UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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 August 13, 1997 was 37,559,976.
Encore Computer Corporation
Index
Part I FINANCIAL INFORMATION Page
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 14
Part II OTHER INFORMATION 18
Signature Page 19
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
Net sales:
Equipment $ 3,411 $ 6,551 $ 7,594 $ 13,122
Service 3,943 5,048 8,093 10,191
7,354 11,599 15,687 23,313
Costs and expenses:
Cost of equipment sales 6,122 5,075 13,298 10,954
Cost of service sales 4,285 4,113 8,554 9,074
Research and development 7,152 7,677 14,421 15,941
Sales, General and Admin 7,580 7,814 15,218 16,532
Total 25,139 24,679 51,491 52,501
Operating loss -17,785 -13,080 -35,804 -29,188
Int exp, princ related parties -1,355 -548 -2,754 -1,238
Interest income 32 35 61 76
Other (expense)/income, net -500 -118 -1,163 -258
Loss before income taxes -19,608 -13,711 -39,660 -30,608
Provision for income taxes 196 0 167 0
Net loss $ -19,804 $ -13,711 $ -39,827 $ -30,608
Net loss per common share:
Net loss attributable to common
shareholders $ -27,066 $ -19,754 $ -53,949 $ -42,604
Loss per common share $ -0.60 $ -0.45 $ -1.21 $ -0.97
Weighted average shares
of common stock 44,781 44,120 44,711 43,916
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Balance Sheets
(in thousands except share data)
Unaudited
Jun 29, Dec 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 3,155 $ 3,936
Accounts receivable, less allowance 8,009 14,970
Inventories (Note B) 9,475 13,896
Prepaid expenses and other current assets 1,351 1,409
Total current assets 21,990 34,211
Property and equipment, net 30,409 33,376
Other assets 1,427 1,669
Total assets $ 53,826 $ 69,256
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long term
debt-related parties (Notes D and E) $ 57,061 $ 72,659
Current portion of long term debt-other (Note D) 152 182
Accounts payable and accrued liabilities (Note C) 28,456 28,665
Total current liabilities 85,669 101,506
Long term debt-other (Note D) 414 476
Other liabilities 1,414 1,284
Total liabilities 87,497 103,266
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 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 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. 376 373
Additional paid-in capital 487,227 447,068
Accumulated deficit -521,323 -481,496
Total capital deficiency -33,671 -34,006
Total liabilities and capital deficiency $ 53,826 $ 69,260
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Mos Six Mos
Ended Ended
June 29, June 30,
1997 1996
Cash flows from operating activities:
Net loss $ -39,827 $ -30,608
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 3,897 5,795
Inventory obsolescence and writedown to lower of cost
or market 540 540
Bad debt provision/(credit) 408 -153
Net changes in operating assets and liabilities:
Accounts receivable 6,553 -296
Inventories 3,881 -9,594
Prepaid expenses and other current assets 58 144
Other assets 2 109
Accounts payable and accrued liabilities -372 713
Other liabilities 130 168
Net cash used in operating activities -24,730 -33,182
Cash flows from investing activities:
Additions to property and equipment -690 -3,963
Net cash used in investing activities -690 -3,963
Cash flows from financing activities:
Net borrowings under revolving loan agreements 24,402 36,175
Principal payments of long term debt -92 -84
Preferred stock dividends paid 0 -2
Issuance of common stock 329 1,075
Net cash provided by financing activities 24,639 37,164
Increase (decrease) in cash and cash equivalents -781 19
Cash and cash equivalents, beginning 3,936 2,797
Cash and cash equivalents, ending $ 3,155 $ 2,816
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Six Mos Six Mos
Ended Ended
June 29, June 30,
1997 1996
Cash paid during the period for interest $ 55 $ 78
Cash paid during the period for income taxes 1,212 34
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.
<PAGE>
ENCORE COMPUTER CORPORATION
Condensed Statements of Shareholders' Equity (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 Jun 29, 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 Jun 29, 1997 533,333 $5 572,289 $6 350,000 $4 400,000 $4
Common Stock Shrhldrs'
Addt'l Eq
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 -39,827 -39,827
Bal Jun 29, 1997 37,559,976 $376$487,227 ($521,323) ($33,671)
<PAGE>
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.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note D of Notes to Condensed Consolidated Financial Statements,
the Company has borrowings under a $65,000,000 facility which matures August
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.
Per Share Data
Per share data is calculated based upon the weighted average number of
shares of common stock and common stock equivalents outstanding. In fiscal
periods which report net losses, the calculation does not include the effect
of common stock equivalents such as stock options since the effect on the
amounts reported would be antidilutive. Series A Convertible Participating
Preferred Stock ("Series A") has been considered common stock (on an assumed
converted basis) for purposes of all income (loss) per share calculations.
All other series of preferred stock have been determined to be common stock
equivalents but are not included in the weighted average number of shares of
common stock and equivalents or in the calculation of net loss per share for
the periods presented because the effect would be antidilutive.
