software during 1995, 1994, and 1993
were $673,000, $2,467,000, and $2,142,000, respectively. As of
December 31, 1995, there were no material commitments for capital
expenditures.
Cash was provided through financing activities of $58,658,000,
$78,496,000, and $48,219,000 in 1995, 1994, and 1993,
respectively. The principal source of financing has been through
various agreements provided by the Japan Energy Group.
The majority of the year end cash on hand of $2,797,000 was at
various international subsidiaries. With minor exceptions, all
cash is freely remittable to the United States.
On April 16, 1996 the Company issued Gould 350,000 shares of
Series H Preferred Stock ("Series H") with a liquidation
preference of $35,000,000 in exchange for Gould canceling
$35,000,000 of debt owed by the Company. In addition, Gould
increased Encore's borrowing capacity to $65,000,000 and
extended the maturity date to April 30, 1997. As of April 16,
1996 the Company had $38,400,000 of committed borrowing facility
remaining.
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 should 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 it will have
difficulties settling its liabilities in the normal course of
business.
ITEM 8 Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
of Encore Computer Corporation
We have audited the consolidated financial statements and the
financial statement schedule of Encore Computer Corporation and
Subsidiaries listed in Item 14 (a) of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the
financial statement schedule 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 M 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 $35 million of
the Company's outstanding indebtedness for preferred stock and
provided the Company with a $65 million revolving credit
facility. The Company is dependent upon the continued 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included
therein.
Coopers & Lybrand L.L.P.
Miami, Florida
February 16, 1996 except for Note M as to
which the date is April 16, 1996.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Operations
(in thousands except per share data)
Year
Ended
December December December
31, 31, 31,
1995 1994 1993
Net sales:
Equipment $ 22,005 $ 38,412 $ 43,622
Service 27,323 38,138 49,910
Total 49,328 76,550 93,532
Costs and expenses:
Cost of equipment sales 34,975 35,052 29,581
Cost of service sales 20,718 25,855 36,250
Research and development 33,249 30,339 23,331
Sales, general and admin. 33,683 36,152 43,190
Restructuring costs 4,499 - 23,265
Total 127,124 127,398 155,617
Operating loss (77,796) (50,848) 62,085)
Interest expense,
principally related parties (2,957) (3,363) (6,380)
Interest income 171 128 134
Other income (expense),net 75 70 (780)
Loss before income taxes (80,507) (54,013) (69,111)
Provision for income taxes 847 543 454
Net loss $ (81,354) $ (54,556) $ (69,565)
Net loss per common share:
Net loss attributable to
common shareholders $ (100,416) $ (68,543) $ (78,750)
Loss per common share $ (2.37) $ (1.68) $ (2.01)
Weighted average shares
of common stock 42,287 40,755 39,273
The accompanying notes are an integral part of the
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Pro forma
December December December
31, 31, 31,
1995 1995 1994
(See Note M)
ASSETS
Current assets:
Cash and cash equivalents $ 2,797 $ 2,797 $ 2,517
Accounts receivable,
less allowances of $1,798
in 1995 and $5,017 in 1994 13,723 13,723 19,855
Inventories 15,796 15,796 27,555
Prepaid expenses and other
current assets 1,353 1,353 1,863
--------- -------- ---------
Total current assets 33,669 33,669 51,790
Property and equipment,net 35,800 35,800 40,921
Capitalized software,net 2,258 2,258 5,139
Other assets 810 810 1,171
Total assets $ 72,537 $ 72,537 $ 99,021
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term debt-other $ 171 $ 171 $ 195
Accounts payable and accrued liabilities 28,210 28,008 31,358
Total current liabilities 28,381 28,179 31,553
Long term debt - related parties 5,154 40,154 88,421
Long term debt - other 658 658 828
Other liabilities 1,032 1,032 259
Total liabilities 35,225 70,023 121,061
Commitments and
contingencies (Note I)
Shareholders' equity (capital
deficiency) :
Preferred stock, $.01 par value;
authorized10,000,000 shares:
Series A Convertible Participating
Preferred, issued 73,641
shares in 1995 and 1994 1 1 1
6% Cumulative Series B Convertible
Preferred, issued 707,345 and 666,453
in 1995 and 1994, respectively
with an aggregate liquidation
preference of $70,734,500 and
$66,645,300 in 1995 and 1994,
respectively 7 7 7
6% Cumulative Series D Convertible
Preferred, issued 1,082,362 and
1,019,787 shares in 1995 and 1994
, respectively with an aggregate
liquidation preference of $108,236,200
and $101,978,700 in 1995 and 1994,
respectively 11 11 10
6% Cumulative Series E Convertible
Preferred, issued 1,106,343 and
1,042,381 shares in 1995 and 1994,
respectively, with an aggregate
liquidation preference of $110,634,300
and $104,238,100 in 1995 and 1994,
respectively 11 11 10
6% Cumulative Series F Convertible
Preferred, issued 517,687 in 1995
with an aggregate liquidation
preference of $51,768,700 5 5 -
6% Cumulative Series G Convertible
Preferred, issued 555,500 in 1995
with an aggregate liquidation
preference of $55,550,000 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 36,067,792
and 34,076,124 in 1995 and 1994,
respectively 361 361 341
Additional paid-in 447,670 412,876 307,001
capital
Accumulated deficit (410,764) (410,764) (329,410)
Total shareholders' equity
(capital deficiency) 37,312 2,514 (22,040)
Total liabilities and
shareholders' equity (capital
deficiency) $ 72,537 $ 72,537 $ 99,021
The accompanying notes are an integral part of the
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Year
Ended
December December December
31, 31, 31,
1995 1994 1993
Cash flows from operating activities:
Net Loss $ (81,354) $ (54,556) $(69,565)
Adjustments to arrive at
net cash used in operating activities:
Depreciation and amortization 11,750 10,850 12,320
Non cash compensation (Note J) 1,424 - 788
Inventory obsolescence and
writedown to lower
of cost or market 12,367 (30) 860
Equity in loss (income)
of joint venture 773 286 (27)
Bad debt provision 2,735 2,928 203
Restructuring charges 4,499 - 23,265
Foreign exchange loss(gain) (134) (93) 744
Loss (gain) on disposal
of property and equipment 1,839 (1) 36
Net changes in operating assets
and liabilities:
Accounts receivable 3,821 (5,942) 11,654
Inventories (608) (9,765) (2,891)
Prepaid expenses and
other current assets 375 1,217 (1,575)
Other assets 381 (257) 203
Accounts payable and
accrued liabilities (8,330) (9,048) (8,912)
Other liabilities - (93) (1,986)
Net cash used in (50,462) (64,504) (34,883)
operating activities
Cash flows from investing activities:
Additions to property
and equipment (7,335) (13,089) (11,780)
Proceeds from sale of
property and equipment 14 220 60
Capitalization of
software costs (673) (2,467) (2,142)
Net cash used in
investing activities (7,994) (15,336) (13,862)
Cash flows from financing activities:
Net borrowings under revolving loan
agreements 56,733 76,497 46,724
Principal payments of long term debt (194) (169) (214)
Dividends paid on Preferred Stock (1) (2) -
Issuance of common stock 2,120 2,170 1,709
Net cash provided by
financing activities 58,658 78,496 48,219
Effect of exchange rate changes on cash 78 108 (529)
Increase (decrease) in cash
and cash equivalents 280 (1,236) (1,055)
Cash and cash equivalents, beginning 2,517 3,751 4,806
Cash and cash equivalents, ending $ 2,797 $ 2,515 $ 3,751
The accompanying notes are an integral part of the
consolidated financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
1995 1994 1993
Cash paid during the period for interest $ 1,354 $ 2,162 $ 8,648
Cash paid during the period for income taxes 1,273 - 912
Supplemental schedule of noncash investing and financing activities:
A. During 1995 and 1994, the Company exchanged $105,000,000 and
$100,000,000, respectively, of indebtedness for
1,050,000 shares and 1,000,000 shares, respectively, of the
Company's Convertible Preferred Stock. Refer to Note J
of Notes to Consolidated
Financial Statements.
