UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to _______.
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2789167 .
(State of Incorporation) (I.R.S. Employer Identification No.)
6901 West Sunrise Blvd
Fort Lauderdale, Florida 33313 .
(Address of Principal Executive Offices) (Zip Code)
Telephone: 954-587-2900
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
The number of shares outstanding of the registrant's only class of
Common Stock as of November 10, 1997 was 67,346,291.
Encore Computer Corporation
Index
Page
Part I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II OTHER INFORMATION 21
Signature Page 22
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
Sept 28, Sept 29, Sept 28, Sept 29,
1997 1996 1997 1996
Net sales:
Equipment $ 3,834 $ 8,558 $ 11,428 $ 21,680
Service 3,595 4,711 11,688 14,902
7,429 13,269 23,116 36,582
Costs and expenses:
Cost of equipment sales 4,840 10,918 18,138 21,872
Cost of service sales 3,893 5,005 12,447 14,079
Research and development 6,455 7,866 20,876 23,807
Sales, General and Admin 6,743 7,760 21,961 24,292
Total 21,931 31,549 73,422 84,050
Operating loss -14,502 -18,280 -50,306 -47,468
Int exp, princ related parties -2,024 -911 -4,778 -2,149
Interest income 33 55 94 131
Other (expense)/income, net -118 87 -1,281 -171
Loss before income taxes -16,611 -19,049 -56,271 -49,657
Provision for income taxes 27 0 194 0
Net loss $ -16,638 $ -19,049 $ -56,465 $ -49,657
Net loss per common share:
Net loss attributable to common
shareholders $ -24,310 $ -25,707 $ -78,259 $ -68,311
Loss per common share $ -0.65 $ -0.69 $ -2.09 $ -1.86
Weighted average shares
of common stock 37,560 37,009 37,419 36,704
The accompanying notes are an integral part of the condensed consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(in thousands except share data)
Unaudited
Sept 28, Dec 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 4,461 $ 3,936
Accounts receivable, less allowance 7,927 14,970
Inventories (Notes B and C) 7,711 13,896
Prepaid expenses and other current assets 1,122 1,409
Total current assets 21,221 34,211
Property and equipment, net (Note B) 29,438 33,376
Other assets 1,300 1,669
Total assets $ 51,959 $ 69,256
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long term
debt-related parties (Notes E and F) $ 68,416 $ 72,659
Current portion of long term debt-other (Note E) 137 182
Accounts payable and accrued liabilities (Note D) 31,534 28,665
Total current liabilities 100,087 101,506
Long term debt-other (Note E) 381 476
Other liabilities 1,800 1,284
Total liabilities 102,268 103,266
Capital Deficiency:
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred, issued
73,641 shares in 1997 and 1996 (Note B) 1 1
6% Cumulative Series B Convertible Preferred, issued
728,722 in 1997 and 1996, respectively, with an aggregate
liquidation preference of $72,872,200 (Note B) 7 7
6% Cumulative Series D Convertible Preferred, issued
1,115,074 in 1997 and 1996, respectively, with
an aggregate liquidation preference of $111,507,400 11 11
6% Cumulative Series E Convertible Preferred, issued
1,139,782 in 1997 and 1996, with an
aggregate liquidation preference of $113,978,200 11 11
6% Cumulative Series F Convertible Preferred, issued
533,333 in 1997 and 1996, respectively, with
an aggregate liquidation preference of $53,333,300 5 5
6% Cumulative Series G Convertible Preferred, issued
572,289 in 1997 and 1996, respectively, with
an aggregate liquidation preference of $57,228,900 6 6
6% Cumulative Series H Convertible Preferred, issued
350,000 in 1997 and1996, respectively, with
an aggregate liquidation preference of $35,000,000. 4 4
6% Cumulative Series I Convertible Preferred, issued
400,000 in 1997 with an aggregate liquidation preference
of $40,000,000. 4 4
Common stock, $.01 par value; authorized 200,000,000 shares;
issued 37,559,976 and 37,270,457 in 1997 and 1996,
respectively (Note B) 376 373
Additional paid-in capital 487,227 447,068
Accumulated deficit -537,961 -481,496
Total capital deficiency -50,309 -34,006
Total liabilities and capital deficiency $ 51,959 $ 69,260
The accompanying notes are an integral part of the condensed consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Mos Nine Mos
Ended Ended
Sept 28, Sept 29,
1997 1996
Cash flows from operating activities:
Net loss $ -56,465 $ -49,657
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 5,485 8,510
Non cash compensation (Note F) 0 589
Inventory obsolescence and writedown to lower of cost
or market 810 3,395
Bad debt provision/(credit) 378 -1
Net changes in operating assets and liabilities:
Accounts receivable 6,665 -3,684
Inventories 5,375 -13,181
Prepaid expenses and other current assets 287 60
Other assets 12 35
Accounts payable and accrued liabilities 2,706 3,042
Other liabilities 516 169
Net cash used in operating activities -34,231 -50,723
Cash flows from investing activities:
Additions to property and equipment -1,190 -5,309
Net cash used in investing activities -1,190 -5,309
Cash flows from financing activities:
Net borrowings under revolving loan agreements 35,757 56,047
Principal payments of long term debt -140 -127
Preferred stock dividends paid 0 -2
Issuance of common stock 329 1,095
Net cash provided by financing activities 35,946 57,013
Increase in cash and cash equivalents 525 981
Cash and cash equivalents, beginning 3,936 3,490
Cash and cash equivalents, ending $ 4,461 $ 4,471
The accompanying notes are an integral part of the condensed consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Nine Mos Nine Mos
Ended Ended
Sept 28, Sept 29,
1997 1996
Cash paid during the period for interest $ 76 $ 78
Cash paid during the period for income taxes 1,210 69
Non-cash investing and financing activities:
Indebtedness exchanged for preferred stock $ 40,000 $ 35,000
The accompanying notes are an integral part of the condensed consolidated
financial statements.
