UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
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 I.D. NO.)
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313
(Address of Principal Executive (Zip Code)
Offices)
Telephone: (954) 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 or15(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 the 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, 1997 of Common Stock held by
non-affiliates of the registrant: $75,087,914.
The number of shares outstanding of the registrant's only class of Common
Stock as of April 12, 1997 was 37,308,306.
PART OF DOCUMENT
DOCUMENTS INCORPORATED BY REFERENCE: IN WHICH INCORPORATED
A list of all exhibits to this Form 10-K is on Page 65.
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 systems,
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 1989, Japan Energy Group and
its wholly owned subsidiaries, Gould and EFI, have
been the principal source of the Company's financing
by either directly providing or guaranteeing the
Company's loans. Each of the Company's debt
agreements with Japan Energy Group and its wholly
owned subsidiaries have contained various covenants
including maintenance of cash flow, leverage,
tangible net worth ratios, limitations on capital
expenditures, dividend payments and additional
indebtedness. Currently and at various times in the
past, the Company has been in default of certain
covenants contained in the debt agreements but
waivers of compliance with those covenants have been
obtained and, generally, the Company has been able to
successfully renegotiate favorable terms with its
creditor. To continue operating in the normal course
of business, the Company is and will remain dependent
on the continued financial support of Japan Energy
Group and its subsidiaries. Until such time as the
Company returns to a state of sustained
profitability, Encore will be unable to secure
funding from other parties and/or generate sufficient
levels of cash through operations to meet the needs
of the business.
Since the acquisition, the Company has invested
heavily in research and development activities to
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 SPTM and the Infinity R/TTM. The Company
has invested heavily in research and development of
the Infinity SPTM 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 family of
products 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 scalable system elements, 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
Memory R interconnect 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) a slower than anticipated acceptance of the
Company's new open systems technology products in the
information systems marketplace, (ii) the termination
of a reseller agreement between the Company and
Amdahl Corporation, (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. Total sales from the Company's new open
systems technology products amounted to $6,603,000
through December 31, 1996.
Approximately 22% of 1996 revenues were derived
through sales to various U.S. government agencies.
Certain of these 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 March 19, 1997, the Japan Energy Group
beneficially owned 83% of the Company's common stock
assuming the full conversion of all shares of its
preferred stock. In light of limitations on the
ability of certain U.S. government agencies to
transact 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 and exchanges of debt for Series H
and Series I Preferred Convertible Stock as discussed
in more detail in Notes J and M of Notes to
Consolidated Financial Statements, the United States
Defense Investigative Service ("DIS") has reviewed
the relationship between the Company and the Japan
Energy Group under revised government requirements
relating to foreign ownership, control and influence.
Given the current requirements in the National
Industrial Security Program Operating Manual
("NISPOM"), DIS has decided to replace the previous
method of negation of Foreign Ownership Control and
Influence, accomplished by resolution of the
Company's Board of Directors, with a more detailed
Security Control Agreement as prescribed by DIS in
the NISPOM, which is currently being drafted by
Encore's counsel.
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 position previously taken 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 mainframe and open systems storage
and real-time computing marketplaces.
Mainframe and Open Systems Storage 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) Network Attached Storage and
(iv) Open Systems Storage. 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.
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 access 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
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/TTM Family, 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. 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 market places 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.
Principal Products
Encore offers two principal families of storage and
computer systems targeted at the niches within the
storage processing and real-time computing
marketplaces of the information technology industry
discussed above. These product families are the
Infinity SPTM Storage Processors, and the Infinity
R/TTM Series. Additionally, the Company continues to
support its prior generation CONCEPT/32R real-time
computer product line.
Infinity SPTM
The Infinity SPTM Series Universal Storage Processors
with DataShareTM 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 software products such as Mainframe
DataShareTM, Open Systems DataShareTM, Backup/Restore
DataShareTM, Remote Dual Copy, Backup While Open and
others which take full advantage of the storage
processors architecture to provide data center
solutions to the entire enterprise in a seamless
fashion. 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 SPTM 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 SPTM storage subsystems are capable of
delivering storage solutions from 48 gigabytes to
multiple terabytes. Encore believes the Infinity SPTM
provides the world of increasingly heterogeneous
computing components simpler and cost effective
solutions.
Infinity Gateway TM
The Encore Infinity GatewayTM, 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 R, 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/TTM offers high performance
real-time solutions with the latest in processor
technology. The Infinity R/T is specifically
designed to incrementally migrate CONCEPT/32 legacy
applications to an open systems environment by
maintaining object code and bus compatibility.
The Infinity R/T Model 500 Modular Computing Family
is Encore's entry level PCI bus based system,
powered by Digital Equipment Corporation's AlphaR
and/or Intel Corporation's PentiumR processor. This
provides unprecedented modularity and flexibility
with tremendous price/performance leadership. The
Infinity R/T Model 400 Family of systems is
comprised of state-of-the-art departmental and
enterprise Symmetrical Multi-processing computers,
powered by Digital's Alpha micro-processors and is
based on the latest PCI bus technology. Encore's
Real-Time software and hardware enables users to
derive ultra high performance without sacrificing
the Real-Time requirements of low latency, high
determinism and fast I/O response. Both models are
compatible with Encore's new PCI Reflective Memory
subsystem that provides high-speed R/T connectivity
for up to 256 clustered nodes.
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 two
years. 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 storage system
sales has been its direct sales force, consisting of
approximately 23 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, distributors 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 a
distribution agreement with Federal Computer
Corporation as well as a business development
agreement with Jones & McClesky.
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
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
1996, 1995 and 1994, approximately 22%, 24%, and
32%, 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
Storage Product
The company builds and distributes a family of
revolutionary storage products designed to connect to
IBM Mainframe, Open Systems and Network Hosts. While
competing products are implemented as dedicated
hardware designs intended to meet a single storage
requirement, Encore's implementation is a software
approach based on standard hardware components. As a
result, the Encore product is the expression in the
high-end storage market of the following industry
trends:
-The replacement of dedicated, proprietary,
single-function electronic hardware platforms
with standard, general purpose, "commodity,"
computer configurations.
-The migration of virtually all computing
platforms to low cost, personal computer
components.
-The replacement of hardware-intensive
solutions with software-intensive ones.
-The replacement of large, stand-alone systems
with multiple, networked small systems.
To accomplish Encore's vision, the Company is
integrating the necessary elements:
-Data sharing to allow universal real-time
access to common data (one copy of data,
readable from open and proprietary systems).
The SP is a "computer," thus a generic
platform. DataShare represents one key
application; new applications like Intershare,
Communications, Storage Management, etc.
further demonstrates the inherent flexibility
of the architecture.
-Encore's current multi-node capability is a
predecessor to the ability to have hundreds of
storage processors interconnected over high
speed fiber optics. All discs across the
network of storage processors must become
available to all hosts in a real-time manner.
This requires a high-speed media (Fiber
optics), distances to multiple kilometers, and
most importantly, "indistinguishable access to
local or remotely located discs".
-Internet and Intranet capabilities. Users on
open and proprietary systems through Encore
have access via networks (e.g., Ethernet LANs,
WANs) as well as access via the Internet or
Intranet to previously unseen data. Mainframe
data can now be viewed via the Infinity SP on
to the Net.
Encore's product vision is to use highly intelligent
and interconnected storage processors to blur the
traditional boundaries between computer networks and
storage environments. Encore's systems attempt to
provide a single system view of corporate data by
making access to any device remote or local, open or
proprietary, transparent.
Real Time
Encore's Research and Development strategy is defined
around the following targets of opportunity:
-Encore's existing customer base: "Systems,
SEL, Gould" - simulation, telemetry, energy
and transportation.
-Digital Equipment Corporation (DEC) customers
who need real-time capabilities, integration
and high speed interconnectivity:
- Digital UNIX real-time enhancements
- Real-Time option modules
- VME Alpha Systems
- Deterministic SMP Alpha Systems
- High Speed Clustering
-Other opportunities in which high speed
interconnectivity of systems (extreme low
latency and greater throughput than
networking) is a critical aspect of the
application.
The Company has a long history of proprietary design
(SEL, Concept, RSX, Encore 91/93) and a large
installed base. In Real-Time/Technical computing,
the key trend of the 90s has been to utilize PC and
PC-bus technologies because of their price and
performance advantages. The traditional competition
has not reacted to this trend and has lost major
market share by continuing to do proprietary designs.
The new competition is made up of UNIX Servers and
PCUs augmented with third party offerings to provide
reasonable real-time capabilities. Encore seeing
this trend has implemented a research and development
strategy in which we utilize industry standard
technology (Pentium Pro, Alpha, UNIX, Windows NT, PC
buses, etc.). Encore's value-add is that the Company
has developed a set of real-time software, scaling
technologies, cluster interconnects, real-time
options, and third party integration to provide true
real-time capabilities while maintaining industry
price and performance curves.
Because Encore's value-adds have been developed as
layered products, which sit above industry solutions,
they are quickly ported to the diverse and ever
changing technology. Therefore, the Company's
products avoid the classic lag time associated with
adding real-time capabilities to the industry's
leading technology.
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) and Hitachi Data Systems. The primary
competitors in the Company's real-time markets are
also established companies, such as Concurrent
Computer Corporation and Silicon Graphics.
Many of Encore's competitors have greater financial,
technical, and marketing resources than Encore. In
some cases, this places the Company at a
disadvantage. While the competition is beginning to
utilize software solutions to improve functionality
in the storage marketplace, the Company considers its
level of experience and general understanding of its
computer architecture and software solutions to be
its competitive advantage.
Patents and Licenses
Encore owns a number of patents, copyrights, and
trademarks relating to its products and business.
Encore's most important patents constitute the basis
for Encore's premiere Reflective Memory technology,
which is incorporated into the Company's high-
performance, high-availability Storage Systems
products. Reflective Memory products permit the same
data to be broadcast (i.e. reflected) instantaneously
to several nodes at once, thereby extraordinarily
decreasing data transfer times. Encore continues to
develop this highly valuable and sought-after
technology and is actively engaged in a program to
protect it's patents and registered marks from
infringement. The Company is also actively pursuing
additional patents on its innovations.
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 the Santa Cruz Operation to use and
sublicense 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. 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 right 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 a very substantial
investment.
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, 1996, Encore had 694 full-time
employees engaged in the following activities:
Employees
Customer Service 131
Manufacturing 125
Research and Development/Custom Products 235
Sales and Marketing 147
General and Administrative 56
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 66 Chairman of the Board
and Chief Executive Officer
Rowland H. Thomas, Jr. 61 President and
Chief Operating Officer
Charles S. Anderson 67 Vice President,
Corporate Relations
Ziya Aral 44 Vice President,
SystemsEngineering
and Chief Technology Officer
Robert A. DiNanno 50 Vice President and General
Manager,
Global Customer Operations
Charles S. Namias 38 Vice President,
Corporate Alliances
James C. Shaw 49 Vice President,
Manufacturing Operations
George S. Teixeira 40 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. In June of 1996, Mr. DiNanno was
appointed Vice President and General Manager of
Global Customer 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 1996,
approximately 59% 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, 1996.
Owned or Approximate
Location Principal Leased Square
Use Feet
Ft. Lauderdale, FL Administrative Owned 232,000
Development/
Marketing
Melbourne, FL Manufacturing Owned 137,000
London, England Sales/Service Leased 35,000
Paris, France Sales/Servic Leased 23,000
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
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.
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,
1996.
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters The Company's common
stock is traded on the NASDAQ Small Cap Market System
under the symbol ENCC.
The high and low closing sale prices of Encore's
common stock are shown for fiscal years 1996 and 1995
in the table below:
Fiscal 1996 Fiscal 1995
High Low High Low
1st Quarter 3 7/16 1 5/8 3 9/32 1 23/32
2nd Quarter 3 13/16 2 7/16 3 1 1/16
3rd Quarter 3 1/32 1 11/16 2 19/32 1 1/16
4th Quarter 1 31/32 1 2 3/4 1 1/2
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 12, 1997, there were approximately 2,638
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) 1996(2) 1996 1995 1994 1993 1992
Net sales $47,627 $47,627 $49,328 $76,550 $93,532 $130,893
Operating loss (67,218) (67,218) (77,796) (50,848) (62,085) (22,544)
Net loss (70,732) (70,732) (81,354) (54,556) (69,565) (32,522)
Net loss per common
share (1) (2.18) (2.18) (2.37) (1.68) (2.01) (0.98)
Weighted average
shares of common stock
outstanding (1) 44,174 44,174 42,287 40,755 39,273 37,899
Working capital
(deficit) (27,479) (67,295) 5,490 20,237 3,499 14,270
Total assets 69,256 69,256 72,537 99,021 84,070 105,686
Long term debt 476 476 40,812 89,249 112,919 66,413
Shareholders' equity
(capital deficiency)5,806 (34,010) 2,514 (22,040) (66,560) 508
(1) During 1996, 1995, 1994 and 1993, preferred stock
dividends amounted to $25,413,000, $19,061,600,
$13,986,600 and $9,184,700, respectively. All
preferred stock dividends were paid in additional
shares of preferred stock.
(2) Presents the pro forma effect of an exchange of
$40,000,000 indebtedness for preferred stock between
Gould Electronics Inc. and the Company on March 19,
1997 as if such transaction had occurred on December
31, 1996.
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 R 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 1994, the Company has spent
approximately $94,000,000 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 is 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 $130,893,000 in 1992 to $41,024,000 in
1996. 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. Through December 31, 1996,
total sales of the Company's new open systems
technology products amounted to $6,603,000.
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
storage product and open system offerings to market.
The Company has acquired significant inventories,
provided product to customers on a trial basis and
continues to improve product features and
functionality. Direct sales of these products to
date have not met management's expectations as
customers express concerns over the financial
viability of the Company. The Company was
unsuccessful in negotiating an OEM agreement in 1996,
but continues to discuss possible agreements, with
several potential OEM's. There can be no assurance
that the Company's products will achieve or sustain
market acceptance or successfully compete against the
products of other larger and more financially
resourceful companies.