B. During 1995 and 1994, the Company reduced by $400,000 and
$625,000, respectively, accruals established for
transaction costs relating to the Gould capital transactions.
These amounts were credited to additional paid-in capital.
The accompanying notes are an integral part of the
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, 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
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
Issuance of Series E
Convertible Preferred Stock
Dividends issued to
Preferred Stockholders
in shares of Series B, D and E 74,828 1 114,504 1
Adjustment of estimated
transaction costs
relating to Gould
capital transactions
Balance December 31, 1994 73,641 1 666,453 7 1,019,787 10
Common stock options
exercised, $.63 to
$2.31 per share
Shares issued through
employee stock purchase
plan at $1.75 per share
Issuance of Series F
and Series G Convertible
Preferred Stock
Dividends issued to
Preferred Stockholders
in shares of Series B,D,E,F and G 40,892 - 62,575 1
Cash paid in lieu of
fractional share dividends
Extension of expiration
date on outstanding
grant of common
stock options
Adjustment of estimated
transaction costs
relating to Gould
capital transactions
Balance December 31, 1995 73,641 $ 1 707,345 $ 7 1,082,362 $11
The accompanying notes are an intergral part
of the consolidated financial statements.
Preferred Stock
Series E Series F Series G
Par Par Par
Shares Value Shares Value Shares Value
Balance December 31, 1992 - $ - - $ - - $ -
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
Balance December 31, 1993 - - - - - -
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
Issuance of Series E
Convertible
Preferred Stock 1,000,000 10
Dividends issued
to Preferred Stockholders
in shares of Series B,D
and E 42,381 -
Adjustment of estimated
transaction costs
relating to Gould
capital transactions
Balance December 31, 1994 1,042,381 10 - - - -
Common stock options
exercised, $.63 to
$2.31 per share
Shares issued through
employee stock purchase
plan at $1.75 per share
Issuance of Series F
and Series G Convertible
Preferred Stock 500,000 5 550,000 6
Dividends issued to
Preferred Stockholders
in shares of Series B,
D, E, F and G 63,962 1 17,687 - 5,500 -
Cash paid in lieu of
fractional share
dividends
Extension of expiration
date on outstanding
grant of common stock
options
Adjustment of estimated
transaction costs
relating to Gould
capital transactions
Balance December 31, 1995 1,106,343 $ 11 517,687 $ 5 555,500 $ 6
Common Stock Shareholder's
Additional Equity
Par Paid-in Accumulated (Capital
Shares Value Capital Deficit Deficiency)
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
Issuance of Series E
Convertible
Preferred Stock 96,273 96,283
Dividends issued to Preferred
Stockholders
in shares of Series B,D and E (4) (2)
Adjustment of estimated
transaction costs
relating to Gould
capital transactions 625 625
Net loss (54,556) (54,556)
Balance December 31, 1994 34,076,124 341 307,001 (329,410) (22,040)
Common stock options
exercised, $.63 to
$2.31 per share 1,568,934 16 1,363 1,379
Shares issued through
employee stock purchase
plan at $1.75 per share 422,734 4 737 741
Issuance of Series F
and Series G Convertible
Preferred Stock 101,954 101,965
Dividends issued to
Preferred stockholders
in shares of Series B,
D, E, F and G (2) -
Cash paid in lieu
of fractional
share dividends (1) (1)
Extension of
expiration date
on outstanding
grant of common stock options 1,424 1,424
Adjustment of estimated
transaction costs
relating to Gould
capital transactions 400 400
Net loss (81,354) (81,354)
Balance December 31, 1995 36,067,792 $ 361 $ 412,876 $ (410,764) $ 2,514
Notes to Consolidated Financial Statements
A. Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations
Encore Computer Corporation ("Encore" or the "Company"), founded
in 1983, designs, manufactures, distributes and supports scalable
real time data storage, data retrieval, and sharing technologies
for mixed platform processing environments. Headquartered in
Fort Lauderdale, Florida, the Company has sales offices and
distributors in the United States, Canada, Europe, and
the Far East.
Since 1989, the principal source of financing for the Company has
been provided by the Japan Energy Corporation, through its wholly
owned subsidiaries, Gould Electronics, Inc. ("Gould") and EFI
International ("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 be unable 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.
Principles of Consolidation
The accompanying financial statements include the accounts of
Encore and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated. The Company's 50%
investment in a Japanese joint venture operation is accounted for
under the equity method. The Company has a commitment to make
additional capital contributions to the joint venture,
accordingly, the Company has recognized losses in excess of its
investment to the extent of this capital commitment.
Pervasiveness of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with
maturities at the date of purchase of three months or less.
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 which approximates the timing of
services performed.
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 classified 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 an assets retirement or disposition, the cost and
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.