ENCORE COMPUTER CORPORATION
Condensed Statements of Capital Deficiency
(in thousands except share data)
Preferred Stock
Series A Series B Series D Series E
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Balance
Dec 31, 1996 73,641 $1 728,722 $7 1,115,074 $11 1,139,782 $11
Common stock options
exercised, $.69 to
$1.56 per share 0 0 0 0 0 0 0 0
Shares issued through employee
stock purchase plan at a price of
$1.17 per share 0 0 0 0 0 0 0 0
Issuance of Series I
Convert. Preferred
Stock (Notes D and E) 0 0 0 0 0 0 0 0
Net loss
Bal Sep 28, 1997 73,641 $1 728,722 $7 1,115,074 $11 1,139,782 $11
The accompanying notes are an intergral part of the condensed consolidated
financial statements.
Preferred Stock
Series F Series G Series H Series I
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Bal Dec 31, 1996 533,333 $5 572,289 $6 350,000 $4 0 $0
Common stock options
exercised, $.69 to
$1.56 per share 0 0 0 0 0 0 0 0
Shares issued through employee
stock purchase plan at a price of
$1.17 per share 0 0 0 0 0 0 0 0
Issuance of Series I
Convert. Preferred
Stock (Notes D and E) 0 0 0 0 0 0 400,000 4
Net loss
Bal Sep 28, 1997 533,333 $5 572,289 $6 350,000 $4 400,000 $4
Common Stock
Addt'l
Par Paid-in Accum (Capital
Shares Val Capital Deficit Def)
Bal Dec 31, 1996 37,270,457 $373$447,068 ($481,496) ($34,010)
Common stock options
exercised, $.69
to $2.00/shar 58,848 1 59 0 60
Shares issued through employee
stock purchase plan at a price of
$1.17 per share 230,671 2 267 0 269
Issuance of Series I
Convertible Preferred Stock
(Notes D and E) 0 0 39,833 0 39,837
Net loss 0 0 0 -56,465 -56,465
Bal Sep 28, 1997 37,559,976 $376$487,227 ($537,961) ($50,309)
Encore Computer Corporation
Notes to Condensed Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation and Other Matters
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Encore Computer Corporation ("Encore" or the
"Company") in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1996.
The condensed consolidated financial statements, in the opinion of the
Company, reflect all adjustments (including normal recurring accruals)
necessary for a fair statement of the results for the interim periods. All
adjustments made during the interim periods are normal recurring
adjustments. The year-end condensed balance sheet data is derived from
audited financial statements but does not include all disclosures required
by generally accepted accounting principles. Certain reclassifications have
been made to conform prior period data to current period presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the fiscal years.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard No. 128, Earnings per
Share ("SFAS 128"). SFAS 128 specifies new standards for the computation,
presentation and disclosure requirements for earnings per share ("EPS").
SFAS 128 is intended to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines by revising
the disclosure requirements to provide more consistent and meaningful
information and by increasing the comparability of EPS data on an
international basis. SFAS 128 is effective for the financial statements
issued for periods ending after December 15, 1997. The Company will adopt
SFAS 128 effective December 31, 1997 and will restate EPS for all periods
presented. In September 1997, the FASB issued Statement of Financial
Account Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established standards of reporting and display of comprehensive
income and its components. In September 1997, the FASB also issued
Statement of Financial Account Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
established standards for reporting operating and geographic segments and
the type and level of financial information to be discussed about those
segments. Both SFAS 130 and SFAS 131 are effective for fiscal years
beginning after December 15, 1997.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note E of Notes to Condensed Consolidated Financial Statements,
the Company has borrowings under a $75,000,000 facility which matures
November 30, 1997. Additionally, the Company does not have a committed
source of financing to meet expected requirements over the next year.