With the net losses incurred in the three years ended
December 31, 1996, 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, 1996, the Company and the Japan Energy Group have
also entered into a series of financing transactions
involving the cancellation of $240,000,000 of
indebtedness in exchange for the issuance of various
series of the Company's Preferred Stock. As
discussed more fully in Note M of Notes to
Consolidated Financial Statements, on March 19, 1997,
the Company and Gould agreed to cancel $40,000,000 of
indebtedness owed to Gould under their loan agreement
(the "Credit Agreement") in exchange for the issuance
to Gould of 400,000 shares of the Company's Series I
Convertible Preferred Stock ("Series I") with a
liquidation preference of $40,000,000. In addition
to the exchange of indebtedness for shares of Series
I, the Company and Gould also agreed to amend the
Credit Agreement to (i) reduce the maximum amount
which can be borrowed by the Company from $80,000,000
to $50,000,000 and (ii) provide that any borrowings
in excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to
the exchange of indebtedness for shares of Series I)
may be made only at the discretion of Gould. As of
April 12, 1997 the Company owed to Gould $45,525,494
under the Credit Agreement, plus $12,974,348 in
accrued interest. All borrowings under the Credit
Agreement, plus accrued interest, are due and payable
on May 31, 1997. In the event of default, the rate
of interest to be applied will immediately increase
by an additional 2%.
The accompanying consolidated financial statements
have been prepared assuming that the company will
continue as a going concern. Based on current
estimates of available cash flow, management does not
believe it will have sufficient cash to make the
mandatory payment on May 31, 1997, without proceeds
from the sale of assets or a refinancing or
restructuring of the Credit Agreement prior to such
date. Additionally, the Company does not have a
committed source of financing to meet expected
requirements over the next year. The Company has
retained an investment banking firm to assist in
exploring strategic alternatives which include, among
other things, a business combination, sales of
assets, strategic investment in the Company or a
refinancing of the Credit Agreement. There can be no
assurance that the Company will be successful in its
attempt to consummate one of the strategic
alternatives or a refinancing or restructuring of the
Credit Agreement. If the Company does not make the
required payment at maturity of the Credit Agreement
or is unable to obtain a committed source of
financing adequate to meet expected requirements, it
may be unable to continue its normal operations,
except to the extent permitted by the Japan Energy
Group. Substantially all of the Company's tangible
and intangible assets are pledged as collateral under
the Credit Agreement.
Comparison of Calendar 1996, 1995 and 1994.
Net sales for 1996 were $47,627,000 compared to net
sales for 1995 and 1994 of $49,328,000 and
$76,550,000, respectively. Equipment sales increased
25% in 1996 to $27,600,000 when compared to
$22,005,000 in 1995. Equipment sales in 1994 were
$38,412,000. Service revenues for 1996, 1995 and
1994 were $20,027,000, $27,323,000 and $38,138,000,
respectively.
Equipment sales as a percentage of total net sales in
1996, 1995 and 1994 were 58%, 45% and 50%,
respectively. The increase in 1996 is primarily due
to; (i) sales of the Company's Storage Products of
$6,603,000, (ii) steady sales in real-time and open
systems computers and (iii) the decline in service
sales. The decrease in 1995 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. International equipment sales increased
68% to $16,050,000 in 1996, while domestic equipment
sales decreased 7% to $11,550,000 compared to 1995.
Continued declining service revenues reflect the
effect on the service business of; (i) the Company's
prolonged decline in equipment sales, (ii) the price
competitiveness of the marketplace, (iii) the
completion of long running government programs and
subsequent deinstallation of systems and (iv) longer
warranty periods for equipment sales required to
compete in the storage marketplace. The Company
expects this trend to continue. International
service sales decreased 22% to $12,277,000 in 1996,
while domestic service sales decreased 33% to
$7,750,000 compared to 1995. The slower decline in
International service revenue is attributed to
limited competition.
International net sales increased 12% in 1996 when
compared to 1995, versus a decrease of 26% in 1995
compared to 1994. Domestic net sales decreased 20%
and 44% in 1996 and 1995, respectively, when compared
to the prior year. International sales in 1996, 1995
and 1994 were $28,327,000, $25,277,000 and 33,937,000
or 59%, 51% and 44%, respectively, of total net
sales.
During the three years ended December 31, 1996, 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 22%, 24% and 32% of net sales in 1996,
1995 and 1994, 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 1996 to $53,608,000,
from $55,963,000 in 1995 and $60,907,000 in 1994.
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 1994, combined manufacturing
and customer service headcount has been reduced by
approximately 33%, certain customer service field
operations have been closed or scaled down, and
manufacturing operations have been consolidated in
Melbourne, Florida.
In 1996 and 1995, cost of equipment sales exceeded
sales by $8,186,000 and $12,970,000 or (30%) and
(59%) of net sales, respectively, compared to a 9%
gross margin of $3,360,000 in 1994. 1996 cost of
sales included $9,932,000 (36% of equipment sales)
in additional valuation reserves on Storage Product
inventory. Gross margins were reduced in 1995 and
1994 due 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 (65% of equipment sales) and $8,960,000
(23% of equipment sales) respectively, in connection
with the termination of the Amdahl Reseller Agreement.
The decline in equipment gross margin as a percentage
of revenue in 1995 when compared to 1994 is
attributable to factory variances related to lower
production volumes and under utilization of
manufacturing capacity, as well as higher warranty
costs associated with new product introductions.
Equipment gross margin remained low in 1996 due to
the discounting of Storage Products in order to
penetrate the marketplace and establish reference
accounts. Warranty costs related to the Storage
Product were also higher than anticipated due to
engineering changes on current installations and
spare part inventory.
In 1996, gross margins on service sales were
$2,205,000 or (11%), compared to $6,605,000 (24%) and
$12,283,000 (32%) in 1995 and 1994, respectively.
For 1996, 1995 and 1994, service margins were reduced
for investments in various programs and
infrastructure necessary to support the Storage
Product line. The Company invested $5,979,000 (30%
of service sales), $3,719,000 (14% of service sales)
and $2,010,000 (5% of service sales) in support of the
Storage Product line during 1996, 1995, and 1994,
respectively.
All service sales are derived from installed real-
time products and the cost structure within the
service department is highly variable due to the
utilization of service partners. Therefore, as
revenues decline, costs decline as well. Moreover,
management continues to reduce fixed costs on an
ongoing basis. As a result, gross margin as a
percentage of revenue has increased to 41% in 1996,
from 38% and 37% for 1995 and 1994, respectively,
when adjusted for the impact of the investment in
Storage Product support programs and infrastructure.
The Company expects to achieve similar gross margins
in the future.
Research and development expenses in 1996 were
$30,260,000 compared to $33,249,000 and $30,339,000
in 1995 and 1994, respectively. However, in 1995 the
Company charged research and development $500,000 for
the write down of capitalized software projects as
discussed in Note B of the Notes to Consolidated
Financial Statements. Excluding this charge, 1996
expenses decreased $2,489,000 or 8% when compared to
1995. The decrease in research and development
expenses in 1996 is primarily related to
restructuring actions taken in the second quarter of
1995. Research and development expenses as a
percentage of net sales was 64% in 1996, 67% in 1995
and 40% in 1994. The percentage increase from 1994
was 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.
Sales, general and administrative ("SG&A") expenses
in 1996 were $30,977,000 compared to $33,683,000 and
$36,152,000 in 1995 and 1994, respectively. In 1996
and 1995, SG&A expenses decreased due to management's
actions taken to minimize headcount, close or
consolidate marginally profitable field offices and
to more effectively focus its advertising programs.
During 1995, SG&A expenses were also reduced by lower
commissions on the year's lower sales. These
reductions were partially offset by non cash
compensation charges of $589,000 and $1,424,000 in
1996 and 1995, respectively, in connection with the
extension of the expiration date of certain
individual stock option grants. As a percentage of
net sales, SG&A expenses were 65%, 68% and 47% in
1996, 1995 and 1994, respectively.
As discussed in Note F of Notes to Consolidated
Financial Statements, in the second quarter of 1995
management evaluated the Company's latest financial
projections, and concluded; (i) the termination of
the Amdahl Reseller Agreement, as discussed in
Note B, 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 R 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.
International operating income was $1,234,000 in 1995.
In 1996 international generated an operating loss of
$1,047,000 despite higher revenues, principally due to
higher cost of sales in 1996 associated with the Company's
efforts to penetrate new international storage product
markets. International operating income decreased in
1995 from 1994 by $3,002,000, due principally to lower
revenues.
Interest expense increased in 1996 to $3,520,000
primarily due to increased debt levels. Interest
expense decreased to $2,957,000 in 1995 from
$3,363,000 in 1994. Since February 4, 1994, Encore
has completed a series of refinancing agreements with
the Japan Energy Group resulting in conversions of
$240,000,000 of debt to preferred stock.
Other expense, net, was greater in 1996 than in 1995
and 1994 due principally to greater foreign exchange
losses.
Income taxes provided in 1995 and 1994 relate to
taxes payable by foreign subsidiaries (see Note H of
the Notes to Consolidated Financial Statements). The
tax credit for 1996 reflects the reversal of tax
accruals not deemed necessary as of December 31,
1996.
Liquidity and Capital Resources
Because of the continuing operating losses incurred
for the five years ended December 31, 1996, the
Company has been unable to generate cash from
operating activities. In 1996, 1995 and 1994, the
Company used cash in operating activities of
$60,744,000, $49,769,000 and $64,504,000,
respectively. As of December 31, 1996, the Company
had a capital deficiency of $34,010,000.
From 1995 to 1996, cash used in operating activities
increased by $10,975,000, reflecting the increase in
working capital of $8,600,000, primarily increased
inventory. Additionally, for 1996, the net loss, as
adjusted for non cash items, exceeded the 1995 net
loss by $2,029,000.
Cash used in 1995 operating activities decreased by
$14,735,000 from 1994 reflecting working capital
changes which resulted principally from the Amdahl
Reseller Agreement and its termination as discussed
more fully in Note B of Notes to Consolidated
Financial Statements. 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 $3,906,000 in 1995, an improvement of
$24,302,000 as compared to 1994. These improvements
were partially offset by the increase in the 1995 net
loss of $10,174,000, as adjusted by non cash items.
Expenditures for property and equipment during 1996,
1995 and 1994 were $7,433,000, $7,335,000 and
$13,089,000, respectively. Purchases of Customer
Service spare parts in support of the Storage Product
accounted for 40% of total property and equipment
spending in 1996. Expenditures for capitalized
software during 1995 and 1994 were $673,000 and
$2,467,000, respectively. As of December 31, 1996,
there were no material commitments for capital
expenditures.
Cash was provided through financing activities of
$68,707,000, $58,658,000 and $78,496,000, in 1996,
1995 and 1994, respectively. The principal source of
financing has been through various agreements
provided by the Japan Energy Group. On April 16,
1996 the Japan Energy Group continued its support as
discussed in Note G of the Notes to Consolidated
Financial Statements by; (i) accepting Preferred
Series "H" Stock in exchange for $35,000,000 of debt
and (ii) providing a $65,000,000 committed borrowing
facility. Gould has allowed the Company to borrow
additional funds in excess of the maximum limit. As
of December 31, 1996, Encore owed to Gould
$72,659,000 in principal, plus $10,791,000 in accrued
interest. On January 9, 1997 Gould and Encore agreed
to amend the credit agreement to increase the maximum
amount of loans to $80,000,000, however, any loan
exceeding $65,000,000 will be made at the discretion
of Gould.
On March 19, 1997, the Company and Gould agreed to
cancel $40,000,000 of indebtedness owed to Gould
under their loan agreement (the "Credit Agreement")
in exchange for the issuance to Gould of 400,000
shares of the Company's Series I Convertible
Preferred Stock ("Series I") with a liquidation
preference of $40,000,000. In addition to the
exchange of indebtedness for shares of Series I, the
Company and Gould also agreed to amend the Credit
Agreement to (i) reduce the maximum amount which can
be borrowed by the Company from $80,000,000 to
$50,000,000 and (ii) provide that any borrowings in
excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to
the exchange of indebtedness for shares of Series I)
may be made only at the discretion of Gould. As of
April 12, 1997 the Company owed to Gould $45,525,494
under the Credit Agreement, plus $12,974,348 in
accrued interest. All borrowings under the Credit
Agreement, plus accrued interest, are due and payable
on May 31, 1997. In the event of default, the rate
of interest to be applied will immediately increase
by an additional 2%.
The accompanying consolidated financial statements
have been prepared assuming that the company will
continue as a going concern. Based on current
estimates of available cash flow, management does not
believe it will have sufficient cash to make the
mandatory payment on May 31, 1997, without proceeds
from the sale of assets or a refinancing or
restructuring of the Credit Agreement prior to such
date. Additionally, the Company does not have a
committed source of financing to meet expected
requirements over the next year. Therefore, the Company
is unable to generate sufficient cash to support its
operations through December 31, 1997. The Company has
retained an investment banking firm to assist in
exploring strategic alternatives which include, among
other things, a business combination, sales of
assets, strategic investment in the Company or a
refinancing of the Credit Agreement. There can be no
assurance that the Company will be successful in its
attempt to consummate one of the strategic
alternatives or a refinancing or restructuring of the
Credit Agreement. If the Company does not make the
required payment at maturity of the Credit Agreement
or is unable to obtain a committed source of
financing adequate to meet expected requirements, it
may be unable to continue its normal operations,
except to the extent permitted by the Japan Energy
Group. Substantially all of the Company's tangible
and intangible assets are pledged as collateral under
the Credit Agreement.