Statement of Financial Accounting Standards ("FAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" was issued in March 1995 and will
be adopted in the Company's fiscal year beginning January 1, 1996.
FAS 121 requires that long-lived assets, such as property and
equipment, and certain identifiable intangibles to be held and
used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss, based on the fair value
of the asset, should be recognized if the expected future cash
flows (undiscounted and without interest charges) resulting from
the use and eventual disposition of the asset is less than the
carrying amount of the asset.
As discussed in Note F of Notes to Consolidated Financial
Statements, the Company has historically written down the carrying
value of long-lived assets deemed permanently impaired. However,
as contemplated by FAS 121, the Company's history of operating and
cash flow losses indicates that the recoverability of the carrying
amount of the long-lived assets should be assessed. Based on
preliminary assessments of the fair value of property and
equipment, the Company does not anticipate that adoption of FAS
121 will have a material impact on financial position or results
of operations.
Employer's Postemployment Benefits
The Company provides employees with 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 postemployment
benefits at the date of the event giving rise to the liability to
pay those benefits.
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 by the greater of; (a)
straight line amortization over the expected commercial life of
each product (three to five years), or (b) the ratio that current
revenues for a product bear to the total of current and
anticipated future revenues for that product.
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. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
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. 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
$19,061,600, $13,986,600 and $9,184,700 for 1995, 1994 and 1993,
respectively. For 1993, the Company accumulated preferred stock
dividends because it reported a capital deficiency. All such
accumulated dividends were paid in 1994. All preferred stock
dividends have been paid in additional shares of the appropriate
class of preferred stock.
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.
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.
Reclassifications
Certain reclassifications have been made to conform prior years'
data to the current year presentation.
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 begin in the second half of 1994 with significant
sales volumes scheduled in the first half of 1995. However, after
entering into the agreement certain significant contractual issues
arose delaying the sale of products and on June 8, 1995, Encore
announced that the Amdahl Reseller Agreement had been terminated.
The Company's inventory levels and overhead costs were based on a
plan designed to meet accelerating sales commitments defined in
the Amdahl Reseller Agreement. However, because of the termination of the
Amdahl Reseller Agreement, product sales have fallen well short of
expectations and all elements of the Company's results of
operations have been adversely affected. As a result of these
events, during 1995, the Company charged operations $19,241,000,
consisting of $11,442,000 charged to cost of sales to reduce
inventory carrying amounts to estimated net realizable value, as
well as $2,800,000 charged to cost of sales for uncollected Amdahl
accounts receivable, $500,000 charged to research and development
to write down capitalized software projects in process, and
$4,499,000 charged to restructuring costs in recognition of the
impairment in value of certain assets, severance and benefit pay
and other expenses associated with the termination of the Amdahl
Reseller Agreement. As of December 31, 1994, because of
uncertainties surrounding the Amdahl relationship, the Company
also charged cost of sales $8,960,000 in order to reduce
inventories to estimated net realizable value and to provide for
uncollectible accounts receivable.
C. Inventories
Inventories consist of the following (in thousands):
December 31, December 31,
1995 1994
Purchased parts $ 9,161 $ 3,307
Work in process 4,570 23,377
Finished goods 1,799 482
Loaned computer equipment
and consignment inventory 266 389
--------- -------
$ 15,796 $ 27,555
Storage product inventory, amounted to $11,139,000 and $18,567,000
at December 31, 1995 and 1994, respectively. In light of the
termination of the Amdahl Reseller Agreement, the Company is expanding its
programs to market the Company's storage products through various
other channels. This includes direct, distributor and OEM sales
and marketing campaigns. No estimate can be made of a range of
amounts of loss that are reasonably possible should the programs
not be successful.
D. Property and Equipment;
Property and equipment consists of the following (in thousands):
December 31, December 31,
1995 1994
Land $ 5,100 $ 5,100
Buildings 15,243 14,878
Equipment 44,349 43,285
Customer service inventory 13,985 12,922
Furniture and fixtures 2,900 3,286
Leasehold improvements 1,309 1,861
Loaned equipment 4,815 4,915
Construction in progress - 561
-------- --------
87,701 86,808
Accumulated depreciation
and amortization (51,901) (45,887)
--------- ---------
$ 35,800 $ 40,921
========= =========
Depreciation expense in 1995, 1994 and 1993 amounted to
$9,260,000, $8,619,000, and $9,853,000, respectively.
E. Capitalized Software
Capitalized software consists of the following (in thousands):
December 31, December 31,
1995 1994
Capitalized software $ 7,763 $ 11,840
Accumulated amortization (5,505) (6,701)
$ 2,258 $ 5,139
Software costs capitalized in 1995, 1994, and 1993 amounted to
$673,000, $2,467,000 and $2,142,000, respectively. Amortization
of capitalized software costs charged to expense amounted to
$2,490,000, $2,226,000 and $1,696,000, respectively. During 1995,
$1,625,000 was charged to restructuring in recognition of the
permanent impairment in value of capitalized software and $561,000
was transferred from construction in progress to capitalized
software.
F. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following
(in thousands):
December 31, December 31,
1995 1994
Accounts payable $ 7,339$ 10,582
Accrued salaries and benefits 4,261 4,663
Accrued restructuring costs 1,566 4,926
Accrued interest-related parties 5,921 1,882
Accrued taxes 4,045 3,359
Deferred income,
principally maintenance contracts 827 1,548
Other accrued expenses 4,049 4,398
$ 28,008 $ 31,358
During 1995 and 1993, the Company recognized restructuring
expenses of $4,499,000 and $23,265,000, respectively. The 1995
charge relates to; (i) the recognition of the permanent impairment
in value of $2,406,000 of certain long-lived assets, including
capitalized software and property and equipment, (ii) severance
and benefit pay of $1,335,000 as a result of a 95 person reduction
in workforce, principally in manufacturing and development, and
(iii) other expenses associated with the termination of the Amdahl
Reseller Agreement. The 1993 charge related to ; (i) the
recognition of the permanent impairment in value of $13,171,000 of
certain long-lived assets including property and equipment and
goodwill, (ii) severance and out placement costs associated with a
12% reduction in workforce, and (iii) the accrual of costs to be
incurred for field offices abandoned due to the reduced sales and
service workforce.