However, as discussed more fully in Note B of Notes to Condensed
Consolidated Financial Statements, on July 17, 1997, the Company signed a
definitive Asset Purchase Agreement with Sun Microsystems and Sun
Microsystems International, B.V. On that same date, the Company also
executed an agreement with Gould, pursuant to which the Company will use a
portion of the proceeds to be received to (a) pay the principal amount of,
and the accrued interest on, the Company's indebtedness to Gould and (b)
redeem the Company's outstanding Preferred Stock, all of which is held by
Gould and EFI. The closing of the asset purchase transaction is subject to,
among other things, the approval of the Encore shareholders at a meeting
which is will be held on November 24, 1997. 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.
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 $7,671,500 and $21,796,600 for the three and
nine month periods ended September 28, 1997, respectively. For the three
and nine month periods ended September 29, 1996, preferred stock dividends
amounted to $6,658,400 and $18,654,700, respectively. Based on the capital
deficiency, the Company is precluded from paying dividends on its preferred
stock outstanding. Accordingly, the Company has accumulated preferred stock
dividends since July 15, 1996 amounting to $35,210,300. All preferred stock
dividends other than those accumulated at September 28, 1997 have been paid
in additional shares of the appropriate shares of stock.
B. Asset Purchase Agreement with Sun Microsystems
On July 17, 1997, the Company signed a definitive Asset Purchase Agreement
with Sun Microsystems and Sun Microsystems International, B.V. (collectively
"SUN"). Pursuant to the terms of the Asset Purchase Agreement, Encore has
agreed to sell to SUN substantially all of the assets associated with
Encore's storage products business (the "Storage Products Business") for a
purchase price of $185 million in cash of which $150 million is payable at
closing and $35 million is payable on July 1, 1998 (the "SUN Transaction").
The assets associated with the Company's Storage Products Business being
sold to SUN consist primarily of approximately $5,037,000 of net inventory,
$27,325,000 of net book value of property, plant and equipment including
land and buildings located in Fort Lauderdale and Melbourne, Florida, as
well as approximately $300,000 of capitalized software purchased for
internal use. On July 17, 1997, the Company also executed an agreement with
Gould (the "Gould Agreement"), pursuant to which the Company will use a
portion of the proceeds to be received at the closing to (a) pay the
principal amount of, and the accrued interest on, the Company's indebtedness
to Gould (the "Gould Debt"), which is estimated to be approximately $93.7
million at the time of closing, and (b) redeem the Company's outstanding
Preferred Stock, all of which is held by Gould and EFI and which has an
aggregate liquidation preference over the Common Stock of $411 million, for
$60 million, of which $25 million will be paid in cash at the closing of the
SUN Transaction and the balance will be paid by assigning to Gould the
Company's right to receive the $35 million in proceeds from Sun on July 1,
1998. The closing of the SUN Transaction is subject to, among other things,
the approval of the Encore shareholders at a meeting which is expected to be
held on November 24, 1997
Additionally, the Gould Agreement provides for Gould, at its discretion, to
convert all Series A and Series B Preferred Stock into Common Stock.
Kenneth G. Fisher, Chairman of the Board and Chief Executive Officer of
Encore, may also convert the Series B Preferred Stock held by Indian Creek
Capital, Ltd., a limited partnership of which Mr. Fisher is the managing
general partner, into Common Stock. Any conversion by Gould is subject to,
among other things, obtaining certain U.S. Government approvals. On October
30, 1997, Gould, having obtained all required U.S. Government approvals,
converted all of its Series A and Series B Preferred Stock into Common Stock
and Indian Creek Capital, Ltd. converted all of its Series B Preferred Stock
into Common Stock. As a result, as of the record date of October 31, 1997,
Gould owned 32,673,169 shares of Common Stock, representing 48.5% of the
outstanding shares on that date. On the record date, Mr. Fisher, his wife
and Indian Creek Capital, Ltd., owned a total of 5,003,944 shares of Common
Stock, representing 7.4% of the outstanding shares on that date.