The majority of the year end cash on hand of
$3,936,000 was at various international subsidiaries.
With minor exceptions, all cash is freely remittable
to the United States.
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.
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, 1996
and 1995, and the consolidated results of their
operations and their cash flows for each of the
three years in the period ended December 31, 1996 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.
The accompanying consolidated financial statements
have been prepared assuming that the Company will
continue as a going concern. The Company has
suffered recurring losses from operations and has a
net capital deficiency and a working capital deficit
as of December 31, 1996. As discussed in Notes G
and M to the consolidated financial statements, on
March 19, 1997, Japan Energy Corporation exchanged
$40 million of the Company's outstanding
indebtedness for preferred stock and provided the
Company with an uncommitted credit facility of up to
$50 million. The facility, plus accrued interest is
due and payable on May 31, 1997. Based on current
estimates of available cash flow, management does
not believe it will have sufficient cash to make the
payment due at maturity. Additionally, the Company
does not have a committed source of financing to
meet expected requirements over the next year.
These matters raise substantial doubt about the
Company's ability to continue as a going concern.
Management's plans in regard to these matters are
described in Note N to the consolidated financial
statements. The consolidated financial statements
do not include any adjustments that might result
from the outcome of these uncertainties.
Coopers & Lybrand L.L.P.
Miami, Florida
January 30, 1997 except for Note M as to
which the date is March 19, 1997.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Operations
(in thousands except per share data)
Year Ended
Dec 31, Dec 31, Dec 31,
1996 1995 1994
Net sales:
Equipment $27,600 $22,005 $38,412
Service 20,027 27,323 38,138
Total 47,627 49,328 76,550
Costs and expenses:
Cost of equipment sales (Note B) 35,786 34,975 35,052
Cost of service sales 17,822 20,718 25,855
Research and development 30,260 33,249 30,339
Sales, General and Admin 30,977 33,683 36,152
Termination Charge (Note B) 0 4,499 0
Total 114,845 127,124 127,398
Operating loss -67,218 -77,796 -50,848
Int exp, princ related parties -3,520 -2,957 -3,363
Interest income 196 171 128
Other (expense)/income, net -554 75 70
Loss before income taxes -71,096 -80,507 -54,013
Provision for income taxes -364 847 543
Net loss ($70,732) ($81,354) ($54,556)
Net loss per common share (Note A):
Net loss attributable to common
shareholders ($96,145)($100,416) ($68,543)
Loss per common share ($2.61) ($2.88) ($2.05)
Weighted average shares
of common stock 36,810 34,923 33,391
The accompanying notes are an integral part of the consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Proforma
Dec 31, Dec 31, Dec 31,
1996 1996 1995
(See Note M)
ASSETS
Current assets:
Cash and cash equivalents $3,936 $3,936 $3,490
Accounts receivable, less allowances of $614 in 1996 and
$1,798 in 1995 14,970 14,970 13,030
Inventories 13,896 13,896 15,796
Prepaid expenses and other current assets 1,409 1,409 1,353
Total current assets 34,211 34,211 33,669
Property and equipment, net 33,376 33,376 35,800
Capitalized software, net 0 0 829
Other assets 1,669 1,669 2,239
Total assets $69,256 $69,256 $72,537
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Curr. portion long term debt-rela parties(Note E)$32,659 $72,659 $ 0
Current portion long term debt-other (Note E) 182 182 171
Accounts payable and accrued liabilities (Note D) 28,849 28,665 28,008
Total current liabilities 61,690 101,506 28,179
Long term debt-related parties (Note E) 0 0 40,154
Long term debt-other (Note E) 476 476 658
Other liabilities 1,284 1,284 1,032
Total liabilities 63,450 103,266 70,023
Commitments and contingencies (Note I)
Shareholders' equity (Capital deficiency) (Notes E and F):
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred, issued
73,641 shares in 1996 and 1995 1 1 1
6% Cumulative Series B Convertible Preferred, issued
728,722 and 707,345 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $72,872,200
and $70,734,500 in 1996 and 1995, respectively. 7 7 7
6% Cumulative Series D Convertible Preferred, issued
1,115,074 and 1,082,362 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $111,507,400
and $108,236,200 in 1996 and 1995, respectively 11 11 11
6% Cumulative Series E Convertible Preferred, issued
1,139,782 and 1,106,343 in 1996 and 1995, with an
aggregate liquidation preference of $113,978,200 and
$110,634,300 in 1996 and 1995, respectively 11 11 11
6% Cumulative Series F Convertible Preferred, issued
533,333 and 517,687 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $53,333,300
and $51,768,700 in 1996 and 1995, respectively. 5 5 5
6% Cumulative Series G Convertible Preferred, issued
572,289 and 555,500 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $57,228,900
and $55,550,000 in 1996 and 1995, respectively. 6 6 6
6% Cumulative Series H Convertible Preferred, issued
350,000 in 1996 with an aggregate liquidation preference
of $35,000,000. 4 4 0
6% Cumulative Series I Convertible Preferred, issued
400,000 in 1996 with an aggregate liquidation preference
of $40,000,000. 4 0 0
Common stock, $.01 par value; authorized 200,000,000 shares;
issued 37,270,457 and 36,067,792 in 1996 and 1995,
respectively. 373 373 361
Additional paid-in capital 486,880 447,068 412,876
Accumulated deficit -481,496 -481,496 -410,764
Total shareholders' equity (Capital deficiency) 5,806 -34,010 2,514
Total liab and sharehldrs' equity (Cap'l Defic.)$69,256 $69,256 $72,537
The accompanying notes are an integral part of the consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Year Ended
Dec 31, Dec 31, Dec 31,
1996 1995 1994
Cash flows from operating activities:
Net loss ($70,732) ($81,354) ($54,556)
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 10,747 11,750 10,850
Non cash compensation (Note J) 589 1,424 0
Inventory obsolescence and writedown to lower of cost
or market 11,013 12,367 -30
Equity in loss of
joint venture 253 773 286
Bad debt provision (credit) -550 2,735 2,928
Restructuring charges 0 4,499 0
Foreign exchange loss (gain) 412 -134 -93
Loss (gain) on disposal of property
and equipment 138 1,839 -1
Net changes in operating assets and liabilities:
Accounts receivable -1,750 4,514 -5,942
Inventories -8,888 -608 -9,765
Prepaid expenses and other current assets -89 375 1,217
Other assets 36 381 -257
Accounts payable and accrued liabilities -1,922 -8,330 -9,048
Other liabilities -1 0 -93
Net cash used in operating activities -60,744 -49,769 -64,504
Cash flows from investing activities:
Additions to property and equipment -7,433 -7,335 -13,089
Proceeds from sale of property and equipment 114 14 220
Capitalization of software costs 0 -673 -2,467
Net cash used in investing activities -7,319 -7,994 -15,336
Cash flows from financing activities:
Net borrowings under revolving loan agreements 67,505 56,733 76,497
Principal payments of long term debt -171 -194 -169
Dividends paid on Preferred Stock -2 -1 -2
Issuance of Common Stock 1,375 2,120 2,170
Net cash provided by financing activities 68,707 58,658 78,496
Effect of exchange rate changes
on cash -198 78 110
Increase (decrease) in cash and cash equivalents 446 973 -1,234
Cash and cash equivalents, beginning 3,490 2,517 3,751
Cash and cash equivalents, ending $3,936 $3,490 $2,517
The accompanying notes are an integral part of the consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
1996 1995 1994
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for interest $150 $1,354 $2,162
Cash paid during the period for income taxes 631 1,273 0
Non-cash investing and financing activity:
Indebtedness exchanged for preferred stock $35,000 $105,000 $100,000
Accruals originally established for transaction
costs related to Gould capital transactions credited to
additional paid-in capital $0 $400 $625
The accompanying notes are an integral part of the consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Consolidated Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D
Par Par Par
Shares Val Shares Val Shares Val
Bal Dec 31, 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 avg
price of $2.69 per share
Issuance of Series E Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 0 0 74,828 1 114,504 1
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 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 an avg price of
$1.75 per share
Issuance of Series F and G Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 40,892 0 62,575 1
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 31, 1995 73,641$ 1 707,345 $ 7 1,082,362$ 11
Common stock options
exercised, $.69 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg price of
$1.52 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 21,377 0 32,712 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Net loss
Bal Dec 31, 1996 73,641$ 1 728,722 $ 7 1,115,074$ 11
Preferred Stock
Series E Series F Series G Series H
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Bal Dec 31, 1993 0 $0 0 $0 0 $0 0 $0
Common stock options
exercised, $.63 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg
price of $2.69 per share
Issuance of Series E
Convertible Preferred
Stock (Note E) 1,000,000 10 0 0 0 0 0 0
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 42,381 0 0 0 0 0 0 0
Net loss
Bal Dec 31, 1994 1,042,381 $10 0 $0 0 $0 0 $0
Common stock options
exercised, $.63 to $2.31
per share
Shares issued through employee
stock purchase plan, at a price of
$1.75 per share
Issuance of Series F and G
Convertible Preferred
Stock (Note E) 0 0 500,000 5 550,000 6
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 63,962 1 17,687 0 5,500 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 31, 1995 1,106,343$ 11 517,687 $ 5 555,500$ 6
Common stock options
exercised, $.69 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg price of
$1.52 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 33,439 0 15,646 0 16,789 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Bal Dec 31, 1996 1,139,782 $11 533,333 $5 572,289 $6 350,000 $4
Common Stock Shrhldrs'
Addt'l Eq
Par Paid-in Accum (Capital
Shares Val Capital Deficit Def)
Bal Dec 31, 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 0 1,141
Shares issued through employee stock
purchase plan, at an avg price of $2.69
per share 382,999 4 1,025 0 1,029
Issuance of Series E
Convertible Preferred
Stock (Note E) 0 0 96,273 0 96,283
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 0 0 -4 0 -2
Adjustment of estimated transaction
costs relating
to Gould 0 0 625 0 625
Net loss 0 0 0 -54,556 -54,556
Bal Dec 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 0 1,379
Shares issued through employee stock
purchase plan, at an avg price of $1.75
per share 422,734 4 737 0 741
Issuance of Series F and G
Convertible Preferred
Stock (Note E) 0 0 101,954 0 101,965
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 -2 0 0
Cash paid in lieu of
fract shs 0 0 -1 0 -1
Extension of expiration date on outstanding
grant of commom
stock options 0 0 1,424 0 1,424
Adjustment of estimated transaction
costs relating to Gould capital
transactions 0 0 400 0 400
Net loss 0 0 0 -81,354 -81,354
Bal Dec 31, 1995 36,067,792 $361 $412,876 $-410,764 $2,514
Common stock options
exercised, $.69 to $2.00
per share 808,011 8 767 0 775
Shares issued through employee stock
purchase plan, at an avg price of $1.52
per share 394,654 4 596 0 600
Issuance of Series H
Convertible Preferred
Stock (Note E) 0 0 32,242 0 32,246
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 -1 0 -1
Cash paid in lieu of
fract shs 0 0 -1 0 -1
Extension of expiration date on outstanding
grant of commom
stock options 0 0 589 0 589
Net loss 0 0 0 -70,732 -70,732
Bal Dec 31, 1996 37,270,457 $373 $447,068 $-481,496 $-34,010
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.
Basis of Presentation
The accompanying consolidated financial statements
have been prepared assuming that the Company will
continue as a going concern. As discussed in Note N
of the Notes to Consolidated Financial Statements,
the Company has borrowings under a $50,000,000
facility which matures May 31, 1997. Additionally,
the Company does not have a committed source of
financing to meet expected requirements over the next
year. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
The consolidated financial statements do not include
any adjustments that might result from the outcome of
these uncertainties.
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. With respect to the
Company's storage processor product line, during the
product introductory period, revenue will be
recognized upon customer acceptance. The Company
expects acceptance to occur within thirty days of
shipment. This practice will be reviewed in 1997 and,
if appropriate, the Company will revert to the
established recognition policy. 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 was 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 the Company's analysis of the fair
value of property and equipment, no adjustment is
required in 1996.
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.
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option and
stock purchase plans. Accordingly, no compensation
cost has been recognized for these plans with the
exception of extension of the expiration date of
certain individual stock option grants. Pro forma
disclosure of the fair value impact on earnings and
earnings per share as required in FAS 123, "Accounting
for Stock-Based Compensation" is presented in Note J
of the Notes to Consolidated Financial Statements.
Capitalized Software
Through June 1995, the Company capitalized certain
internal costs associated with software development
after the project reached technological feasibility.
Such costs as well as capitalized costs for purchased
software, were 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 were considered
research and development costs and were expensed as
incurred. During June 1995, as discussed in Note B of
the Notes to Consolidated Financial Statements, the
Company took a charge of $500,000 to research and
development to write down capitalized software
projects in process. Since that time, all software
development costs have been 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. All 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 $25,413,000,
$19,061,600 and $13,986,600 for 1996, 1995 and 1994,
respectively. Based on the capital deficiency at
December 31, 1996, the Company has accumulated
preferred stock dividends amounting to $13,417,000.
All preferred stock dividends other than those
accumulated as of December 31, 1996, have been paid in
additional shares of the appropriate class of
preferred stock.
In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, Earnings Per Share (EPS)
("SFAS No. 128"). SFAS No. 128 specifies new
standards designed to improve the EPS information
provided in financial statements by simplifying the
existing computational guidelines, revising the
disclosure requirements, and increasing the
comparability of EPS data on an international basis.
Some of the changes made to simplify the EPS
computations include; (a) eliminating the presentation
of primary EPS and replacing it with basic EPS, with
the principal difference being that common stock
equivalents are not considered in computing basic EPS,
(b) eliminating the modified treasury stock method and
the three percent materiality provision, and (c)
revising the contingent share provisions and the
supplemental EPS data requirements. SFAS 128 also
makes a number of changes to existing disclosure
requirements. SFAS 128 is effective for financial
statements issued for periods ending after December
15, 1997, including interim periods. The Company had
not yet determined the impact of the implementation of
SFAS 128.