Net loss per common share was determined by dividing the net loss, as
adjusted, by applicable shares outstanding. The loss was adjusted by the
aggregate amount of dividends on the Company's preferred stock. Preferred
stock dividends amounted to $7,262,500 and $14,122,100 for the three and six
month periods ended June 29, 1997, respectively. For the three and six
month periods ended June 30, 1996, preferred stock dividends amounted to
$6,042,800 and $11,996,300, 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 $27,538,800. All preferred stock
dividends other than those accumulated at June 29, 1997 have been paid in
additional shares of the appropriate shares of stock.
B. Inventories
Inventories consist of the following (in thousands):
June 29, Dec 31,
1997 1996
Purchased parts $ 3,054 $ 9,357
Work in process 4,892 306
Finished goods 1,443 3,981
Loaned computer equipment and
consignment inventory 86 252
Total inventory $ 9,475 $ 13,896
Storage Product inventory amounted to $6,990,000 and $9,169,000 at June 29,
1997 and December 31, 1996, respectively. On May 28, 1997, as discussed
further in Note F, the Company executed a non-binding Memorandum of
Understanding with Sun Microsystems, Inc. ("SUN") to sell the assets,
products and technology related to the Company's Storage Products business.
C. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following (in
thousands):
June 29, Dec 31,
1997 1996
Accounts payable $ 4,034 $ 4,976
Accrued salaries and benefits 4,573 4,034
Accrued interest-related parties 14,378 11,614
Accrued taxes 828 2,760
Deferred income, principally
maintenance contracts 1,359 879
Other accrued expenses 3,284 4,402
Total accounts payable and accrued liabilities $ 28,456 $ 28,665
Accrued interest of $14,378,000 and $10,791,000 was payable to Gould at June
29, 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.
D. Debt
Debt consists of the following (in thousands):
June 29, Dec 31,
1997 1996
Debt to unrelated parties:
Mortgages payable $ 566 $ 658
Current portion of debt -152 -182
Total long term debt to unrelated parties $ 414 $ 476
Debt to related parties:
Credit agreement with Gould Electronics, Inc. $ 57,061 $ 72,659
Current portion of debt -57,061 -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 E 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
July 12, 1997 Gould agreed to amend the Credit Agreement to increase the
maximum amount which can be borrowed by the Company to $65,000,000. All
borrowings after July 12, 1997 in excess of the $58,979,927 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 August 31, 1997. In the event of default, the rate of interest
to be applied will immediately increase by an additional 2%. As of August
13, 1997 the Company owed to Gould $63,397,449 under the Credit Agreement,
plus $15,302,539 in accrued interest.
The credit facility bears interest at the prime rate plus 2% (10.5% at June
29, 1997). As of June 29, 1997, Encore owed to Gould $57,061,000 in
principal, plus $14,378,000 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 June 29, 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 Encore's counsel.
E. Shareholders' Equity
As discussed in more detail in Note D 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;
(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
F. Subsequent Events
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. 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 $90 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 no later than October 1997, following preparation,
review by the Securities and Exchange Commission and delivery to the
shareholders of a notice of the meeting and proxy statement relating to the
transaction.
Additionally, the Gould Agreement provides for Gould, at its discretion, to
convert all Series A and Series B Preferred Stock into Common Stock. Ken
Fisher may also convert the Series B Preferred Stock held by Indian Creek
Capital into Common Stock. Any conversion by Gould is subject to, among
other things, obtaining certain U.S. Government approvals. As of August 13,
1997 neither Gould nor Ken Fisher has converted their Preferred Stock. In
the event of such conversion, the total Common Stock outstanding would
increase to 67,346,291, or which Gould would hold 32,673,169 or 48.5% of
outstanding and Mr. Fisher would hold 5,003,944 or 7.4% of outstanding.
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.
Item 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
for the Three and Six Months Ended June 29, 1997
Compared to the Three and Six Months Ended June 30, 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 six month periods ended June
29, 1997 compared to the three and six month periods ended June 30, 1996.
The Company's net loss for the three and six months ended June 29, 1997 was
$19,804,000 and $39,827,000, respectively, compared to the net loss for the
same periods of 1996 of $13,711,000 and $30,608,000, respectively. The
increased losses are 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 six month periods of 1997 decreased 37%
and 33%, respectively, to $7,354,000 and $15,687,000 from $11,599,000 and
$23,313,000 for the three and six month periods of 1996. International net
sales declined to $4,087,000 and $8,442,000 for the three and six month
periods ended June 29, 1997, respectively, representling a decrease of 38%
and 29% from the three and six month periods ended June 30, 1996.
International sales for the three and six months ended June 29, 1997 were
56% and 54%, respectively, of total net sales as compared to 57% and 51% for
the same periods in 1996.
During the three and six month periods ended June 29, 1997, equipment sales
decreased $3,140,000 or 48% and $5,528,000 or 42%, respectively, from the
same periods of 1996. Net Storage Product sales were $1,012,000 and
$2,245,000 for the three and six month periods ended June 29, 1997,
respectively, including the reversal of $200,000 in the three month period
and $1,154,111 in the six month period, associated with international
installations which have been returned, compared storage to product sales of
$1,480,000 and $2,924,000 for the same periods of 1996. Sales of the
Company's real-time products declined by $2,671,000 and $4,849,000, or 53%
and 48%, in the three and six month periods ended June 29, 1997,
respectively, from the three and six month periods ended June 30, 1996.