G. Debt
Debt consists of the following (in thousands):;
Unaudited
(See Note M)
Pro Forma
December 31, December, 31, December 31,
1995 1995 1994
Debt to unrelated parties:
Mortgages payable $ 829 $ 829 $ 1,023
Less:
Current portion of debt (171) (171) (195)
Total long term debt
to unrelated parties $ 658 $ 658 $ 828
Debt to related parties:
Revolving loan agreement
with Gould Electronics Inc.$ - $ - $ 50,000
Credit Agreement with
Gould Electronics Inc. 5,154 40,154 38,421
Total long term debt
to related parties $ 5,154 $ 40,154 $88,421
As discussed more fully in Note J of Notes to Consolidated
Financial Statements, the Japan Energy Group has canceled
indebtedness owed by the Company in exchange for various series of
convertible preferred stock. During 1995 and 1994, these
cancellations of indebtedness totaled $105,000,000 and
$100,000,000, respectively. Assuming full conversion of preferred
stock holdings as of December 31, 1995, the Japan Energy Group
beneficially owns 77% of the Company's common stock.
As of December 31, 1995, the Company had borrowed $40,154,000 from
Gould pursuant to a Revolving Credit Agreement("Credit Agreement")
which matures April
16, 1996. The total credit facility amounts to $45,000,000, of
which, $20,000,000 is uncommitted and may be disbursed to the
Company for general corporate purposes at Gould's absolute and
sole discretion. The credit facility bears interest at the prime
rate plus 2% (10.5% at December 31, 1995). Through December 31,
1995, Gould funded $15,154,000 of the uncommitted facility.
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 M of Notes to 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 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 all financial covenants
until January 1, 1997. In light of the 1996 recapitalization and
refinancing, the borrowings at December 31, 1995 have been
considered long-term obligations.
As of December 31, 1994, the Company owed Gould $88,421,000 under
certain revolving and short term loan agreements bearing interest
at the prime rate plus 1% (9.5% at December 31, 1994). During
1995, these borrowings were canceled in exchange for preferred
stock.
H. Income Taxes
The Company utilizes the liability method of accounting for
deferred income taxes and has recorded a provision of $847,000,
$543,000 and $454,000 for the years ended 1995, 1994 and 1993,
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. 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, 1995, these temporary differences
were approximately $5,800,000. A determination of the amount of
unrecognized deferred tax liability related to these investments
is not practicable.
The significant components of the deferred tax assets and liabilities
as of December 31, 1995 and 1994 were as follows (in thousands):
1995 1994
Deferred tax assets:
Net operating losses $ 126,618 $ 85,262
Research &
experimental credits 1,750 1,750
Capital losses 4,396 4,396
Allowance for
doubtful accounts 452 2,836
Inventory reserves 8,113 2,722
Accrued vacation 600 928
Various reserves/other 3,405 1,028
Accrued restructuring 102 1,397
145,436 100,319
Valuation allowance 143,808 98,652
1,628 1,667
Deferred tax liabilities:
Depreciation (770) (349)
Capitalized software (858) (1,318)
------- --------
Net $ - $ -
======= ========
For income tax purposes the Company had a change in ownership, as
defined by Internal Revenue Code Section 382, in connection with a
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, 1995, 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 $243,000,000. These net
operating losses and tax credit carryforwards expire in the years
2005 through 2010. 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, 1995, the U.S. Federal Income Tax Returns for
1992 through 1994 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 space 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 $3,187,000, $3,594,000 and
$4,127,000 for 1995, 1994, and 1993, respectively. Future minimum
rental payments under operating leases for the next five years are
approximately as follows:
(in thousands)
Year
1996 $ 2,358
1997 1,697
1998 1,389
1999 1,278
2000 1,169
Joint Venture Capital Commitment
The Company has committed to invest up to a total of $3,250,000
for a Japanese joint venture, of which $1,032,000 has been accrued
in recognition of losses reported through December 31, 1995.
Litigation
The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of
management, the amount of the ultimate liability with respect to
these actions will not materially affect the financial position of
the Company.
Intellectual Property License
In connection with its recapitalization in January 1991, the
Company licensed substantially all of its intellectual property
to Gould on a royalty free basis. However, under the terms of
the agreement, and in combination with certain extensions granted
by Gould, Encore retained the exclusive use of the intellectual
property through December 31, 1995. Those extensions have expired
and effective January 1, 1996, both Gould and Encore have the
option to use the Encore intellectual property. The Company
maintains the right to terminate the Gould license if all Gould
borrowings are repaid and the commitment under any Gould
Revolving credit agreements are terminated and one of the
following four conditions is met; (i) the 6% Cumulative Series B
Convertible Preferred Stock ("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, or (iv) the Company pays Gould a
fixed dollar amount equal to $46,540,000 plus 9% per annum
interest compounded annually for the period after January 28,
1996, through the date of payment.
J. Capital Stock
Series A Convertible Participating Preferred Stock
Certain of the Company's operations relate to classified U.S.
Government contracts. Accordingly, the United States 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 the Japan Energy
Corporation, a foreign corporation. In this connection, the
Company has issued to Gould 73,641 shares of Series A Convertible
Participating Preferred Stock ("Series A") 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 to common stock 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 all
per share calculations for the fiscal periods presented herein.
Cumulative Convertible Preferred Stock
The Company's Cumulative Convertible Preferred Stock, consisting
of Series B, D, E, F and G (collectively "Preferred Stock") has a
liquidation preference of $100 per share and 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 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
Series D, E, F and G 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
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 Preferred Stock is redeemable 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 Preferred Stock and additional shares which may be issued as a
dividend. As of December 31, 1995, the number of common shares
reserved for this purpose amounts to 129,624,277.
The Series B is non-voting, except for 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
also has the right to elect two additional directors in the event
that Encore fails to pay cash dividends for eight consecutive
quarters. As of January 1, 1996, Encore failed to meet this
requirement. The Series D, E, F and G shares are non-voting,
except for the right to approve actions adversely affecting the
Preferred Stock. The Company has not achieved operating income
levels set forth by the terms of the Series B and accordingly, the
holders of the Series B Preferred Stock could elect a majority of
the directors of the Company. However, Gould has agreed it would
not vote its shares of Preferred Stock or take any other action as
a holder of the Preferred Stock to elect any additional directors
of the Company due to the Company's failure to meet the operating
income and cash dividend payment requirements of the Series B
until at least December 1, 1996. It is unlikely that the Company will
meet such requirements prior to December 1, 1996. At that time Gould
could exercise its rights under the terms of the Series B.