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. These
estimates are based upon historical data for mature products
and engineering estimates for new products. Actual warranty
costs are reviewed on a quarterly basis and subsequent
estimates adjusted appropriately.
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.
During the second and third quarters of 1994 the Company
delivered products to Amdahl under the terms of the Amdahl
Agreement which Encore believes conformed fully with the
agreement. However, as of December 31, 1994 Amdahl had
not paid for the products received.
The Company had continuing discussions with Amdahl requesting
payment of all past due invoices and the resumption of
deliveries under the terms of the Amdahl Agreement. In
response to a February 1995 letter sent by the Company to
Amdahl notifying Amdahl of its intent to terminate the
Amdahl Agreement if past due invoices were not paid, Amdahl
filed suit in the Delaware Chancery Court on March 29, 1995
seeking to prevent Encore from terminating the agreement.
On March 30, 1995, Encore and Amdahl agreed to a "Stand-Still"
Agreement which, in effect, preserved the status quo to allow
the companies time to more thoroughly discuss the contractual
issues that existed. The "Stand-Still" Agreement ran until
April 14, 1995.
Because of the uncertainties surrounding the outcome of the
discussions between the companies, management and its
independent auditors considered it prudent to establish
certain reserves at December 31, 1994. Reserves were
established at December 31, 1994 by charging cost of goods
sold $8,960,000, including (i) an allowance of $3,300,000
related to Storage Product systems sales, against past due
Amdahl trade receivables of $6,100,000, and (ii) an adjustment
of $5,600,000, after consideration of estimated salvage value,
against the $22,300,000 carrying value of Infinity SP
inventory.
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 was extended to allow
sufficient time to document the agreement. However, the
companies were unable to reach a final agreement. On June 8,
1995, Encore announced that the Reseller Agreement between
Encore and Amdahl for the sale of Encore's storage products
by Amdahl 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 fell well short of
expectations and all elements of the Company's results
of operations were adversely affected. As a result of
these events, during 1995, the Company charged
operations $19,241,000, consisting of:(i) a charge
to cost of sales of $11,442,000 against $24,895,000 of
Storage Product inventory to reduce carrying amounts to
estimated net realizable value, (ii) a charge to cost of
sales of $2,800,000 for Amdahl accounts receivable,
which were deemed uncollectible in light of the termination
of the Amdahl Agreement, (iii) a charge to research and
development of $500,000 to write down capitalized
software projects in process relating to the Storage Product
business, and (iv) a charge to termination costs of
$4,499,000. The termination charge related
to; (i) the recognition of the permanent impairment in
value of $2,406,000 of certain long-lived assets,
including capitalized software relating to the
Company's UNIX based product line and property and
equipment used in support of the Amdahl Reseller
Agreement, (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 Company's estimate of asset impairments for fiscal
1994 and 1995 were based on the status of the Amdahl
negotiations at the applicable reporting dates.
C. Inventories
Inventories consist of the following (in thousands):
December December
31, 31,
1996 1995
Purchased parts $ 9,357 $ 9,161
Work in process 306 4,570
Finished goods 3,981 1,799
Loaned computer equipment and
consignment inventory 252 266
$ 13,896 $ 15,796
During the fourth quarter of 1996, the Company
provided an additional reserve of $7,348,000 in light
of the continued slow market acceptance of the
Company's storage products. Storage product
inventory, amounted to $9,169,000 and $11,139,000 at
December 31, 1996 and 1995, respectively. The Company
is expanding its programs to market the Company's
storage products through various direct, distributor
and OEM channels. 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 December
31, 31,
1996 1995
Land $ 5,100 $ 5,100
Buildings 15,238 15,243
Equipment 36,005 44,349
Customer service inventory 16,282 13,985
Furniture and fixtures 2,539 2,900
Leasehold improvements 1,298 1,309
Loaned equipment 4,815 4,815
81,277 87,701
Accumulated depreciation
and amortization (47,901) (51,901)
$ 33,376 $ 35,800
Depreciation expense in 1996, 1995 and 1994 amounted
to $9,380,000, $9,260,000 and $8,619,000, respectively.
E. Capitalized Software
Capitalized software consists of the following (in
thousands):
December December
31, 31,
1996 1995
Capitalized software $ - $ 3,708
Accumulated amortization - (2,879)
$ - $ 829
Software costs capitalized in 1995 and 1994 amounted
to $673,000 and $2,467,000, respectively.
Amortization of capitalized software costs charged to
expense in 1996, 1995 and 1994 amounted to $1,367,000,
$2,490,000 and $2,226,000, respectively. During 1995,
$1,625,000 was charged to termination charges 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 December
31, 31,
1996 1995
Accounts payable $ 4,976 $ 7,339
Accrued salaries and benefits 4,034 4,261
Accrued termination costs 362 1,566
Accrued interest-related parties 11,614 5,921
Accrued taxes 2,760 4,045
Deferred income, principally
maintenance contracts 879 827
Other accrued expenses 4,040 4,049
$ 28,665 $ 28,008
Accrued interest of $10,791,000 and $5,215,000 was
payable to Gould at December 31, 1996 and 1995,
respectively. The balance of accrued interest to
related parties is being amortized over the term of
the credit agreement.
G. Debt
Debt consists of the following (in thousands):
(See Note
M)
Pro forma
December December December
31, 31, 31,
1996 1996 1995
(Unaudited)
Debt to unrelated parties:
Mortgages payable $ 658 $ 658 $ 829
Current portion of debt (182) (182) (171)
Total long term debt to
unrelated parties $ 476 $ 476 $ 658
Debt to related parties:
Credit Agreement with Gould
Electronics Inc. $ 32,659 $ 72,659 $ 40,154
Current portion of debt (32,659) (72,659) -
Total long term debt to
related parties $ - $ - $ 40,154
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 Japan Energy Group is a related party
due to the significant financial interests of Gould
and EFI in the Company. 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. Assuming full conversion
of preferred stock holdings as of December 31, 1996,
the Japan Energy Group beneficially owns 82% of the
Company's common stock.
During 1995, Gould canceled $105,000,000 of
indebtedness and on April 16, 1996, Gould as
authorized by Japan Energy Corporation canceled
$35,000,000 of indebtedness pursuant to a Credit
Agreement ("Credit Agreement") which was scheduled to
mature on that date, in exchange for 350,000 shares of
the Company's Series H Convertible Preferred Stock
("Series H"). In addition to the exchange of
indebtedness for Series H, Gould amended the Credit
Agreement in order to provide the Company with a
committed borrowing facility of $65,000,000. Gould
also has allowed the Company to borrow additional
funds in excess of the maximum limit. The credit
facility bears interest at the prime rate plus 2%
(10.25% at December 31, 1996). As of December 31,
1996, Encore owed to Gould $72,659,000 in principal,
plus $10,791,000 in accrued interest. On January 9,
1997 Gould and Encore agreed to amend the credit
agreement to increase the maximum amount of loans to
$80,000,000, however, any loan exceeding $65,000,000
will be made at the discretion of Gould. Borrowings
are collateralized by substantially all of the
Company's tangible and intangible assets and the
agreement contains various covenants including
maintenance of cash flow, leverage and tangible net
worth ratios and limitations on capital expenditures,
dividend payments and additional indebtedness. Gould
has waived compliance with these financial covenants
in the agreement until January 1, 1997.
As discussed more fully in Note M of Notes to
Consolidated Financial Statements, on March 19, 1997,
the Company and Gould agreed to cancel $40,000,000 of
indebtedness owed to Gould under their loan agreement
(the "Credit Agreement") in exchange for the issuance
to Gould of 400,000 shares of the Company's Series I
Convertible Preferred Stock ("Series I") with a
liquidation preference of $40,000,000. In addition to
the exchange of indebtedness for shares of Series I,
the Company and Gould also agreed to amend the Credit
Agreement to (i) reduce the maximum amount which can
be borrowed by the Company from $80,000,000 to
$50,000,000, and (ii) provide that any borrowings in
excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to
the exchange of indebtedness for shares of Series I)
may be made only at the discretion of Gould. As of
April 12, 1997 the Company owed to Gould $45,525,494
under the Credit Agreement, plus $12,974,348 in
accrued interest. All borrowings under the Credit
Agreement, plus accrued interest, are due and payable
on May 31, 1997. In the event of default, the rate of
interest to be applied will immediately increase by an
additional 2%.
H. Income Taxes
The Company utilizes the liability method of
accounting for deferred income taxes and has recorded
a credit of $364,000 in 1996 due to overestimated tax
accruals in prior years, and a provision of $847,000
and $543,000 for 1995 and 1994, 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, 1996, these
temporary differences were approximately $6,000,000.
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, 1996 and 1995 were
as follows (in thousands):
December December
31, 31,
1996 1995
Net operating losses $ 150,195 $ 126,618
Research and experimental credits 1,750 1,750
Capital losses 4,954 4,396
Allowance for doubtful accounts 172 452
Inventory reserves 9,023 8,113
Accrued vacation 560 600
Various reserves/other 4,279 3,405
Accrued termination 7 102
170,940 145,436
Valuation allowance (168,739) (143,808)
2,201 1,628
Deferred tax liabilities:
Depreciation (1,863) (770)
Capitalized software (338) (858)
Net $ - $ -
For income tax purposes the Company had a change in
ownership, as defined by Internal Revenue Code Section
382, in connection with the Gould debt exchange on
January 28, 1991. The change in ownership resulted in
an annual limitation of approximately $2,000,000 on
the amount of net operating losses incurred prior to
January 28, 1991 that can be utilized to offset the
Company's future taxable income.
At December 31, 1996, the Company has available
approximately $85,000,000 of pre change net operating
losses of which only $30,000,000 will be 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 $330,000,000.
These net operating losses and tax credit
carryforwards expire in the years 1998 through 2012.
The Company also has a capital loss carryforward of
$12,937,000 related to the 1992 refinancing, which
expires in 1997, as well as, a $100,000 capital loss
carryforward stemming from the sale of an interest in
a foreign investment during 1995, which expires in
2000. 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, 1996, the U.S. Federal Income Tax
Returns for 1992 through 1994 were in the process of
examination by the Internal Revenue Service, which the
Company believes will propose certain adjustments.
The Company believes that the tax returns are
substantially correct as filed and intends to
vigorously contest any proposed adjustments.
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 $3,003,000, $3,187,000 and
$3,594,000 for 1996, 1995, and 1994, respectively.
Approximate future minimum rental payments under
operating leases for the next five years are as
follows (in thousands):
Year
1997 $ 2,756
1998 1,623
1999 1,312
2000 1,215
2001 817
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
$1,285,000 has been accrued in recognition of losses
reported through December 31, 1996.
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 right to use
the Encore intellectual property. The Company
maintains the right to terminate the Gould license if
all Gould borrowings are repaid and the commitments
under any Gould 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
Based upon the Company's anticipated needs to issue
additional shares of Common Stock, "pay-in-kind"
preferred stock dividends and the issuance of Series I
Preferred Convertible Stock (as discussed more fully
in Note M of Notes to Consolidated Financial
Statements), as well as common stock reserves
established for the Company's Stock Option and
Purchase plans, the Company will attempt to obtain
stockholder approval to amend Encore's Certificate of
Incorporation to increase the number of shares of
common stock it is authorized to issue to 300,000,000
shares.
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 G and H (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 G and H is convertible, at the holder's
option, into the Company's common stock at $3.25 per
share only; (a) if the shareholder is a United States
citizen or a corporation or other entity owned in the
majority by United States citizens, or (b) in
connection with an underwritten public offering. The
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. Series B Preferred Stock is redeemable by
the Company at any time for cash equal to the
liquidation preference plus accumulated dividends.
Series D,E,F,G and H are not redeemable. 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, 1996, the number of common shares
reserved for this purpose amounts to 149,353,415.
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, 1997, Encore
failed to meet this requirement. The Series D, E, F G
and H 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 31, 1996. The Company has not
met these requirements as of December 31, 1996,
therefore, Gould could exercise its rights under the
terms of the Series B.
During 1996, 350,000 shares of Series H were issued to
Gould as part of the exchange of indebtedness totaling
$35,000,000. 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. Because of the related party nature of
these transactions, 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. The financial effects of these
transactions are summarized as follows (in thousands):
December December
31, 31,
1996 1995
Reduction of debt $ 35,000 $ 105,000
Less:
Par value of shares issued (4) (11)
Accrued transaction costs (200) (600)
Reversal of accrued interest on
previous recapitalizations 111 5,203
Accrued interest on remaining Gould
indebtedness for the remaining term
of the agreements (2,665) (7,638)
Increase in additional
paid-in capital $ 32,242 $ 101,954
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 the Company reduced the
remaining accrued liability by $400,000 and increased
additional paid-in capital.
A quarterly dividend on Preferred Stock for the period
of October 16, 1996 through January 15, 1997 of
$6,859,600 was accumulated as of January 15, 1997.
Impact of Foreign Ownership
In connection with the various exchanges of
indebtedness for preferred stock discussed herein and
in Note M of the Notes to Consolidated Financial
Statements, the United States Defense Investigative
Service ("DIS") has reviewed the relationship between
the Company and the Japan Energy Group under revised
government requirements relating to foreign ownership,
control and influence. Given the current requirements
in the National Industrial Security Program Operating
Manual ("NISPOM"), DIS has decided to replace the
previous method of negation of Foreign Ownership
Control and Influence, accomplished by Board
Resolution, with a more detailed Security Control
Agreement as prescribed by DIS in the NISPOM, which is
currently being drafted by Encore's counsel.