In a letter to the Company dated July 17, 1997, Gould confirmed that it was
not obligated to provide any additional financing to Encore but that so long
as Gould was convinced that the SUN Transaction would take place, it was
likely that Gould would continue to provide financing to Encore but only to
the extent absolutely necessary to enable the SUN Transaction to be
consummated. However, if either (i) a meeting of the Encore stockholders
for the purpose of voting upon the SUN Transaction is held, but the vote
required to approve the transaction is not obtained, or (ii) a meeting of
the Encore stockholders for the purpose of voting upon the SUN Transaction
is not held by November 30, 1997, the letter stated that Gould would not
provide any financing to Encore after the day of the meeting of Encore
stockholders (or after November 30, 1997, if the meeting is not held by that
date). If the vote required to approve the SUN Transaction is not obtained,
the Company will be unable to continue its normal operations, and will have
no alternative to liquidation.
Following the Sun Transaction, Encore's only active business will be its
real-time business. However, Encore believes there are opportunities for it
to use experience gained in developing its real-time products and its
storage products to create software which will enable various types of
standard computer hardware to be operated in clusters to create large
capacity, high reliability versions of the computer hardware. The Company
expects to incur approximately $1,800,000 in legal, accounting and other
fees and expenses associated with the Sun Transaction and approximately
$22,000,000 in restructuring costs in connection with the Sun Transaction
and organization and operation of the Company following the Sun Transaction.
These restructuring costs include approximately $11,400,000 in employee
severance and outplacement costs, $5,600,000 in retention and incentive
bonuses payable to employees of the Company (including $4,600,000 pursuant
to written agreements between the Company and each of approximately 49
employees and $1,000,000 to be paid to certain key employees in the
discretion of management), approximately $4,500,000 in connection with the
termination of certain office and equipment leases and approximately
$500,000 in leasehold improvements at the Company's Fort Lauderdale facility
to be leased from SUN.
For a more detailed description of the SUN Transaction and the Gould
Agreement, refer to the Company's Definitive Proxy Statement dated October
31, 1997.
C. Inventories
Inventories consist of the following (in thousands):
Sept 28, Dec 31,
1997 1996
Purchased parts $ 2,893 $ 9,357
Work in process 3,897 306
Finished goods 914 3,981
Loaned computer equipment and
consignment inventory 7 252
Total inventory $ 7,711 $ 13,896
Storage Product inventory amounted to $3,363,000 and $9,169,000 at September
28, 1997 and December 31, 1996, respectively. On August 17, 1997, as
discussed more fully in Note B, the Company executed a definitive Asset
Purchase Agreement with SUN to sell the assets, products and technology
related to the Company's Storage Products business.
D. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following (in
thousands):
Sept 28, Dec 31,
1997 1996
Accounts payable $ 4,063 $ 4,976
Accrued salaries and benefits 4,760 4,034
Accrued interest-related parties 16,322 11,614
Accrued taxes 953 2,760
Deferred income, principally
maintenance contracts 1,260 879
Other accrued expenses 4,176 4,402
Total accounts payable and accrued liabilities $ 31,534 $ 28,665
Accrued interest of $16,322,000 and $10,791,000 was payable to Gould at
September 28, 1997 and December 31, 1996, respectively. Accrued interest on
the previous refinancing ($823,000 at December 31, 1996) was being amortized
over the term of the Credit Agreement. The balance remaining on March 19,
1997 was reversed.
E. Debt
Debt consists of the following (in thousands):
Sept 28, Dec 31,
1997 1996
Debt to unrelated parties:
Mortgages payable $ 518 $ 658
Current portion of debt -137 -182
Total long term debt to unrelated parties $ 381 $ 476
Debt to related parties:
Credit agreement with Gould Electronics, Inc. $ 68,416 $ 72,659
Current portion of debt -68,416 -72,659
Total long term debt to unrelated parties $ 0 $ 0
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. Assuming full conversion of preferred stock holdings as of
June 29, 1997, the Japan Energy Group beneficially owns 83% of the Company's
common stock. The Company is dependent on the continued financial support
of the Japan Energy Group. Should the Japan Energy Group withdraw its
financial support, the Company may be unable to continue its normal
operations.
On March 19, 1997, Gould as authorized by Japan Energy Corporation, agreed
to cancel $40,000,000 of indebtedness pursuant to 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"), as
discussed in more detail in Note F of Notes to Condensed Consolidated
Financial Statements. 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. On October
8, 1997 Gould agreed to amend the Credit Agreement to increase the maximum
amount which can be borrowed by the Company to $75,000,000. All borrowings
after October 8, 1997 in excess of the $70,238,933 of indebtedness then
outstanding may be made only at the discretion of Gould. All borrowings
under the Credit Agreement, plus accrued interest, are due and payable on
November 30, 1997. In the event of default, the rate of interest to be
applied will immediately increase by an additional 2%. As of November 10,
1997 the Company owed to Gould $75,858,672 under the Credit Agreement, plus
$17,331,990 in accrued interest.