During 1995, 500,000 shares of Series F and 550,000 shares of
Series G were issued to Gould as part of the exchange of
indebtedness totaling $105,000,000. During 1994, 1,000,000 shares
of Series E were issued to Gould as part of the exchange of
indebtedness totaling $100,000,000. Because of the related party
nature of these transactions, the difference between the carrying
amount
of the indebtedness exchanged and par value of the securities
issued and other consideration granted has been credited to
additional paid-in capital. The financial effects of these
transactions are summarized as follows (in thousands):
1995 1994
Reduction of debt $ 105,000 $ 100,000
Less:
Par value of shares issued (11) ( 10)
Accrued transaction costs (600) (700)
Reversal of accrued interest
on previous recapitalizations 5,203 -
Accrued interest on the
remaining Gould indebtedness
for the remaining term
of the agreements (7,638) (3,017)
Increase in additional
paid-in capital $ 101,954 $ 96,273
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 exchanges were less than those initially estimated and
accrued. Accordingly, during 1995 and 1994, the Company reduced
the remaining accrued liability by $400,000 and $625,000,
respectively, and increased additional paid-in capital.
A quarterly dividend on Preferred Stock for the period of October
16, 1995 through January 15, 1996 of $5,120,300 was paid in additional
shares of preferred stock as of January 15, 1996.
Impact of Foreign Ownership
In connection with the various exchanges of indebtedness for
preferred stock discussed herein and in Note M of Notes to
Consolidated Financial Statements, the United States Defense
Investigative Service 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.
Shareholders' Agreement
The Company, Kenneth G. Fisher, the Company's Chairman and Chief
Executive Officer, and Gould have agreed 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.
Stock Option Plans
The Company had two stock option plans, the 1983 Incentive Stock
Option Plan (the "ISO Plan") which expired in 1993, and the 1985
Non-Qualified Stock Option Plan (the "NQO Plan"). On January 19,
1995, the Board of Directors adopted the Company's 1995 Long Term
Performance Plan (the "Performance Plan") which was approved by
the stockholders of the Company on June 27, 1995. The Performance
Plan replaced both the ISO Plan and the NQO Plan. No further
grants under the ISO Plan or NQO Plan will be made. The
24,000,000 shares of Common Stock previously reserved for issuance
under the ISO Plan and the NQO Plan are now reserved for issuance
under the Performance Plan to officers, directors, employees and
certain consultants.
During 1993, all 88,880 outstanding options granted under the ISO
Plan were exercised at $1.13 per share.
Stock Option activity for the NQO Plan is as follows:
Shares Under Option
Shares Price
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
Fiscal 1995:
Granted 1,677,000 $0.81 to $2.00
Exercised (1,568,934) $0.63 to $2.31
Canceled (1,921,309) $0.69 to $2.31
Outstanding at December 31, 1995 8,298,729 $0.63 to $4.19
Exercise rights for options granted under the NQO Plan vest over
varying periods of up to four years and options to purchase
7,290,395 shares were exercisable at December 31, 1995. All
options granted under the NQO Plan were granted at the then
current fair market value, except as described below.
During 1995 and 1993, 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 such time as the options could be exercised and the
underlying shares sold in accordance with Company policy. The
extensions were treated as cancellations of the old options and a
grant of new options in the same amounts at the same exercise
prices. Non-cash compensation charges of $1,424,000 and $788,000,
respectively, were incurred in connection with the extension of
the expiration dates of the stock options.
Stock Option activity for the Performance Plan is as follows:
Shares Under Option
Shares Price
Fiscal 1995:
Granted 1,679,450 $1.56
Exercised -
Canceled (32,450) $1.56
Outstanding at
December 31, 1995 1,647,000 $1.56
Exercise rights for options granted under the Performance Plan
vest over varying periods of up to four years and no options were
exercisable at December 31, 1995. All options granted to date
have been at the then current fair market value.
Employee Stock Purchase Plan
Substantially all employees are eligible to participate in the
Employee Stock Purchase Plan (the "Purchase Plan"). The purchase
price per share of common stock in any offering under the Purchase
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 Purchase Plan, the Company issued 422,734
shares at a weighted average price of $1.75 in 1995, 382,999
shares at a weighted average price of $2.69 in 1994, and 477,579
shares at a weighted average price of $1.56 in 1993. The Company
has reserved 8,000,000 shares for issuance pursuant to rights
granted under the Purchase Plan.
New Accounting Pronouncement
The Company presently measures stock-based compensation except for
the Purchase Plan
as the difference between the market price of the Company's stock
and the amount to be paid for the stock at the measurement date.
In October 1995, the Financial Accounting Standards Board issued
FAS No. 123, "Accounting for Stock-Based Compensation", was issued
which introduces a fair value based method of accounting for stock-
based compensation. Although expense recognition for grants of
stock, stock options and other equity instruments to employees
based on the new fair value accounting rules is not mandatory, FAS
123 requires disclosure of proforma net income and earnings per
share under the new method for grants awarded after January 1,
1995. The new disclosure requirements are effective for the
Company's fiscal year beginning January 1, 1996.
The Company does not expect to adopt the fair value method of
recognizing compensation expense. Accordingly, FAS 123 is not
expected to have a material impact on financial position or
results of operations.
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 1995, 1994, and
1993, no single customer accounted for as much as 10% of revenues.
During 1995, 1994 and 1993 approximately 24%, 32% and 37%,
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 a joint venture in Japan, and distributors throughout the
remainder of the region. Information about the Company's
operations for 1993, 1994, and 1995 is presented below (in
thousands). Inter-geographic net sales, operating income and
assets have been eliminated to arrive at the consolidated amounts.
Net Sales to Inter-
Unrelated Geographic Total Operating Identifiable
Entities Net Sales Net Sales Income(loss) Assets
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
1994:
United States $ 42,613 $ 8,886 $ 51,499 $(55,133) $83,234
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) 99,926
Inter-Geographic - (8,886) (8,886) 49 (905)
Total $ 76,550 $ - $ 76,550 $ (50,848) $ 99,021
1995:
United States $ 24,051 $ 7,893$ 31,944 $ (78,767) $55,488
Europe 23,721 - 23,721 1,165 18,030
Other 1,556 - 1,556 69 189
Geographic Total 49,328 7,893 57,221 (77,533) 73,707
Inter-Geographic - (7,893) (7,893) (263) (1,170)
Total $ 49,328 $ - $ 49,328 $(77,796) $ 72,537
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. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are limited to cash and trade
receivables. The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses is such accounts.