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 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 Compensation Plans
At December 31, 1996, the Company had three fixed
stock option plans, the 1983 Incentive Stock Option
Plan (the "ISO Plan") which expired in 1993, the 1985
Non-Qualified Stock Option Plan (the "NQO Plan") and
the 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 have
been 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. The Company applies APB
Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed
stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock based
compensation plans been determined based on the fair
value at the grant dates for awards under those plans
consistent with the method of FASB Statement 123, the
Company's net loss and loss per share would have been
reduced to the pro forma amounts indicated below:
1996 1995
Net Loss As reported ($70,732) ($81,354)
Pro forma ($71,641) ($81,942)
Loss per share As reported ($2.18) ($2.37)
Pro forma ($2.20) ($2.39)
The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-
pricing model with the following assumptions for 1995
and 1996: risk-free interest rate of 6 percent;
dividend yield of 0 percent; expected life of 4 years;
and volatility of 104.9 percent.
During 1996 and 1995, 1,119,000 and 1,652,000 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 $589,000 and $1,424,000, respectively, were
incurred in connection with the extension of the
expiration dates of the stock options.
A summary of the status of the Company's fixed stock
option plans as of December 31, 1996, 1995 and 1994,
and changes during the years ending on those dates is
presented below:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
Outstanding at beginning
of year 9,946 $1.50 10,112 $1.44 10,026 $1.09
Granted
Price = Fair Value 666 $2.83 1,690 $1.58 1,331 $3.74
Price > Fair Value - $0.00 15 $2.00 - -
Exercised (808) $0.96 (1,569) $0.88 (966) $1.18
Forfeited (222) $2.47 (302) $2.97 (279) $1.02
Outstanding at end
of year 9,582 $1.62 9,946 $1.50 10,112 $1.44
Options exercisable
at year end 7,445 7,290 7,311
Weighted-average fair value of
options granted during
the year $2.09 $1.17 $1.07
The following table summarizes information about fixed
stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Excercisable Exercise
Exercise as of Life Price as of Price
Prices 12/31/96 12/31/96
$0.62- 713,149 2.19 $0.7525 713,149 $0.7525
$0.81
$0.94- 4,395,791 2.73 $0.9375 4,395,791 $0.9375
$0.94
$1.50- 2,606,175 6.52 $1.7197 1,560,889 $1.8193
$2.00
$2.38- 1,867,075 8.07 $3.4075 774,773 $3.6824
$4.19
$.062- 9,582,190 4.76 $1.6177 7,444,602 $1.3903
$4.19
Employee Stock Purchase Plan
Under the 1991 Employee Stock Purchase Plan (the
"Purchase Plan"), the Company is authorized to issue
up to 8,000,000 shares of common stock to its full-
time employees. As of December 31, 1996, 4,271,669
shares have been purchased. Under the terms of the
Purchase Plan, employees can choose each year to have
up to 10 percent of their annual base earnings
withheld to purchase the Company's common stock. 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. The percentage of
employees participating in the plan were 39% and 29%
in 1995 and 1996, respectively. Under the Purchase
Plan, the Company issued 394,654 shares at a weighted
average price of $1.52 in 1996, 422,734 shares at a
weighted average price of $1.75 in 1995, and 382,999
shares at a weighted average price of $2.69 in 1994.
Pro forma compensation cost is recognized for the fair
value of the employees' purchase rights, which was
estimated using the Black-Scholes model with the
following assumptions for 1995 and 1996: dividend
yield of 0 percent; expected life of six months;
expected volatility of 4.9% ; and risk-free interest
rate of 5.2%. For 1996 and 1995, the Pro forma
compensation costs under the Purchase Plan were
$270,000 and $337,000, respectively.
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 1996, 1995, and
1994, no single customer accounted for as much as 10%
of revenues. During 1996, 1995 and 1994 approximately
22%, 24% and 32%, 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 1994, 1995, and 1996 is presented below (in
thousands). Inter-geographic net sales, operating
income and assets have been eliminated to arrive at
the consolidated amounts.
Net Sales Inter- Operating
to Unrelated Geographic Total Income Identifiable
Entities Net Sales Net Sales (Loss) Assets
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
1996:
United States $ 19,300 $12,026 $ 31,326 $ (65,502) $ 46,734
Europe 26,616 - 26,616 (968) 24,258
Other 1,711 - 1,711 (79) 103
Geographic Total 47,627 12,026 59,653 (66,549) 71,095
Inter-Geographic - (12,026) (12,026) (669) (1,839)
Total $ 47,627 $ - $ 47,627 $ (67,218) $ 69,256
Inter-geographic net sales are recorded principally at
60% of list price; however, inter-geographic net sales
of the Company's storage processor product line are
recorded at 85% of end selling 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 in 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
As of March 19, 1997 (the "Closing Date"), the Company
and Gould consummated the transactions described
below:
Exchange of Indebtedness for Preferred Stock
On the Closing Date, Gould agreed to cancel
$40,000,000 of indebtedness owed to it by the Company
for 400,000 newly-issued shares of Series I
Convertible Preferred Stock ("Series I"). The
canceled debt had represented prior to the Closing
Date, a portion of the indebtedness owed by the
company to Gould under the Credit Agreement.
The principal terms of the Series I are as follows:
(a) holders of such shares are entitled to receive,
when, as and if declared by the Company's board of
directors, an annual dividend per share equal to
$6.00; provided, however, that if the number of
authorized shares of common stock of Company is not
increased to at least 300,000,000 on or prior to July
15, 1997, then such dividend per share is increased to
$10; and, further provided, that if the number of
shares of authorized common stock of the Company is
increased to at least 300,000,000 at any time after
July 15, 1997, then such dividend per share is
decreased from $10 to $6;
(b) dividends on such shares are payable in cash;
provided, however, under certain specified
circumstances such dividends may be paid in additional
shares of Series I Stock;
(c) such shares are entitled to a liquidation
preference of $100 per share plus an amount equal to
accrued and unpaid dividends on such share, which
liquidation preference is senior in priority to the
Company's common stock and to all other shares of
Preferred Stock currently outstanding;
(d) subject to certain specified restrictions, such
shares are convertible, at the holder's option, at any
time, into that number of shares of the Company's
common stock equal to (i) the liquidation preference
divided by $3.25, which amount is subject to
adjustment under certain specified circumstances;
(e) such shares are convertible, at the Company's
option, in accordance with the conversion methodology
summarized in paragraph (d) above, if (i) the last
sale price of the Company's common stock exceeded
$3.90 for twenty consecutive trading days and (ii) a
buyer is contractually committed to purchase (x) for
at least $3.90 per share, at least 50% of the shares
of common stock into which the outstanding Series I
are then convertible or (y) for at least $3.50 per
share, at least 75% of the shares of common stock into
which the outstanding shares of Series I are then
convertible;
(f) such shares are non-voting shares except as to
matters that would adversely affect the Series I Stock
and except as to any other matters which, pursuant to
applicable law, holders of such shares may be entitled
to vote; and
(g) to the extent that there are not a sufficient
number of authorized shares of the Company's common
stock to allow for a conversion of Series I into
shares of common stock as described above (after
taking into account, among other things, (x) the
number of options, warrants and other similar rights
outstanding and (y) 135% of the maximum number of
shares of common stock the Company may be required to
issue on conversion of all the shares of each series
of preferred stock then outstanding), then, to that
extent, the Series I is convertible into shares of
Series J Convertible Participating Preferred Stock of
the Company (the "Series J") at the rate of one share
of Series J for each 100 shares of common stock.
The principal terms of the Series J are as follows:
(a) holders of such shares are entitled to receive a
dividend per share equal to 100 times the dividend
that is paid by the Company with regard to a share of
common stock of the Company;
(b) such shares are entitled to a liquidation
preference of $1 per share plus an amount equal to
accrued and unpaid dividends on such share, which
liquidation preference is senior in priority to the
Company's common stock, and, after the holders of
common stock have received $0.01 per share, such
shares of Series I are further entitled to receive an
amount equal to 100 times the amount per shares in
excess of that $0.01 received by the holders of the
common stock;
(c) subject to certain specified restrictions, such
shares are convertible, at the holder's option, at any
time, in that number of shares of the Company's common
stock equal to (i) 100 shares of common stock, which
amount is subject to adjustment under certain
specified circumstances;
(d) such shares are voting shares and holders thereof
shall be entitled to vote together with the holders of
common stock, voting as a single class, on all matters
presented for a vote of the holders of common stock,
which each share of Series J being entitled to 100
times the number of votes to which a share of common
stock is entitled; and
(e) the Series J (i) rank prior to the shares of
common stock to the extent specifically provided in
the Certificate of Designations, Powers, Rights and
Preferences of the Series J, and in all other
respects, rank on parity with the common stock, (ii)
are on parity with the shares of Series A Convertible
Participating Preferred Stock of the Company and (iii)
are, and will be, junior to the shares of all other
series of preferred stock of the Company, other than
series which are expressly designated as ranking on a
parity with, or being junior to, the Series J.
Prior to the transaction, Japan Energy Corporation,
and its wholly-owned subsidiaries including Gould (the
"Japan Energy Group") beneficially owned, on a fully-
diluted basis, 81.6% of the Company's outstanding
common stock. Upon completion of this transaction,
Japan Energy Group's beneficial ownership, on a fully
converted basis, increased to 82.8%.
The Credit Agreement
As of the Closing Date, the Company had borrowed
$81,915,869 under the Credit Agreement. In conjunction
with the exchange of the canceled debt for Series I,
the Second Amendment to the Credit Agreement was
executed between Encore and Gould which (i) reduced
the maximum amount which can be borrowed by the
Company from $80,000,000 to $50,000,000 and (ii)
provides that any borrowings in excess of $41,915,869
(the principal amount outstanding on March 19, 1997
after giving effect to the exchange of indebtedness
for shares of Series I) may be made only at the
discretion of Gould. All borrowings under the Credit
Agreement, plus accrued interest, are due and payable
on May 31, 1997.
Borrowings under the Credit Agreement 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. Interest on the loans
equals the prime rate plus 2%.
Financial Impact of Transactions
The completion of these transactions has the following
effect on the Company's financial statements:
(i) shareholders' equity increased by $39,833,000 as
follows:
Reduction of debt $ 40,000
Less:
Par value of shares issued (4)
Reversal of accrued interest
on previous recapitalizations 283
Accrued interest on remaining Gould
indebtedness for the remaining term
of the agreements (446)
Increase in additional paid-capital $ 39,833
Note 1 - Because the transaction is considered a
troubled debt restructuring, interest is accrued from
the Closing Date until the loan's maturity on the
outstanding loan balance for the remainder of the loan
agreement.
(ii) No costs in connection with the transaction have
been recorded as an accrued expense, due to the over
accrual of costs associated with prior
recapitalizations.
N. Liquidity
The accompanying consolidated financial statements
have been prepared assuming that the company will
continue as a going concern. Since 1989, the
principal source of financing for the Company has been
provided by the Japan Energy Group. As discussed in
Note M of Notes to Consolidated Financial Statements,
on March 19, 1997, Gould exchanged $40 million of the
Company's outstanding indebtedness for 400,000 shares
of Series I Convertible Preferred Stock and provided
the Company with an uncommitted credit facility of up
to $50 million. After giving effect to the
aforementioned debt conversion, approximately $41.9
million was outstanding under the Credit Agreement.
Any loans exceeding the $41.9 million can be made only
at the discretion of Gould. All borrowing under the
Credit Agreement, plus accrued interest, are due and
payable on May 31, 1997. Based on current estimates
of available cash flow, management does not believe it
will have sufficient cash to make the mandatory
payment on May 31, 1997, without proceeds from the
sale of assets or a refinancing or restructuring of
the Credit Agreement prior to such date.
Additionally, the Company does not have a committed
source of financing to meet expected requirements over
the next year. Therefore, the Company is unable to generate
sufficient cash to support its operations through December
31, 1997. The Company has retained an investment
banking firm to assist in exploring strategic
alternatives which include, among other things, a
business combination, sales of assets, strategic
investment in the Company or a refinancing of the
Credit Agreement. There can be no assurance that the
Company will be successful in its attempt to
consummate one of the strategic alternatives or a
refinancing or restructuring of the Credit Agreement.
If the Company does not make the required payment at
maturity of the Credit Agreement or is unable to
obtain a committed source of financing adequate to
meet expected requirements, it may be unable to
continue its normal operations, except to the extent
permitted by the Japan Energy Group. Substantially
all of the Company's tangible and intangible assets
are pledged as collateral under the Credit Agreement.
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
The names of the Company's Board of Directors and
certain information about them are set forth below.
Kenneth G. Fisher, age 66
Mr. Fisher is a founder of the Company and has served
as a Director, Chairman and Chief Executive Officer
of the Company since the Company+s inception in May
1983. He was the Company+s President from its
inception until December 1985 and also served in that
capacity from December 1987 to January 1991. From
January 1982 until May 1983, Mr. Fisher was engaged
in private venture transactions. From 1975 to 1981,
Mr. Fisher was President and Chief Executive Officer
of Computervision (formerly Prime Computer, Inc.).
Before joining Computervision, Mr. Fisher was Vice
President of Central Operations for Honeywell
Information Systems, Inc.
Rowland H. Thomas, Jr., age 61
Mr. Thomas has been a member of the Board of
Directors since December 1987 and Chief Operating
Officer since June 1989. He presently also serves as
President of the Company, a position to which he was
appointed in January 1991. From June 1989 to January
1991, Mr. Thomas served as Executive Vice President
of the Company. In February 1988, he was named
President and Chief Executive Officer of Netlink Inc.
Prior to joining Netlink, Mr. Thomas was Senior
Executive Vice President of National Data Corporation
(-NDC+), a transaction processing company, a position
he held from June 1985 to February 1988. From May
1983 through June 1985, Mr. Thomas was Executive Vice
President and Senior Vice President at NDC.