The credit facility bears interest at the prime rate plus 2% (10.5% at
September 28, 1997). As of September 28, 1997, Encore owed to Gould
$68,416,000 in principal, plus $16,322,000 in accrued interest. 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 indicated it will not waive any covenants in the
event of non-compliance. As of September 28, 1997, the Company is not in
compliance with any covenants except capital expenditures.
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 the Company's counsel.
The Company and Gould Electronics Inc. have been advised by DIS that the
conversion to be done in conjunction with the Asset Purchase Agreement of
Gould's Series A and Series B Preferred Stock will not adversely affect the
Company's facility security clearance, provided Gould's commitment not to
vote its common stock for matters other than the approval of the Asset
Purchase Agreement and the election of directors of the Company, a majority
of whom will be Gould designees, is met. Gould is continuing discussions
with DIS concerning the formation of a plan acceptable to DIS to address the
issue of Foreign Ownership, Control and Interest ("FOCI") presented by the
majority of directors being representatives of a foreign interest, Gould
Electronics Inc.
F. Shareholder' Equity
As discussed in more detail in Note E of Notes to Condensed Consolidated
Financial Statements, on March 19, 1997 Gould canceled $40,000,000 of
indebtedness in exchange for 400,000 newly-issued shares of Series I. 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.
However, pursuant to the Gould Agreement dated July 17, 1997, as discussed
in Note B of the Notes to Condensed Consolidated Financial Statements, the
Company's outstanding Preferred Stock held by Gould and EFI, which has an
aggregate liquidation preference over the Common Stock of $411 million, will
be redeemed for $60 million upon the closing of the SUN Transaction. As a
result, the necessity to increase the authorized shares of common stock of
the Company will no longer be required upon the closing of the SUN
Transaction.
(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 J 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.
Upon completion of the Series I transaction, Japan Energy Group's beneficial
ownership, on a fully converted basis, increased to 82.9%.
The completion of these transactions had 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 addtional paid-in capital $ 39,833
During the nine months ended September 29, 1996, options granted to certain
officers and employees of the Company were scheduled to expire if not
exercised. However, at the time the options were scheduled to expire the
Company's policy on insider trading effectively prevented the officers from
exercising the options. Accordingly, the Board of Directors approved an
extension of the expiration date until January 21, 2000. The extension was
treated as a cancellation of the old options and a grant of new options in
the same amount at the same exercise price. A non-cash non-recurring
compensation charge of $589,000 was recorded in connection with the
extension of the expiration date of the stock options.
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three and Nine Months Ended September 28, 1997
Compared to the Three and Nine Months Ended September 29, 1996
The following is management's discussion and analysis of the financial
condition and the results of operations of Encore Computer Corporation
("Encore" or the "Company") for the three and nine month periods ended
September 28, 1997 compared to the three and nine month periods ended
September 29, 1996. The Company's net loss for the three and nine months
ended September 28, 1997 was $16,638,000 and $56,465,000, respectively,
compared to the net loss for the same periods of 1996 of $19,049,000 and
$49,657,000, respectively. The decreased loss for the three month period of
1997 compared to the same period in 1996 is due principally to lower labor
costs, reduced development material costs and lower commissions due to the
decline in sales. The increased loss for the nine month period of 1997
compared to the same period in 1996 is attributable to lower revenues and
gross margins as potential customers continue to express concerns over the
Company's financial condition.
RESULTS OF OPERATIONS:
Total net sales for the three and nine month periods of 1997 decreased 44%
and 37%, respectively, to $7,429,000 and $23,116,000 from $13,269,000 and
$36,582,000 for the three and nine month periods of 1996. International net
sales declined to $4,281,000 and $12,723,000 for the three and nine month
periods ended September 28, 1997, respectively, representing a decrease of
52% and 39% from the three and nine month periods ended September 29, 1996.
International sales for the three and nine months ended September 28, 1997
were 58% and 55%, respectively, of total net sales as compared to 67% and
57% for the same periods in 1996.
During the three and nine month periods ended September 28, 1997, equipment
sales decreased $4,724,000 or 55% and $10,252,000 or 47%, respectively, from
the same periods of 1996. Net Storage Product sales were $1,517,000 and
$3,762,000 for the three and nine month periods ended September 28, 1997,
respectively, including the reversal of $1,154,111 in the nine month period,
associated with international installations which have been returned,
compared to storage product sales of $3,035,000 and $5,960,000 for the same
periods of 1996. Sales of the Company's real-time products declined by
$3,206,000 and $8,054,000, or 58% and 51%, in the three and nine month
periods ended September 28, 1997, respectively, from the three and nine
month periods ended September 29, 1996.