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. The Company performs in-depth credit
evaluations for all new customers and requires letters of credit
if deemed necessary. Doubtful accounts are adequately reserved
when identified and bad debts realized by the Company in prior
years have not been excessive, except in relation to the
cancellation of the Amdahl Reseller Agreement discussed more fully
in Note B of Notes to Consolidated Financial Statements.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate
fair value because of the short maturity of these items. Based
upon the unique and significant financial relationship between the
Company and Gould, it is not practicable to estimate the fair
value of the Gould long term debt.
M. Subsequent Events
On April 16, 1996, Gould, as authorized by the Japan Energy
Corporation, has 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 principal terms of the Series H
are identical to the Preferred Stock except the Series H is senior
in liquidation priority to all other classes of the Company's
preferred and common stock. Upon completion of the transaction,
the Japan Energy Group's beneficial ownership interest, assuming
the full conversion of Preferred Stock holdings increased 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. On April 16, 1996, the
Company had incurred borrowings under the Credit Agreement
of $26,600,000.
Gould, as authorized by the Japan Energy Corporation,
has agreed to extend 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. Gould also agreed it would not vote its shares
of the Series B or take any other action as a holder of the Series
B to elect a majority of the directors of the Company until at
least December 31, 1996.
The accompanying unaudited Pro Forma Consolidated Balance Sheet as
of December 31, 1995 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 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
Less:
Par value of shares issued (4)
Accrued estimated transaction costs (200)
Reversal of accrued interest on
previous recapitalization 706
Accrued interest on the remaining
Gould indebtedness for the
remaining term of the agreement (708)
Increase in additional paid in capital $ 34,794
The United States Defense Investigative Service ("DIS") has not
yet reviewed the effect this exchange of indebtedness for Series H
Preferred combined with the expansion of the credit facility has
on 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 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 it will have difficulties settling its
liabilities in the normal course of business.
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10 Directors and Executive Officers of the Registrant
Information regarding directors of the Company included in the
Company's definitive Proxy Statement for the 1996 Annual Meeting
of Shareholders under the caption "Election of Directors" is
incorporated herein by reference. Information regarding
executive officers of the Company is included in Part I of this
Form 10K under the caption "Executive Officers of the Company"
and is incorporated herein by reference.
Item 11 Executive Compensation
Information regarding Executive Compensation included in the
Company's definitive Proxy Statement for the 1996 Annual Meeting
of Shareholders under the caption "Executive Compensation" is
incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of the executive
officers and directors of the Company and certain other
stockholders which is included in the Company's definitive Proxy
Statement for the 1996 Annual Meeting of Shareholders under the
captions "Principal Stockholders", "Election of Directors", and
"Executive Compensation" is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related
Transactions included in the Company's definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" is incorporated
herein by reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)1. and (a)2. Index to Financial Statements and Financial
Statement Schedules
Form 10-K Page Number
Report of independent public accountants relating to
consolidated financial statements and financial
statement schedules 20
Consolidated statements of operations for the years
ended December 31, 1995, 1994 and 1993 21
Consolidated balance sheets at December 31, 1995 and
1994 22
Consolidated statements of cash flows for the years
ended December 31, 1995, 1994 and 1993 23
Consolidated statements of shareholders' equity
(capital deficiency) for the years ended
December 31, 1995, 1994, and 1993 25
Notes to consolidated financial statements 26-41
The following consolidated financial statement schedules are
submitted herewith:
Form 10-K Page Number
Schedule II Valuation and qualifying accounts 45
The consolidated financial statement schedules should be read in
conjunction with the consolidated financial statements included
herein. All other schedules have been omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and notes thereto.
(a)3. Index to Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the signiture page are incorporated herein
by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the year ended December 31, 1995.
For purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into the
Registrant's Registration Statements on Form S-8 Nos. 33-34171
and 33-33907.
Insofar as indemnification of liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by as director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by the appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<TABLE>
<S> <C> <S> <C> <S> <C> <S>
Schedule VII
ENCORE COMPUTER CORPORATION
Valuation and qualifying accounts
(in thousands)
Balance at Balance at
Additions
---------------------------
Beginning Charged to Charged to
of costs other End of
Description Period and expenses accounts Deductions Period expenses
Year ended December 31,
1993:
Allowance for doubtful $ 2,441 $ 203 $ - $ (494) $ 2,150
accounts
Year ended December 31,
1994:
Allowance for doubtful $ 2,150 $ 2,928 $ - $ (61) $ 5,017
accounts
Year ended December 31,
1995:
Allowance for doubtful $ 5,017 $ 65 $ (2,800) $ (484) $ 1,798
accounts
</TABLE>
(1) includes amounts deemed uncollectible.
(2) Charged to restructuring.
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 as the chief accounting officer and
an officer of the registrant thereunto duly authorized.
ENCORE COMPUTER CORPORATION
(Registrant)
By:KENNETH G. FISHER By:KENNETH S. SILVERSTEIN
----------------- ----------------------
Kenneth G. Fisher Kenneth S.Silverstein
Chairman of the Board Secretary, and
Chief Executive Officer Chief Accounting Officer
April 16, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
KENNETH G. FISHER Chairman of the Board
Kenneth G. Fisher Chief Executive Officer April 16, 1996
President and Chief
ROWLAND H. THOMAS, JR, Operating Officer and
Rowland H. Thomas, Jr. Director April 16, 1996
C. DAVID FERGUSON
C. David Ferguson Director April 16, 1996
ROBERT J. FEDOR
Robert J. Fedor Director April 16, 1996
DANIEL O. ANDERSON
Daniel O. Anderson Director April 16, 1996
KENNETH S. SILVERSTEIN Secretary, and
Kenneth S. Silverstein Chief Accounting Officer April 16,1996
(a)3. Index to Exhibits.
The exhibit numbers in the following index correspond to the
numbers assigned to such exhibits in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company, as
amended (incorporated herein by reference to the
Company's Form 10-K for the year ended December
31, 1990)
3.1a Amendment to the Certificate of Incorporation
filed with the Delaware Secretary of State on
March 26, 1992 (incorporated herein by reference
to Exhibit 3.1a to the Company's Form 10-K for the
year ended December 31, 1991).
3.2 By-laws of the Company, as amended (incorporated
herein by reference to Exhibit 3.2 to the
Company's Form l0-K for the year ended December
31, 1989).