Daniel O. Anderson, age 69
Mr. Anderson has been a member of the Board of
Directors since May 1987. In 1991, Mr. Anderson
retired as Executive Vice President and Chief
Operating Officer of the Harvard Community Health
Plan for New England, a position he held from
November 1986. From October 1984 until July 1986, Mr.
Anderson served as Vice President and Chief Financial
Officer of Guilford Transportation Industries, a
railroad holding company. From November 1975 until
April 1984, Mr. Anderson held various executive
positions with Itek Corporation, most recently as a
Director and President of Itek Graphics Systems.
Prior to his employment with Itek Corporation, Mr.
Anderson was Vice President, Finance and
Administration, North American Operations, for
Honeywell Information Systems, Inc.
Robert J. Fedor, age 56
Dr. Fedor has been a member of the Board of Directors
since July 1992. He is presently Senior Vice
President Corporate Development at Gould, a position
he has held since July 1992. From December 1989 to
July 1992 he was Vice President, Corporate Business
Development at Gould. Prior to assuming that
position, Dr. Fedor was General Manager of Gould+s
U.S. and Far East Foil Business since 1985. Since
joining Gould in 1964, he has served in various
senior marketing and research positions. Dr. Fedor
holds a Ph.D. in Metallurgical Engineering from Case
Western Reserve University.
C. David Ferguson, age 55
Mr. Ferguson has been a member of the Board of
Directors since April 1989. He is presently the
President and Chief Executive Officer and a director
of Gould, a position he has held since October 1988.
Prior to such time, he served as Executive Vice
President, Materials and Components, at Gould+s Foil
Division from 1986 until October 1988. He transferred
to the Foil Division in 1967 from the Gould Engine
Parts Division where he began his career in 1963.
Information regarding executive officers of the
Company is included in Part I of this Form 10-K under
the caption "Executive Officers of the Company" and
is incorporated herein by reference.
Item 11 Executive Compensation
Total compensation paid or accrued for services
rendered during the three most recent fiscal years
for the Chief Executive Officer and the four other
most highly compensated executive officers of the
Company for the year ended December 31, 1996 was as
follows:
Summary Compensation Table
Annual Compensation Long
Term
Compensation
Other Awards All
Annual Number of Shs Other
Name and Compen- Underlying Compen-
Principal Position Year Salary Bonus sation Options(3) sation(2)
Kenneth G. Fisher 1996 $340,000 $ 0 $ 0 952,200 $ 0
Chairman of the 1995 340,000 0 0 196,900 0
Board and Chief 1994 340,001 0 0 103,300 1,234
Executive Officer
Rowland H. Thomas 1996 $265,000 $26,095 $ 0 302,800 $ 0
President and 1995 265,000 26,850 0 113,600 0
Chief Operating 1994 264,617 36,833 0 59,600 728
Officer
Robert A. DiNanno 1996 $187,500 $25,835 $ 0 75,800 $ 0
Vice President and 1995 175,000 25,075 0 46,300 0
General Manager, 1994 175,000 39,644 0 20,000 676
Global Customer
Operations
Charles S. Namias 1996 $151,107 $19,830 $2,000 39,800 $ 0
Vice President, 1995 150,000 19,825 4,800 46,300 0
Corp Alliances 1994 136,154 70,844 4800 105,000 608
Ziya Aral 1996 $150,000 $19,830 $ 0 35,800 $80,000
Vice President, 1995 150,000 19,700 0 46,300 0
Chief Technical 1994 149,229 35,145 0 290,000 0
Officer
(1) Amounts paid to Mr. Namias consist entirely of
an allowance for business-related automobile
expenses.
(2) All Other Compensation for 1994 consists of
earnings associated with the individual's
participation in a company-paid sales award trip.
Mr. Aral received an $80,000 loan from the Company on
September 23, 1996. The note carries an annual
interest rate of 6% and is due and payable on
September 22, 1999.
(3) Includes 800,000 shares for Mr. Fisher, 215,000
shares for Mr. Thomas, 40,000 shares for Mr. DiNanno
and 4,000 shares for Mr. Namias which were originally
granted in 1991 and were scheduled to expire in 1996
if not exercised. However, at the time the options
were scheduled to expire the Company's policy on
insider trading effectively prevented each from
exercising their options. Accordingly, the Board of
Directors approved an extension of the expiration
date to year 2000. The extensions has been treated
as a cancellation of the old options and a grant of
new options in the same amount at the same exercise
price.
The following table sets forth the number of shares
of Common Stock and equivalents of the Company,
including shares which may be acquired within sixty
days after March 31, 1997 by exercise of outstanding
stock options, which are beneficially owned by
executive officers of the Company named in the
Summary Compensation Table and all directors and
executive officers of the Company as a group as of
March 31, 1997 along with the percentage of all
outstanding shares of Common Stock and equivalents
owned by each executive officer and director on such
date.
Common Stock Percentage of
and Equivalents Common Stock
Beneficially and Equivalents
Name Owned Outstanding(1)
Kenneth G. Fisher 7,306,652(2) 3.5%
Chairman of the Board and
Chief Executive Officer
Rowland H. Thomas 1,714,600(3) .8%
President and
Chief Operating Officer
Robert A. DiNanno 390,652(4) .2%
Vice President and General Manager
Global Customer Operations
Charles S. Namias 328,733(5) .2%
Vice President
Corporate Alliances
Ziya Aral 475,606(6) .2%
Vice President and
Chief Technical Officer
Total directors and executive officers as
a group (9 people) 11,318,623(7) 5.4%
(1) For purposes of computing the percentage of
Common Stock and equivalents outstanding, the
7,364,100 shares of Common Stock issuable upon
conversion of the outstanding shares of Series A
Stock, the 23,798,000 shares of Common Stock
issuable upon conversion of the outstanding
shares of Series B Convertible Preferred Stock
("Series B Stock"), the 36,415,230 shares of
Common Stock issuable upon conversion of the
outstanding shares of Series D Convertible
Preferred Stock ("Series D Stock"), the
37,222,184 shares of Common Stock issuable upon
conversion of the outstanding shares of Series E
Convertible Preferred Stock ("Series E Stock"),
the 17,417,138 shares of Common Stock issuable
upon conversion of the outstanding shares of
Series F Convertible Preferred Stock ("Series F
Stock"), the 18,689,385 shares of Common Stock
issuable upon conversion of the outstanding
shares of Series G Convertible Preferred Stock
("Series G Stock"), the 11,430,000 shares of
Common Stock issuable upon conversion of the
outstanding shares of Series H Convertible
Preferred Stock ("Series H Stock") and the
12,400,000 shares of Common Stock issuable upon
conversion of the outstanding shares of Series I
Convertible Preferred Stock ("Series I Stock")
have been included as well as the 7,430,980
shares issuable upon exercise of options
exercisable within 60 days after March 31, 1997.
(2) Includes: (i) 53,764 shares owned by Mr.
Fisher's wife, (ii) 2,238,400 shares which may
be acquired by Mr. Fisher within 60 days after
March 31, 1997 by exercise of stock options and
(iii) 3,901,134 shares of Common Stock and
1,113,354 shares of Common Stock issuable upon
conversion of the shares of Series B Stock each
held by Indian Creek Capital, Ltd., a limited
partnership of which Mr. Fisher is the managing
general partner.
(3) Includes 500 shares owned by Mr. Thomas' wife
and 1,619,850 shares which may be acquired by
Mr. Thomas within 60 days after March 31, 1997,
by exercise of stock options.
(4) Includes 388,062 shares which may be acquired
within 60 days after March 31, 1997, by exercise
of stock options.
(5) Includes 251,987 shares which may be acquired
within 60 days after March 31, 1997, by exercise
of stock options.
(6) Includes 437,362 shares which may be acquired
within 60 days after March 31, 1997, by exercise
of stock options.
(7) Includes 5,994,034 shares which may be acquired
within 60 days after March 31, 1997, by exercise
of stock options and 1,113,354 shares of Common
Stock issuable upon conversion of the shares of
Series B Stock held beneficially by Mr. Fisher.
The following table shows, as to those executive
officers named in the Summary Compensation Table
above, the number, exercise price and expiration date
of options to acquire Common Stock granted under the
Company's Long-Term Performance Plan during fiscal
1996, and the potential realizable value of those
shares assuming certain annual rates of appreciation
in the price of the Company's stock.
Option Grants for the year ended December 31, 1996
Potential realizable
Individual Grants values at assumed annual
Number % of total rates of stock price
of shares options appreciation for the
Underlying granted option term
Options in fiscal Exercise Expiration
Name granted year price/share Date 5% 10%
Kenneth G. Fisher 152,200 8.5% $2.8750 6/24/2006 $275,191 $697,363
800,000 44.8% 2.0000 1/21/2000 344,800 742,560
Rowland H. Thomas 87,800 4.9% 2.8750 6/24/2006 158,750 402,290
215,000 12.0% .8125 1/21/2000 37,645 81,072
Robert A. DiNanno 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
40,000 2.2% .8125 1/21/2000 7,004 15,083
Charles S. Namias 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
4,000 .2% .8125 1/21/2000 700 1,508
Ziya Aral 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
As required by the rules of the Securities and
Exchange Commission, potential values are stated
based on the prescribed assumption that the Common
Stock of the Company will appreciate in value from
the date of grant to the end of the option term at
rates (compounded annually) of 5% and 10%,
respectively, and therefore do not reflect past
results and are not intended to forecast possible
future appreciation, if any, in the price of the
Common Stock.
The following table provides information on option
exercises in 1996 by the named executive officers and
the value of such officers' unexercised options as of
December 31, 1996.
Aggregated Option Exercises in the year ended December 31, 1996
and Option Values as of December 31, 1996
Number of Value of
Shares Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Number of 12/31/96 12/31/96
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
Kenneth G. Fisher 0 $ 0 2,213,788/ $325,000/
338,612 0
Rowland H. Thomas 0 0 1,619,850/ 405,625/
181,150 0
Robert A. DiNanno 229,790 466,611 388,062/ 113,300/
72,238 0
Charles S. Namias 12,000 21,000 235,737/ 32,750/
120,363 0
Ziya Aral 0 0 423,612/ 56,250/
193,488 0
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
ENCORE COMPUTER CORPORATION
Executive Compensation Philosophy
It is the goal of the Compensation Committee of the
Board of Directors to provide compensation to
executives of the Company in accordance with the
following considerations:
To provide compensation that is competitive with
other high technology companies that are of
similar size to Encore with similar products and
markets;
To provide compensation that will attract,
retain and reward superior, industry-
knowledgeable executives who can manage the
shareholders' short and long-term interest; and
To provide total compensation wherein the
majority of value to be delivered is based on
the financial performance of the Company and the
appreciation of the Company's stock.
To meet these goals, the Committee establishes,
administers and reviews several programs for the
Company. These programs are designed to address the
above considerations and consist of three major
components.
Base Salary
For executives of the Company, base salary is
determined by the level of job responsibility and
overall competitive practices in the labor market for
the Company's executive talent. The Committee
recognizes that there is a scarcity of executive
talent with the technical capabilities that are
critical to the Company's long-term success. The
Committee also considers the Company's location
outside of traditional labor markets for technical
talent to be a considerable factor for base salary
positioning. As such, the Committee positions the
Company's executives+ base salaries at the 75th
percentile of the competitive market and generally
believes that this base salary posture is an
essential factor in maintaining a highly skilled
executive team. The Committee derives competitive
data representing the high technology and computer
products sectors from an independent compensation
consultant, Towers Perrin. The Committee believes
that most of the companies in the S & P Computer
Systems Index, which is used as the Company's
industry comparison line in the performance graph
appearing below, are represented in the various
surveys used by the compensation consultant.
1996 executive base salaries were below the above
policy. None of the named executives' base salaries
or incentive bonus targets were increased in 1996,
with the exception of R. DiNanno. Mr. DiNanno+s base
salary and bonus were increased in conjunction with a
significant increase in his responsibilities.
Annual Incentives
All executive officers are eligible to receive
incentives which are based on the short-term
performance of the Company. The program is intended
to highlight critical business goals and reward the
achievement of these goals through individual and
team contributions. Target incentive opportunities
typically range from 15% to 45% of executives+ base
salaries and are based on median bonus levels
observed in other high technology and computer-
related companies. Target award levels are
structured so that at those levels, executives' total
cash compensation (base salary plus annual incentive)
would be comparable to the 75th percentile total cash
compensation of the competitive market as discussed
earlier.
The specific performance criteria used for incentive
compensation goals include the attainment of profit
before tax objectives, achievement of quarterly
financial plans and subjective functional and
teamwork goals as determined by management.
Functional goals include activities aimed at
achieving revenue, bookings, expenses, schedule
targets, etc. Teamwork goals include joint, cross-
functional activities and projects. The relative
weighting of each factor depends on the executive's
position within the Company's organizational
structure. Typically, profit before tax objectives
and quarterly financial plan targets account for 60%
to 100% of the named executives' incentives;
functional and teamwork goals account for 25% to 40%
of the total incentive. In 1996 the Company did not
achieve its profit before tax objective and therefore
no incentive payments were made that were based on
the Company's profit performance. Incentive payments
that were made to certain named executives in 1996
reflect the attainment of individual functional and
teamwork goals.
Long-Term Incentives
The Committee believes that stock-based incentives
provide the strongest link between the rewards earned
by executives and the returns generated for
shareholders. The Committee also believes that
providing the potential for significant share
ownership helps focus executive behavior on the long-
term growth and strength of the organization. As
such, the Committee has made significant stock option
grants throughout the Company to focus all recipients
on long-term growth and the enhancement of
shareholder value. The Committee has generally
observed that stock option grants comprise a
significant portion of executive compensation in the
high technology and computer-related industries.
Stock options represent the right to purchase the
Company's stock at the fair market value of the
Company's stock on the date of grant. Since the
value ultimately realized from the option depends
entirely on the future success of the Company and the
growth of the stock price, an option serves to
provide an incentive to the executive for years after
it has been awarded.