For the three and nine month periods ended September 28, 1997, service sales
declined $1,116,000 or 24%, and $3,214,000 or 22%, respectively, from the
same periods of 1996. 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.
Cost of equipment sales for the three and nine month periods of 1997
decreased 56% and 17% from the three and nine month comparable periods of
1996, a decrease of $6,078,000 and $3,734,000, respectively, due principally
to lower revenues. As a percentage of net equipment sales, 1997 cost of
equipment sales for the three and nine month periods were 126% and 159%,
respectively, compared to 128% and 101% for the three and nine month periods
of 1996, respectively. These increases are the result of (i) continued
heavy discounting of Storage Products in an effort to penetrate the
marketplace, (ii) under utilization of manufacturing capacity, (iii) higher
warranty costs associated with the Storage Product and (iv) the Company's
policy of not reversing cost of sales on returned equipment.
Cost of service sales for the three and nine month periods ended September
28, 1997 decreased from the comparable periods of 1996 by $1,112,000 or 22%,
and $1,632,000 or 12%. 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. While the real-time
service business continues to be profitable, service margins were reduced
for investments in various programs and infrastructure necessary to support
the Storage Product line. For the three and nine month periods ended
September 28, 1997, this investment was $1,643,000 (46% of service sales)
and $4,954,000 (42% of service sales), respectively. Cost of service sales
associated with real-time services was $2,250,000 (63% of service sales) and
$7,493,000 (64% of service sales) for the three and nine month periods ended
September 28, 1997.
Research and development costs for the three and nine month periods ended
September 28, 1997, decreased from the comparable periods of 1996 by
$1,411,000 or 18%, and $2,931,000 or 12%, respectively . The decrease in
1997 spending is attributable to lower labor costs and reduced development
material costs. However, as a percentage of net sales, research and
development expenses were 87% and 90% for the three and nine month periods
ended September 28, 1997, compared to 59% and 65% for the comparable periods
of 1996. The Company expects research and development spending in the near
term, to remain relatively constant.
Selling, general and administrative expenses decreased by $1,017,000 or 13%,
and $2,331,000 or 10% for the three and nine month periods of 1997 when
compared to 1996. The decrease is attributable to lower labor costs in the
administration functions and lower commissions due to the decline in sales.
As a percentage of net sales, selling, general and administrative costs
continue to remain high, 91% and 95% for the three and nine months ended
September 28, 1997 compared to 58% and 66% for the comparable periods of
1996.
Interest expense for the three and nine month periods ended September 28,
1997 increased from 1996 levels by $1,113,000 and $2,629,000, reflecting the
Company's higher debt level during 1997 due to the timing and value of the
various recapitalizations occurring in both years.
Other expense for the three and nine month periods ended September 28, 1997
increased $205,000 and $1,110,000 from the same periods in 1996 due to
higher foreign exchange losses.
LIQUIDITY AND CAPITAL RESOURCES:
During the past five years, the Company has incurred significant operating
losses and has been unable to generate cash flows from operating activities.
Cash used in operating activities for the first nine months of 1997 amounted
to $34,231,000 compared to $50,723,000 for the same period in 1996.
During the nine month period ended September 28, 1997, cash used in
operating activities decreased by $16,492,000 when compared to the nine
month period ended September 29, 1996. For the nine month period ended
September 28, 1997, the net loss, as adjusted for non cash items, exceeded
the net loss for the comparable period of 1996 by $12,628,000. Accounts
receivable and inventories decreased $6,665,000 and $5,375,000,
respectively, in the first nine months of 1997, while in 1996, the Company
invested heavily in inventories to improve Storage Product availability,
increasing inventory by $13,181,000. Accounts payable and accrued
liabilities increased $2,706,000 during the first nine months of 1997. In
the first nine months of 1996, accounts payable and accrued liabilities
increased $3,042,000.
Expenditures for property and equipment for the nine months ended September
28, 1997 and September 29, 1996 were $1,190,000 and $5,309,000,
respectively. Spare parts required to support customer installations
accounted for 89% of total property and equipment spending in the first nine
months of 1997. As of September 28, 1997, there were no material
commitments for capital expenditures.