3.3 Amendment to the Certificate of Incorporation
dated September 30, 1993 increasing the number of
authorized common shares from 120,000,000 to
150,000,000 (incorporated herein by reference to
Exhibit 3.3 to the Company's Form l0-K for the
year ended December 31, 1993).
*3.4 Amendment to the Certificate of Incorporation
dated August 8, 1995 increasing the number of
authorized common shares from 150,000,000 to
200,000,000.
4.1 Articles NINTH and TENTH of the Certificate of
Incorporation of the Company, as amended, and
Certificates of Stock Designation relating,
respectively, to the Company's Series A
Convertible Participating Preferred Stock, Series
B Convertible Preferred Stock and Series C
Redeemable Preferred Stock (see Exhibit 3.1).
Incorporated herein by reference to the Company's
Form 10-K for the year ended December 31,1990.
4.2 Article 1 of the By-laws of the Company, as
amended (incorporated herein by reference to
Exhibit 3.2 to the Company's Form 10-K for the
year ended December 31,1989).
4.3 Certificate of Stock Designation relating to the
Company's Series D Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.3
to the Company's Form 10-K for the year ended
December 31,1992).
4.4 Certificate of Stock Designation relating to the
Company's Series E Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.4
to the Company's Form l0-K for the year ended
December 31, 1993).
*4.5 Certificate of Stock Designation relating to the
Company's Series F Convertible Preferred Stock
#10.1 The Company's 1983 Incentive Stock Option Plan, as
amended (incorporated herein by reference to the
Company's Form S-8/Form S-3 Registration Statement
No. 33-34171).
#10.2 The Company's 1985 Non-Qualified Stock Option
Plan, as amended (incorporated herein by reference
to the Company's Form S-8/Form S-3 Registration
Statement No. 33-34171).
#10.3 The Company's 1990 Employee Stock Purchase Plan
as amended (incorporated herein by reference to
the Company's Form S-8/Form S-3 Registration
Statement No. 33-72458).
#10.4 Form of Indemnification Agreement between the
Company and its executive officers (incorporated
herein by reference to Exhibit 10.4 to the
Company's Form 10-K for the year ended December
31, 1989).
10.5 Master Purchase Agreement dated as of February 3,
1994 between the Company and Gould Electronics
Inc. (incorporated herein by reference to Exhibit
10.7b to the Company's Form l0-K for the year
ended December 31, 1993).
10.6 Intellectual Property License Agreement dated as
of January 28, 1991, among the Company, Encore
Computer U.S., Inc. ("Encore U.S.") and Gould Inc.
(incorporated herein by reference to Exhibit 10.9
of the Company's Form 10-K for the year ended
December 31, 1990).
10.7a The Amended and Restated Revolving Loan Agreement
dated March 31, 1992 between Encore Computer
Corporation and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit
10.13c for the year ended December 31, 1991).
10.7b The Second Amended and Restated Revolving Loan
Note dated March 31, 1992 between Encore Computer
Corporation and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit
10.13d for the year ended December 31, 1991).
10.7c The Renewal Term Notes dated March 31, 1992
between Encore Computer Corporation and Gould Inc.
(incorporated herein by reference to the Company's
Form 10-K Exhibit 10.13e for the year ended
December 31, 1991).
10.7d Amendment Agreement to the Revolving Loan
Agreement among the Company and Gould Inc. and the
Term Loan Agreement among the Company and Gould
Inc. dated April 12, 1993 (incorporated herein by
reference to Exhibit 10.9d to the Company's Form
10-K for the year ended December 31, 1992).
10.7e Amended Loan Agreement and related letter
agreement dated April 11, 1994 between the Company
and Gould Electronics Inc. (incorporated herein
by reference to Exhibit 10.13g to the Company's
Form l0-K for the year ended December 31, 1993).
10.8 Amended and Restated General Security Agreement
dated as of January 28, 1991, among the Company,
Encore U.S. and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit 10.14
for the year ended December 31,1990).
10.9 Support Services Provider Agreement dated December
9, 1993 between Encore Computer Corporation and
Halifax Corporation to subcontract certain
customer service field maintenance activities to
Halifax Corporation (incorporated herein by
reference to Exhibit 10.17 to the Company's Form
l0-K for the year ended December 31, 1993).
#10.10 Amendment No. 1 to Nonqualified Stock Option
Agreement between Encore Computer Corporation and
T. Mark. Morley dated November 10, 1993
(incorporated herein by reference to Exhibit 10.18
to the Company's Form l0-K for the year ended
December 31, 1993).
#10.11 Description of the Company's Corporate Executive
Compensation Plan (incorporated herein by
reference to Exhibit 10.19 to the Company's Form
l0-K for the year ended December 31, 1993).
10.13 The Uncommitted Loan Agreement and certain
exhibits thereto dated as of December 21, 1994
between Encore Computer Corporation and Gould
Electronics Inc. (incorporated herein by reference
to Exhibit 10.13 to the Company's Form l0-K for
the year ended December 31, 1994).
10.14 The Amended and Restated Credit Agreement dated as
of March 17, 1995 between Encore Computer
Corporation and Gould Electronics
Inc. (incorporated herein by reference to Exhibit
10.14 to the Company's Form l0-K for the year
ended December 31, 1994).
10.15 Master Purchase Agreement dated as of March 17,
1995 between the Company and Gould Electronics
Inc. relating to the purchase of Series F
Convertible Preferred Stock, Cancellation of
Indebtedness and Related
Documentation. (incorporated herein by reference to
Exhibit 10.15 to the Company's Form l0-K for the
year ended December 31, 1994).
10.16 Certificate of Designations, Powers Rights and
Preferences of Series G Convertible Preferred
Stock of Encore Computer Corporation (incorporated
herein by reference to Exhibit 3.1 to the
Company's Form l0-Q for the period ended October
1, 1995).
10.17 The Second Amended and Restated Credit Agreement
dated as of August 17, 1995 between Encore
Computer Corporation and Gould Electronics. Inc
(incorporated herein by reference to Exhibit 10.1
to the Company's Form l0-Q for the period ended
October 1, 1995).
10.18 Certificate. Reference made to the Master
Purchase Agreement dated as of August 17, 1995
between the Company and Gould Electronics Inc.
(incorporated herein by reference to
Exhibit 10.2 to the Company's Form l0-Q for the
period ended October 1, 1995).
*11.0 Calculation of Earnings per Share
*22.0 Subsidiaries of the Company.
*24.1 Consent of Independent Public Accountants.