The Committee has adopted formal stock option grant
guidelines which will base annual option grants on
the executive's base salary grade and individual
performance factors. This practice will ensure that
executives at similar organizational levels will have
equal long-term incentive opportunities while
allowing the Committee some discretion to augment
awards as it feels appropriate to recognize
significant individual accomplishments. In 1996, the
Board granted 347,400 options to the named executives
in accord with the pre-established guidelines.
The Committee feels that it is quite important that
executives have a significant personal investment in
the Company. As such, the Committee has also adopted
formal stock ownership guidelines for the CEO and
other executive officers who report directly to the
CEO. The Committee believes that requiring
executives to maintain a certain ownership interest
in the Company complements the existing long-term
incentive program in that once stock options are
exercised, there is an added emphasis on retaining
exercised shares and further enhancing shareholder
value. The specific guidelines require that, by
April, 1997, the CEO acquire and maintain ownership
of Company stock with a value equal to two times his
current base salary; direct reports to the CEO are
required to acquire and maintain ownership of Company
stock with a value equal to at least one-half their
current base salaries. The Committee is pleased to
report that at the end of 1996 the CEO had far
exceeded his ownership requirement, and three of the
other named executives have met the requirement.
Compensation for Mr. Fisher
Mr. Fisher's base salary was not increased in 1996.
Mr. Fisher's base salary is positioned below the
market average of other high technology and computer-
related companies of similar size to the Company.
The Committee intends to deliver most of Mr. Fisher's
compensation in the form of annual cash-based
incentives and long-term stock-based incentives that
will deliver significant value to Mr. Fisher if, and
only if, the Company achieves positive returns and
the stock price appreciates over time.
To focus Mr. Fisher on the attainment of short-term
financial results, the Committee awards a bonus equal
to 5% of the Company's profit before taxes to Mr.
Fisher as an incentive award on a quarterly basis.
This formula approach ensures shareholders that an
incentive payment will be made to Mr. Fisher only if
the Company is profitable. In addition, this
approach provides a consistent incentive to maximize
profit each quarter. No incentive payments were made
to Mr. Fisher in 1996.
The Committee granted 152,200 stock options to Mr.
Fisher in 1996 in accord with the Board's established
annual guidelines. Mr. Fisher continues to have a
significant personal investment in the Company and
he is well motivated to increase the overall value of
the Company and to generate returns on behalf of all
shareholders.
Other Compensation Matters
The Committee continues to evaluate the potential
impact of the $1 million dollar deduction limitation
on executive pay for the top five executives which
was implemented as part of the Omnibus Budget
Reconciliation Act of 1993. The 1995 Stock Option
Plan, approved by the shareholders at the 1995 annual
meeting, is a performance-based plan, and therefore,
any gains on stock options will not be subject to the
$1 million dollar limit. The Committee believes this
action adequately protects the deduction for
executive compensation at the current time. The
Committee will continue to evaluate the Company's
potential exposure to the deduction limitation on an
annual basis.
In conclusion, the Committee feels that all pay
programs are reasonable and appropriate given the
Company's industry, size and organizational
structure. Base salary and incentive programs
provide attractive features to attract, retain and
motivate executives to enhance the performance of the
Company from year to year. The stock option grants
provide a significant incentive to executives to
undertake policies and actions to enhance the overall
value of the organization well into the future.
The Compensation Committee
of the Board of Directors
D.O. Anderson, Chairman
C.D. Ferguson
K.G. Fisher
Comparison of Five Year Cumulative Total Shareholder Return
Among
Encore Computer Corporation, the NASDAQ Market Index and the
NASDAQ Computer Index
The following chart depicts the Company's performance
for the five year period ending December 31, 1996, as
measured by total shareholder return on the Company's
Common Stock compared with the total return of the
NASDAQ Market Stock Index and the NASDAQ Computer
Stock Index.
* This chart assumes an investment on December 31,
1991 of $100 in the Company's Common Stock, the
NASDAQ Market Stock Index and the NASDAQ Computer
Stock Index. See table below:
Year 1991 1992 1993 1994 1995 1996
Encore $100 $162 $446 $385 $238 $146
NASDAQ Market $100 $116 $134 $131 $185 $227
Index
NASDAQ Computer $100 $108 $114 $138 $211 $260
Index
The Report of the Compensation Committee on Executive
Compensation and Comparison of Five Year Cumulative
Total Shareholder Return above shall not be deemed to
be "soliciting material" or incorporated by reference
into any of the Company's filings with the Securities
and Exchange Commission.
Directors' Compensation
The Board of Directors has fixed the compensation of
non-officer directors at $2,500 per regular board
meeting attended. No compensation is paid for
special meetings held by telephone conference. A
total of $10,000 was paid to Mr. Anderson for
meetings attended during fiscal 1996. Mr. Ferguson
and Dr. Fedor have waived payment to them of fees
for attendance at board meetings. Directors who are
also officers of the Company receive no compensation
for serving as directors. During the past fiscal
year, the Company has also reimbursed certain of its
directors for reasonable out-of-pocket expenses
relating to attendance at Board and Committee
meetings.
Item 12 Security Ownership of Certain Beneficial
Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of
the Company, the beneficial owners of 5% or more of
the Company's outstanding Common Stock and
equivalents as of March 31, 1997:
Percentage of
Shares Common Stock Percentage of
Name and Address Beneficially and Equivalents Common Stock
of Beneficial Owner Owned Outstanding(1) Outstanding
Gould Electronics Inc.(2)(5) 135,189,230 64.5% 8.8%
35129 Curtis Boulevard
Eastlake, OH 44095
EFI International Inc.(3) 32,369,353 15.5% 0.0%
12 East 49th Street, Suite 1710
N.Y., N.Y 10017
Japan Energy Corporation(2)(3) 167,558,583 80.0% 8.8%
10-1, Toranomon 2-chome,(5)(6)
Minato-ko, Tokyo, Japan
Kenneth G. Fisher(4) 7,306,652 3.5% 13.8%
6901 West Sunrise Blvd.
Fort Lauderdale, FL 33313-4499
(1) For purposes of computing the percentage of
Common Stock and equivalents outstanding, the
7,364,100 shares of Common Stock issuable upon
conversion of the outstanding shares of Series A
Stock, the 23,798,000 shares of Common Stock
issuable upon conversion of the outstanding
shares of Series B Convertible Preferred Stock
("Series B Stock"), the 36,415,230 shares of
Common Stock issuable upon conversion of the
outstanding shares of Series D Convertible
Preferred Stock ("Series D Stock"), the
37,222,184 shares of Common Stock issuable upon
conversion of the outstanding shares of Series E
Convertible Preferred Stock ("Series E Stock"),
the 17,417,138 shares of Common Stock issuable
upon conversion of the outstanding shares of
Series F Convertible Preferred Stock ("Series F
Stock"), the 18,689,385 shares of Common Stock
issuable upon conversion of the outstanding
shares of Series G Convertible Preferred Stock
("Series G Stock"), the 11,430,000 shares of
Common Stock issuable upon conversion of the
outstanding shares of Series H Convertible
Preferred Stock ("Series H Stock") and the
12,400,000 shares of Common Stock issuable upon
conversion of the outstanding shares of Series I
Convertible Preferred Stock ("Series I Stock")
have been included as well as the 7,430,980
shares issuable upon exercise of options
exercisable within 60 days after March 31, 1997.
(2) Includes 131,253,330 shares of Common Stock
issuable upon conversion of the shares of Series
A Stock, Series B Stock, Series D Stock, Series
E Stock, Series F Stock, Series G Stock, Series
H Stock and Series I Stock held by Gould. The
Series D, Series E, Series F, Series G, Series H
and Series I Stock is convertible only by a
United States citizen or a corporation or other
entity owned in the majority by a United States
shareholder or in connection with an
underwritten public offering. Gould is a wholly
owned subsidiary of Japan Energy Corporation
("Japan Energy") which is a Japanese
corporation.
(3) Consists of Common Stock issuable upon
conversion of Series D Stock held by EFI
International Inc. ("EFI"). Conversion of the
Series D Stock is restricted as described in (2)
above. EFI is a wholly owned subsidiary of
Japan Energy.
(4) Includes: (i) 53,764 shares owned by Mr.
Fisher's wife, (ii) 2,238,400 shares which may
be acquired by Mr. Fisher within 60 days after
March 31, 1997 by exercise of stock options and
(iii) 3,901,134 shares of Common Stock and
1,113,354 shares of Common Stock issuable upon
conversion of the shares of Series B Stock each
held by Indian Creek Capital, Ltd., a limited
partnership of which Mr. Fisher is the managing
general partner.
(5) Gould as the sole holder of the Series A Stock
is entitled to elect two directors to the Board
of Directors. The remaining three directors are
elected by the holders of Common Stock. With
respect to the election of those three
directors, the 3,935,900 outstanding shares of
Common Stock held by Gould will be voted pro
rata in accordance with the votes of the other
holders of Common Stock as provided by a
shareholders agreement among Gould, the Company
and Mr. Fisher.
(6) Japan Energy may be deemed to be the beneficial
owner of the shares owned by Gould and EFI.
Information regarding security ownership of the
executive officers of the Company is included in Item
11 above.
Item 13 Certain Relationships and Related
Transactions
Financing by Gould
During 1996, the Company recorded significant
quarterly operating losses. Additionally, due to the
operating losses incurred, the Company was unable to
generate sufficient levels of cash through operating
activities to fund the business. Cash requirements
were provided by additional borrowings made under a
credit facility with Gould. Gould has provided the
Company with its loan facility since 1989.
On April 16, 1996, Gould canceled $35,000,000 of
indebtedness owed to it by the Company under the
Credit Agreement in exchange for 350,000 shares of
the Company's Series H Convertible Preferred Stock
with a liquidation preference of $35,000,000. The
Series H carries a 6% cumulative annual dividend
requirement payable quarterly which the Company can
accumulate or pay in additional shares of preferred
stock (valued at its liquidation preference) until
the Company's shareholders' equity exceeds
$50,000,000. The Series H is convertible, at the
holder's option, into the Company's common stock at
$3.25 per share only; (a) if the shareholder is a
United States citizen or a corporation or other
entity owned in the majority by United States
citizens, or (b) in connection with an underwritten
public offering. The Series H is convertible, at the
Company's option, if the price of the common stock
exceeds $3.90 per share for twenty consecutive days
and; (a) a buyer is contractually committed to
purchase for at least $3.90 per share at least 50% of
the shares into which all outstanding Preferred Stock
would be converted, or (b) a buyer is contractually
committed to purchase for at least $3.50 per share at
least 75% of the shares into which all outstanding
Preferred Stock would be converted. The Series H is
senior in liquidation priority to all other classes
of the Company's preferred and common stock and is
redeemable by the Company at any time for cash equal
to the liquidation preference plus accumulated
dividends.
In conjunction with the above described exchange, the
Company and Gould also entered into an Amended and
Restated Credit Agreement (the "Amended Agreement").
The Amended Agreement provided the Company with a
committed borrowing facility of $65,000,000. On
October 31, 1996, the Company+s borrowings under the
Amended Agreement exceeded the maximum allowed by the
terms of the Amended Agreement. Subsequent to
October 31, 1996, Gould allowed the Company to borrow
funds in excess of the Amended Agreement's maximum
limit to fund its daily operations and during the
fiscal fourth quarter the Company began negotiations
with Gould to significantly recapitalize the Company.
As of December 31, 1996 the Company had incurred
borrowings under the Amended Agreement of
$72,659,000.
On January 9, 1997, the Company and Gould agreed to
further amend the credit agreement to increase the
maximum amount of the borrowing facility to
$80,000,000. On March 19, 1997, Gould exchanged
$40,000,000 of indebtedness owed to it by the Company
(the "Canceled Debt") for 400,000 newly-issued shares
of the Company's Series I Convertible Preferred Stock
(the "Series I Stock"). The Canceled Debt had,
prior to the closing date, represented a portion of
the indebtedness owed by the Company to Gould under
the Amended Agreement.
The principal terms of the Series I Stock are as follows:
(a) holders of such shares are entitled to receive,
when, as and if declared by the Company's board
of directors, an annual dividend per share equal
to $6.00; provided, however, that if the number
of authorized shares of Common Stock of Company
is not increased to at least 300,000,000 on or
prior to July 15, 1997, then such dividend per
share is increased to $10.00; and, further
provided, that if the number of shares of
authorized Common Stock of the Company is
increased to at least 300,000,000 at any time
after July 15, 1997, then such dividend per
share is decreased from $10.00 to $6.00;
(b) dividends on such shares are payable in cash;
provided, however, that under certain specified
circumstances such dividends may be paid in
additional shares of Series I Stock;
(c) such shares are entitled to a liquidation
preference of $100 per share plus an amount
equal to accrued and unpaid dividends on such
share, which liquidation preference is senior in
priority to the Company's Common Stock and to
all other shares of Preferred Stock currently
outstanding;
(d) subject to certain specified restrictions, such
shares are convertible, at the holder's option,
at any time, into that number of shares of the
Company's Common Stock equal to (i) the
liquidation preference divided by $3.25, which
amount is subject to adjustment under certain
specified circumstances;
(e) such shares are convertible, at the Company's
option, in accordance with the conversion
methodology summarized in paragraph (d) above,
if (i) the last sale price of the Company's
Common Stock exceeded $3.90 for twenty
consecutive trading days and (ii) a buyer is
contractually committed to purchase (x) for at
least $3.90 per share, at least 50% of the
shares of Common Stock into which the
outstanding Series I Stock are then convertible,
or (y) for at least $3.50 per share, at least
75% of the shares of Common Stock into which the
outstanding shares of Series I Stock are then
convertible;
(f) such shares are non-voting shares except as to
matters that would adversely affect the Series I
Stock and except as to any other matters which,
pursuant to applicable law, holders of such
shares may be entitled to vote; and
(g) to the extent that there are not a sufficient
number of authorized shares of the Company's
Common Stock to allow for a conversion of Series
I Stock into shares of Common Stock as described
above (after taking into account, among other
things, (i) the number of options, warrants and
other similar rights outstanding and (ii) 135%
of the maximum number of shares of Common Stock
the Company may be required to issue on
conversion of all the shares of each series of
preferred stock then outstanding), then, to that
extent, the Series I Stock is convertible into
shares of Series J Convertible Participating
Preferred Stock of the Company (the "Series J
Stock") at the rate of one share of Series J
Stock for each 100 shares of Common Stock.