Cash used in operating and investing activities during the nine month
periods of 1997 and 1996 was principally offset by cash provided through
financing activities of $35,946,000 and $57,013,000, respectively. The
principal source of financing has been through various agreements provided
by the Japan Energy Group. As discussed in Notes E and F of Notes to
Condensed Consolidated Financial Statements, on March 19, 1997, Gould as
authorized by Japan Energy Corporation, agreed to cancel $40,000,000 of
indebtedness pursuant to 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"), as discussed in more detail in
Note F of Notes to Condensed Consolidated Financial Statements. 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. Through October 8, 1997 Gould agreed to amend the
Credit Agreement to increase the maximum amount which can be borrowed by the
Company to $75,000,000. All borrowings after October 8, 1997 in excess of
the $70,238,933 of indebtedness then outstanding may be made only at the
discretion of Gould. All borrowings under the Credit Agreement, plus
accrued interest, are due and payable on November 30, 1997. In the event of
default, the rate of interest to be applied will immediately increase by an
additional 2%. As of November 10, 1997 the Company owed to Gould
$75,858,672 under the Credit Agreement, plus $17,331,990 in accrued
interest.
On July 17, 1997, the Company signed a definitive Asset Purchase Agreement
with Sun Microsystems and Sun Microsystems International, B.V. (collectively
"SUN"). Pursuant to the terms of the Asset Purchase Agreement, Encore has
agreed to sell to SUN substantially all of the assets associated with
Encore's storage products business (the "Storage Products Business") for a
purchase price of $185 million in cash, of which $150 million is payable at
closing and $35 million is payable on July 1, 1998 (the "SUN Transaction").
The assets associated with the Company's Storage Products Business being
sold to SUN consist primarily of approximately $5,037,000 of net inventory,
$27,325,000 of net book value of property, plant and equipment including
land and buildings located in Fort Lauderdale and Melbourne, Florida, as
well as approximately $300,000 of capitalized software purchased for
internal use. On July 17, 1997, the Company also executed an agreement with
Gould, pursuant to which the Company will use a portion of the proceeds to
be received at the closing to (a) pay the principal amount of, and the
accrued interest on, the Company's indebtedness to Gould (the "Gould Debt"),
which is estimated to be approximately $93.7 million at the time of closing,
and (b) redeem the Company's outstanding Preferred Stock, all of which is
held by Gould and EFI and which has an aggregate liquidation preference over
the Common Stock of $411 million, for $60 million, of which $25 million will
be paid in cash at the closing of the SUN Transaction and the balance will
be paid by assigning to Gould the Company's right to receive the $35 million
in proceeds from Sun on July 1, 1998. The closing of the SUN Transaction is
subject to, among other things, the approval of the Encore shareholders at a
meeting to be held on November 24, 1997.
In a letter to the Company dated July 17, 1997, Gould confirmed that it was
not obligated to provide any additional financing to Encore but that so long
as Gould was convinced that the SUN Transaction would take place, it was
likely that Gould would continue to provide financing to Encore but only to
the extent absolutely necessary to enable the SUN Transaction to be
consummated. However, if either (i) a meeting of the Encore stockholders
for the purpose of voting upon the SUN Transaction is held, but the vote
required to approve the transaction is not obtained, or (ii) a meeting of
the Encore stockholders for the purpose of voting upon the SUN Transaction
is not held by November 30, 1997, the letter stated that Gould would not
provide any financing to Encore after the day of the meeting of Encore
stockholders (or after November 30, 1997, if the meeting is not held by that
date). If the vote required to approve the SUN Transaction is not obtained,
the Company will be unable to continue its normal operations, and will have
no alternative to liquidation. For a more detailed description of the SUN
Transaction and the Gould Agreement, refer to the Company's Definitive Proxy
Statement dated October 31, 1997.
The Company expects to incur approximately $1,800,000 in legal, accounting
and other fees and expenses associated with the Sun Transaction and
approximately $22,000,000 in restructuring costs in connection with the Sun
Transaction and organization and operation of the Company following the Sun
Transaction. These restructuring costs include approximately $11,400,000 in
employee severance and outplacement costs, $5,600,000 in retention and
incentive bonuses payable to employees of the Company (including $4,600,000
pursuant to written agreements between the Company and each of approximately
49 employees and $1,000,000 to be paid to certain key employees in the
discretion of management), approximately $4,500,000 in connection with the
termination of certain office and equipment leases and approximately
$500,000 in leasehold improvements at the Company's Fort Lauderdale facility
to be leased from SUN. After payment of the Gould Debt, indebtedness to
trade and other creditors, SUN Transaction costs, restructuring costs and
the portion of the redemption price of the Gould Preferred Stock which is
payable in cash at the closing, approximately $7,100,000 (including
$4,300,000 in cash) are expected by Encore to constitute net proceeds from
the SUN Transaction, which will be available to Encore as working capital to
fund its operations following the SUN Transaction.