*27 Financial Data Schedule
# Management contract or compensatory plan or arrangement
* Filed herewith.
[TEXT]
ENCORE COMPUTER CORPORATION
Computation of Loss per Share Exhibit 11
(in thousands except per share data)
Primary 1995 1994 1993
----------- ------------- -------------
Net loss $ (81,354) $ (52,673) $ (69,565)
Accumulated Series B and D
Preferred Stock Dividends - - (9,185)
Series B, D and E Preferred
Stock Dividends (19,062) (13,987) -
----------- ------------- -------------
Net loss attributable to
common shareholders $ (100,416) $ (66,660) $ (78,750)
============ ============ =============
Weighted average common
shares outstanding 34,923 33,391 31,909
Series A assumed converted 7,364 7,364 7,364
----------- ------------ ------------
Weighted average shares
outstanding 42,287 40,755 39,273
Loss per common share $ (2.37) $ (1.68) $ (2.01)
============ ============= =============
Assuming Full Dilution
Net loss $ (81,354) $ (52,673) $ (69,565)
Weighted average common
shares outstanding 42,287 33,391 31,909
Series A assumed converted 7,364 7,364 7,364
Series B assumed converted 21,238 21,660 19,321
Series D assumed converted 32,509 33,143 29,564
Series E assumed converted 33,218 33,877 -
Series F assumed converted 12,393
Series G assumed converted 6,341
Exercise of options reduced by
the number of shares purchased
with proceeds 8,149 - 7,412
----------- ------------- -------------
Weighted average shares
outstanding 163,499 129,435 95,570
=========== =========== ===========
[TEXT]
Loss per common share: $ (0.50) $ (0.41) $ (0.73)
=========== ============ ===========
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Encore Computer Corporation on Forms S-8 (Registration
Statement Nos. 33-10225, 33-33907, 33-34171 and 33-72458) and on
Forms S-3 (Registration Statement Nos. 33-121, 33-33907 and
33-34171) of our reports dated February 16, 1996 except for Note
M as to which the date is April 16, 1996, on our audits of the
consolidated financial statements and financial statement
schedule of Encore Computer Corporation as of December 31, 1995
and 1994 and for the years ended December 31, 1995, 1994 and 1993,
which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 16, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
ENCORE COMPUTER CORPORATION
Exhibit27
Financial Data Schedule
(in thousands except for per share data)
for the years ended December 31,
1995 1994 1993
CASH $ 2,797 $ 2,517 $ 3,751
SECURITIES 0 0
ACCOUNTS RECEIVABLES 15,521 24,872 18,705
ALLOWANCES FOR
DOUBTFUL ACCOUNTS 1,798 5,017 2,150
INVENTORY 15,796 27,555 17,764
CURRENT ASSETS 33,669 51,790 41,117
PP&E 87,701 86,808 81,935
DEPRECIATION 51,901 45,887 44,332
TOTAL ASSETS 72,537 98,762 84,070
CURRENT LIABILITIES 28,179 31,553 37,618
BONDS 829 0 0
COMMON STOCK 361 341 327
PREFERRED MANDATORY
REDEEMABLE STOCK 0 0 0
PREFERRED STOCK 41 28 16
OTHER SHAREHOLDERS EQUITY 2,112 (22,409) (66,903)
TOTAL LIABILITY AND EQUITY 72,537 98,762 84,070
SALES 22,005 38,412 43,622
TOTAL REVENUES 49,328 76,550 93,532
COST OF GOODS SOLD 34,975 60,907 65,831
TOTAL COSTS 55,693 127,398 155,617
OTHER EXPENSES (70) (70) 780
BAD DEBT EXPENSE 2,735 2,928 203
INTEREST EXPENSE 2,786 3,235 6,246
INCOME PRETAX (80,507) (54,013) (69,111)
INCOME TAX 847 543 454
INCOME FROM CONTINUING (81,354) (54,556) (69,565)
OPERATIONS
DISCONTINUED OPERATIONS 0 0 0
EXTRAORDINARY GAIN/LOSS 0 0 0
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 0 0 0
NET INCOME (81,354) (54,556)(69,565)
EPS-PRIMARY (2.37) (1.68) (2.01)
EPS-FULLY DILUTED (0.50) (0.43) (0.73)
</TABLE>
EXHIBIT 22
Subsidiaries of Encore Computer Corporation
- ------------------------------------------------------------------------
Name Jurisdiction Ownership
- --------------------------- ------------ -----------------------
Encore Computer U.S., Inc. Delaware 100%
Encore Computer International, Delaware 100%
Inc.
Encore Computer Limited Canada 100%
Encore Computer (U.K.) Limited United 100%
Kingdom
Encore Computer Belgium S.A. Belgium 100%
Encore Computer GmbH West 100%
Germany
Encore Computer de Puerto Delaware 100%
Rico, Inc.
Encore Computer S.A. France 100%
Encore Computer (Ireland) Ireland 100%
Limited
Encore Computer Italia S.p.A. Italy 100%
Japan Encore Computer Japan 50%
Encore Computer B.V. Netherlands 100%
Encore Computer Nederlands, Netherlands 100%
B.V.
Encore Computer Espana S.A. Spain 100%
Encore Computer (Irish Ireland 50%
Partnership) 50%
Lauderdale Computer A.B. Sweden 100%
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ENCORE COMPUTER CORPORATION
ENCORE COMPUTER CORPORATION (the "Corporation"), organized
and existing under, and by virtue of, the General Corporation Law
of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That Article FOURTH of the Corporation's Certificate
of Incorporation be, and hereby is, amended to read in its
entirety as follows:
FOURTH: The total number of shares of stock which the
Corporation shall have the authority to issue is
210,000,000 shares of which 200,000,000 shares
shall be Common Stock, $.01 par value, and
10,000,000 shares shall be Preferred Stock, $.01
par value. The Preferred Stock may be divided
into, and may be issued from time to time in, one
or more series. The Board of Directors is
authorized from time to time to establish and
designate one or more series of Preferred Stock,
to fix and determine the variations in the
relative rights and preferences as between the
different series, and to fix and alter the number
of shares comprising any such series and the
designation thereof.
SECOND: That the amendment above was duly adopted in
accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by its Chairman and attested by its
Secretary this 8th day of August, 1995.
ENCORE COMPUTER CORPORATION
BY: Kenneth G. Fisher
Chairman
ATTEST:
By: Kenneth S. Silverstein
Secretary