The principal terms of the Series J Stock are as follows:
(a) holders of such shares are entitled to receive a
dividend per share equal to 100 times the
dividend that is paid by the Company with regard
to a share of Common Stock of the Company;
(b) such shares are entitled to a liquidation
preference of $1 per share plus an amount equal
to accrued and unpaid dividends on such share,
which liquidation preference is senior in
priority to the Company's Common Stock, and,
after the holders of Common Stock have received
$0.01 per share, such shares of Series I Stock
are further entitled to receive an amount equal
to 100 times the amount per shares in excess of
that $0.01 received by the holders of the Common
Stock;
(c) subject to certain specified restrictions, such
shares are convertible, at the holder's option,
at any time, in that number of shares of the
Company's Common Stock equal to (i) 100 shares
of Common Stock, which amount is subject to
adjustment under certain specified
circumstances;
(d) such shares are voting shares and holders
thereof shall be entitled to vote together with
the holders of Common Stock, voting as a single
class, on all matters presented for a vote of
the holders of Common Stock, which each share of
Series J Stock being entitled to 100 times the
number of votes to which a share of Common Stock
is entitled; and
(e) the Series J Stock (i) ranks prior to the shares
of Common Stock to the extent specifically
provided in the Certificate of Designations,
Powers, Rights and Preferences of the Series J
Stock, and in all other respects, ranks on
parity with the Common Stock, (ii) is on parity
with the shares of Series A Convertible
Participating Preferred Stock of the Company and
(iii) is, and will be, junior to the shares of
all other series of Preferred Stock of the
Company, other than series which are expressly
designated as ranking on a parity with, or being
junior to, the Series J Stock.
In conjunction with the exchange of the Canceled Debt
for Series I Stock, the Second Amendment to the
Credit Agreement was executed between the Company and
Gould which (i) reduced the maximum amount which can
be borrowed by the Company from $80,000,000 to
$50,000,000 and (ii) provided that any borrowings in
excess of $41,915,869 (the principal amount
outstanding on March 19, 1997 after giving effect to
the exchange of indebtedness for shares of Series I
Stock) may be made only at the discretion of Gould.
The Credit Agreement matures on May 31, 1997.
Borrowings under the Credit Agreement 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. Interest on
the loans equals the prime rate plus 2%.
The following tables display the beneficial ownership
of Japan Energy Corporation through its wholly owned
subsidiaries Gould and EFI in the Company before the
March 19, 1997 transaction as of December 31, 1996
and on a pro forma basis after the transaction as of
December 31, 1996:
Before the Exchange of Indebtedness for Series I Stock
as of December 31, 1996
Debt(1) Beneficial Ownership(2)
($000's) % of total Shares % of total
Gould $ 72,659 99.1% 121,141,690 62.2%
EFI - - 31,891,015 16.4
Other 658 0.9 41,862,460 21.4
Total $ 73,317 100.0% 194,895,165 100.0%
After the Exchange of Indebtedness for Series I Stock
Pro Forma as of December 31, 1996
Debt(1) Beneficial Ownership(3)
($000's) % of total Shares % of total
Gould $ 32,659 98.0% 133,141,690 64.4%
EFI - - 31,891,015 15.4
Other 658 2.0 41,862,460 20.2
Total $ 33,317 100.0% 206,895,165 100.0%
(1)Includes both current and long-term portion of debt.
(2) Includes 150,193,728 shares of Common Stock
issuable upon full conversion of all outstanding
Series A Stock, Series B Stock, Series D Stock,
Series E Stock , Series F Stock, Series G Stock
and Series H Stock after payment of all
dividends payable through January 15, 1997 as
well as shares which may be acquired within
sixty days after December 31, 1996 by exercise
of outstanding stock options.
(3) Includes 162,193,728 shares of Common Stock
issuable upon full conversion of all outstanding
Series A Stock, Series B Stock, Series D Stock,
Series E Stock, Series F Stock, Series G Stock,
Series H Stock and Series I Stock as well as
shares which may be acquired within sixty days
after December 31, 1996 by exercise of
outstanding stock options. The Series D Stock,
Series E Stock, Series F Stock, Series G Stock,
Series H and Series I Stock is convertible by a
United States citizen or a corporation or other
entity owned in the majority by a United States
shareholder or in connection with an
underwritten public offering.
In connection with the various exchanges of
indebtedness for preferred stock discussed herein,
the United States Defense Investigative Service
("DIS") has reviewed the relationship between the
Company and the Japan Energy Group under revised
government requirements relating to foreign
ownership, control and influence. Given the current
requirements in the National Industrial Security
Program Operating Manual ("NISPOM"), DIS has decided
to replace the previous method of negation of Foreign
Ownership Control and Influence, accomplished by
Board Resolution, with a more detailed Security
Control Agreement as prescribed by DIS in the NISPOM,
which is currently being drafted by Encore's counsel.
Since 1989, Japan Energy Group and its wholly owned
subsidiaries, Gould and EFI, have been the principal
source of the Company's financing by either directly
providing or guaranteeing the Company's loans. Each
of the Company's debt agreements with Japan Energy
Group and its wholly owned subsidiaries have
contained various covenants including maintenance of
cash flow, leverage, and tangible net worth ratios
and limitations on capital expenditures, dividend
payments and additional indebtedness. Currently and
at various times in the past, the Company has been in
default of certain covenants contained in the debt
agreements but waivers of compliance with those
covenants have been obtained and, generally, the
Company has been able to successfully renegotiate
favorable terms with its creditor. To continue
operating in the normal course of business, the
Company is and will remain dependent on the continued
financial support of Japan Energy Group and its
subsidiaries. Until such time as the Company returns
to a state of sustained profitability, Encore will be
unable to secure funding from other parties and/or
generate sufficient levels of cash through operations
to meet the needs of the business.
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 schedule 22
Consolidated statements of operations for the years
ended December 31, 1996, 1995 and 1994 23
Consolidated balance sheets at December 31, 1996 and 1995 24
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995 and 1994 25
Consolidated statements of shareholders' equity (capital
deficiency) for the years ended December 31, 1996,
1995, and 1994 27
Notes to consolidated financial statements 28-44
The following consolidated financial statement
schedules are submitted herewith:
Form 10-K Page Number
Valuation and qualifying accounts 63
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 signature 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, 1996.
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 a 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, litigate 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.
Schedule II
ENCORE COMPUTER CORPORATION
Valuation and qualifying accounts
(in thousands)
Additions
Bal Chrgd to Chrgd to Bal
at Beg costs other at End
of Per & expnse accts(2) Deduct(1) of Per
Year ended December 31, 1994:
Allow for doubtful accounts $2,150 $2,928 $0 ($61) $5,017
Inventory obsolescence and 14,016 4,659 941 0 11,587
writedowns
Year ended December 31, 1995:
Allow for doubtful accounts $5,017 $2,735 $0 $(5,954) $1,798
Inventory obsolescence and 11,587 12,367 0 (4,338) 19,616
writedowns
Year ended December 31, 1996:
Allow for doubtful accounts $1,798 ($550) $0 ($634) $614
Inventory obsolescence and 19,616 11,013 0 (1,246) 29,383
writedowns
(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)
KENNETH G. FISHER EDWARD J. BAKER
By: _________________ ________________
Kenneth G. Fisher Edward J. Baker
Chairman of the Board Secretary, Treasurer and
Chief Executive Officer Chief Accounting Officer
October 31, 1997
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 October 31, 1997
ROWLAND H. THOMAS, JR. President and Chief
___________________ Operating Officer and
Rowland H. Thomas, Jr. Director October 31, 1997
C. DAVID FERGUSON
____________________
C. David Ferguson Director October 31, 1997
ROBERT J. FEDOR
____________________
Robert J. Fedor Director October 31, 1997
DANIEL O. ANDERSON
____________________
Daniel O. Anderson Director October 31, 1997
EDWARD J. BAKER
____________________ Secretary, Treasurer and
Edward J. Baker Chief Accounting Officer October 31,1997
(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.
3.5 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).
3.6 Certificate of Designations, Powers
Rights and Preferences of Series H
Convertible Preferred Stock of Encore
Computer Corporation (incorporated
herein by reference to Exhibit 3.1 to
the Company's Form 10Q for the period
ended June 30, 1996).
*3.7 Certificate of Designations, Powers
Rights and Preferences of Series I
Convertible Preferred Stock of Encore
Computer Corporation.
*3.8 Certificate of Designations, Powers
Rights and Preferences of Series J
Convertible Preferred Stock of Encore
Computer Corporation.
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 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).
10.17 Certificate. Reference made to the
Master Purchase Agreement dated as of
August 17, 1995 between the Company
and Gould Electronics Inc. relating
to the purchase of Series G
Convertible Preferred Stock,
Cancellation of Indebtedness and
Related Documents (incorporated
herein by reference to Exhibit 10.2
to the Company's Form l0-Q for the
period ended October 1, 1995).
#10.18 The Company's 1985 Non-Qualified
Stock Option Plan and 1995 Long Term
Performance Plan, as amended
(incorporated herein by reference to
the Company's Form S-8/Form S-3
Registrations Statement No. 33-
72741).
10.19 The Third Amended and Restated Credit
Agreement dated as of April 16, 1996
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 June 30,
1996).
10.20 Certificate. Reference made to the
Master Purchase Agreement dated as of
August 17, 1995 between the Company
and Gould Electronics Inc. relating
to the purchase of Series H
Convertible Preferred Stock,
Cancellation of Indebtedness and
Related Documents (incorporated
herein by reference to Exhibit 10.2
to the Company's Form l0-Q for the
period ended June 30, 1996).
*10.21 Certificate. Reference made to the
Master Purchase Agreement dated as of
March 19, 1997 between the Company
and Gould Electronics Inc. relating
to the purchase of Series I
Convertible Preferred Stock,
Cancellation of Indebtedness and
Related Documents.
*11.0 Computation of Loss per Share
*22.0 Subsidiaries of the Company.
*23.1 Consent of Independent Public
Accountants.
*27 Financial Data Schedule
99 Cautionary Statement for the Purposes
of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform
Act of 1995 (incorporated herein by
reference to Exhibit 99 to the
Company's Form l0-Q for the period
ended June 30, 1996).
# Management contract or compensatory plan or
arrangement
* Filed herewith.
ENCORE COMPUTER CORPORATION Exhibit 11
Computation of Loss per Share
(in thousands except per share data)
Primary 1996 1995 1994
Net Loss ($70,732) ($81,354) ($54,556)
Series B, D, E, F and G Preferred
Stock Dividends (11,996) (19,062) (13,987)
Series B, D, E, F, G and H Accumulated
Preferred Stock Dividends (13,417) 0 0
Net loss attributable to
common shareholders ($96,145)($100,416) ($68,543)
Weighted average common
shares outstanding 36,810 34,923 33,391
Loss per common share ($2.61) ($2.88) ($2.05)
Assuming Full Dilution
Net loss ($70,732) ($81,354) ($54,556)
Wghtd avg common shares outstand 36,810 34,923 33,391
Series A assumed converted 7,364 7,364 7,364
Series B assumed converted 22,544 21,242 20,014
Series D assumed converted 34,496 32,503 30,624
Series E assumed converted 35,260 33,223 28,481
Series F assumed converted 16,499 12,437 0
Series G assumed converted 17,704 6,388 0
Series H assumed converted 7,760 0 0
Exercise of options reduced by the number
of shares purchased
with proceeds 3,158 3,349 4,866
Weighted avg shares outstand 181,595 151,429 124,740
Loss per common share ($0.39) ($0.54) ($0.44)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
ENCORE COMPUTER CORPORATION Exhibit 27
Financial Data Schedule
(in thousands except per share data)
For the years ended December 31,
1996 1995 1994
Cash and cash items 3,936 3,490 2,517
Marketable securities 0 0 0
Notes and accounts receivable-trade 15,584 14,828 24,872
Allowances for doubtful accounts -614 -1,798 -5,017
Inventory 13,896 15,796 27,555
Total current assets 34,211 33,669 51,790
Property, plant and equipment 81,277 87,701 86,808
Accumulated depreciation -47,901 -51,901 -45,887
Total assets 69,256 72,537 99,021
Total current liabilities 101,506 28,179 31,553
Bonds, mortgages and similar debt 658 829 1,023
Preferred stock no mandatory redemption 45 41 28
Common stock 373 361 341
Other shrhldrs' eq (Cap'l deficiency) -34,428 2,112 -22,409
Total liabilities & equity 69,256 72,537 99,021
Sales of tangible products 27,600 22,005 38,412
Total revenues 47,627 49,328 76,550
Cost of tangible goods sold 35,786 34,975 60,907
Total costs applicable to revenues 53,608 55,693 127,398
Other costs and expenses 554 -75 -70
Provision for doubtful accounts and notes -550 2,735 2,928
Interest and amortization of debt discount 3,324 2,786 3,235
Loss before taxes -71,096 -80,507 -54,013
Income tax expense -364 847 543
Net loss -70,732 -81,354 -54,556
Earnings per share-primary -2.61 -2.88 -2.05
Earnings per share-fully diluted -0.39 -0.54 -0.44
</TABLE>