Following the Sun Transaction, Encore's only active business will be its
real-time business. However, Encore believes there are opportunities for it
to use experience gained in developing its real-time products and its
storage products to create software which will enable various types of
standard computer hardware to be operated in clusters to create large
capacity, high reliability versions of the computer hardware. The Company's
Board of Directors has begun to study the options which will be available to
Encore following the SUN Transaction. Those options will include (i)
continuing, and attempting to expand, its real-time business, (ii) entering
into the business of developing software for clustering various types of
computer hardware using Microsoft's Window NT, or (iii) selling the real-
time business and distributing to the Company's common stockholders both the
net proceeds of the sale of the real-time business and the proceeds of the
SUN Transaction which remain after the restructuring costs and payments to
Gould. Factors the Board of Directors will consider in deciding what the
Company should do will include, among other things, (a) the actual and
projected revenues and cash flows from continuing and expanding its real-
time business, (b) the anticipated costs of developing clustering software,
(c) the likelihood Encore would be able to distribute clustering software in
a manner which would generate significant revenues and profits, (d) the
amount of the proceeds of the SUN Transaction which are likely to be
available to support future Encore activities, (e) the Company's ability to
obtain debt or equity financing for future activities, (f) the price for
which Encore's real-time business, and possibly other technology owned by
Encore, could be sold and (g) any other factors which, in the judgment of
the Company's Board of Directors, may bear upon what future course is likely
to be most beneficial to the Company and its stockholders.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per share earnings.
See page 23.
Exhibit No. 27 - Financial Data Schedule. See page 24.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 28, 1997.
Encore Computer Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
Encore Computer Corporation
_________________ _______________
Date: November 12, 1997 KENNETH G. FISHER EDWARD J. BAKER
Chairman of the Board Corporate Controller
and Chief Executive Officer Secretary
Chief Accounting Officer
ENCORE COMPUTER CORPORATION
Computation of Loss per Share
Exhibit No. 11
(unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
Sept 28, Sept 29, Sept 28, Sept 29,
Primary 1997 1996 1997 1996
Net loss $ -16,638 $ -19,049 $ -56,465 $ -49,657
Series B, D, E, F and G Preferred
Stock Dividends 0 0 0 -11,996
Series B, D, E, F, G, H and I accumulated
Preferred Stock Dividends -7,672 -6,658 -21,794 -6,658
Net loss attributable to
common shareholders $ -24,310 $ -25,707 $ -78,259 $ -68,311
Weighted average common
shares outstanding 37,560 37,009 37,419 36,704
Net loss per share $ -1 $ -1 $ -2 $ -2
Assuming Full Dilution
Net loss $ -16,638 $ -19,049 $ -56,465 $ -49,657
Wghtd avg common shares outstand 37,560 37,009 37,419 36,704
Series A assumed converted 7,364 7,364 7,364 7,364
Series B assumed converted 24,096 22,707 23,745 22,373
Series D assumed converted 36,871 34,745 36,334 34,234
Series E assumed converted 37,688 35,515 37,140 34,993
Series F assumed converted 17,635 16,618 17,378 16,374
Series G assumed converted 18,924 17,832 18,648 17,570
Series H assumed converted 11,573 10,906 11,405 6,633
Series I assumed converted 12,555 0 8,920 0
Exercise of options reduced by
the number of shares purchased
with proceeds 0 1,801 0 2,158
204,266 184,497 198,353 178,403
Net loss per share -0.08 -0.10 -0.28 -0.28
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit No. 27
ENCORE COMPUTER CORPORATION
Financial Data Schedule
(Unaudited)
(in thousands)
For the six months ended Sept 28, 1997
Cash and cash items 4,461
Marketable securities 0
Notes and accounts receivable-trade 8,839
Allowances for doubtful accounts -912
Inventory 7,711
Total current assets 21,221
Property, plant and equipment 80,274
Accumulated depreciation -50,836
Total assets 51,959
Total current liabilities 100,087
Bonds, mortgages and similar debt 518
Preferred stock mandatory redemption 0
Preferred stock no mandatory redemption 49
Common stock 376
Other stockholders' equity -50,374
Total liabilities & equity 51,959
Sales of tangible products 11,428
Total revenues 23,116
Cost of tangible goods sold 18,138
Total costs applicable to revenues 30,585
Other costs and expenses 1,281
Provision for doubtful accounts and notes 378
Interest and amortization of debt discount 4,778
Income before taxes and other items -56,271
Income tax expense 194
Income/loss from continuing operations -56,465
Discontinued operations 0
Extraordinary items 0
Cumulative effect of accounting changes 0
Net income or loss -56,465
Earnings per share-primary -2.09
Earnings per share-fully diluted -0.28
</TABLE>