For the three and six month periods ended June 29, 1997, service sales
declined $1,105,000 or 22%, and $2,098,000 or 21%, 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 six month periods of 1997
increased 21% from the three and six month comparable periods of 1996, an
increase of $1,047,000 and $2,344,000, respectively, despite lower revenues.
As a percentage of net equipment sales, 1997 cost of equipment sales for the
three and six month periods were 179% and 175%, respectively, compared to
77% and 83% for the three and six 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 month period ended June 29, 1997
increased from the comparable period of 1996 by $172,000 or 4%. However,
cost of service sales for the six month period ended June 29, 1997 decreased
from the comparable period of 1996 by $520,000 or 6%. 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 six month periods ended June 29, 1997, this investment was $1,953,000
and $3,311,000, respectively. Cost of service sales associated with real-
time services was $2,332,000 and $5,243,000 for the three and six month
periods ended June 29, 1997, resulting in an adjusted gross margin of
$1,611,000 or 41% and $2,850,000 or 35% of service revenues, respectively.
Research and development costs for the three and six month periods ended June
29, 1997, decreased from the comparable periods of 1996 by $525,000 or 7%,
and $1,520,000 or 10%, 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 97% and 92% for the three and six month periods ended June 29, 1997,
compared to 66% and 68% 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 $234,000 or 3%,
and $1,314,000 or 8% for the three and six 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, 103% and 97% for the three and six months ended
June 29, 1997 compared to 67% and 71% for the comparable periods of 1996.
Interest expense for the three and six month periods ended June 29, 1997
increased from 1996 levels by $807,000 and $1,516,000, 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 six month periods ended June 29, 1997
increased $382,000 and $905,000 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 six months of 1997 amounted
to $24,730,000 compared to $33,182,000 for the same period in 1996.
During the six month period ended June 29, 1997, cash used in operating
activities decreased by $8,452,000 when compared to the six month period
ended June 30, 1996. For the six month period ended June 29, 1997, the net
loss, as adjusted for non cash items, exceeded the net loss for the
comparable period of 1996 by $10,556,000. Accounts receivable and
inventories decreased $6,553,000 and $3,881,000, respectively, in the first
half of 1997, while in 1996, the Company invested heavily in inventories to
improve Storage Product availability, increasing inventory by $9,594,000.
Accounts payable and accrued liabilities decreased $372,000 during the
first half of 1997. In the first half of 1996, accounts payable and accrued
liabilities increased $713,000.
Expenditures for property and equipment for the six months ended June 29,
1997 and June 30, 1996 were $690,000 and $3,963,000, respectively. Spare
parts required to support customer installations accounted for 88% of total
property and equipment spending in the first half of 1997. As of June 29,
1997, there were no material commitments for capital expenditures.
Cash used in operating and investing activities during the six month periods
of 1997 and 1996 was principally offset by cash provided through financing
activities of $24,639,000 and $37,164,000, respectively. The principal
source of financing has been through various agreements provided by the
Japan Energy Group. As discussed in Notes D and E 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 E 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 July 12, 1997 Gould agreed to amend the Credit
Agreement to increase the maximum amount which can be borrowed by the
Company to $65,000,000. All borrowings after July 12, 1997 in excess of the
$58,979,927 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 August 31, 1997. In the event of
default, the rate of interest to be applied will immediately increase by an
additional 2%. As of August 13, 1997 the Company owed to Gould $63,397,449
under the Credit Agreement, plus $15,302,539 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. 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 $90 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 no later than October 1997, following preparation,
review by the Securities and Exchange Commission and delivery to the
shareholders of a notice of the meeting and proxy statement relating to the
transaction.
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.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 11 - Statement re: computation of per share earnings.
See page 20.
Exhibit No. 27 - Financial Data Schedule. See page 21.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 29, 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:August 13, 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 Six Months Ended
June 29, June 30, June 29, June 30,
Primary 1997 1996 1997 1996
Net loss $ -19,804 $ -13,711 $ -39,827 $ -30,608
Series B, D, E, F and G Preferred
Stock Dividends 0 -6,043 0 -11,996
Series B, D, E, F, G, H and I accumulated
Preferred Stock Dividends -7,262 0 -14,122 0
Net loss attributable to
common shareholders $ -27,066 $ -19,754 $ -53,949 $ -42,604
Weighted average common
shares outstanding 37,417 36,756 37,347 36,552
Series A assumed converted 7,364 7,364 7,364 7,364
Weighted avg shares outstand 44,781 44,120 44,711 43,916
Net loss per share $ -.60 $ -.45 $ -1.21 $ -.97
Assuming Full Dilution
Net loss $ -19,804 $ -13,711 $ -39,827 $ -30,608
Wghtd avg common shares outstand 37,417 36,756 37,347 36,552
Series A assumed converted 7,364 7,364 7,364 7,364
Series B assumed converted 23,740 22,371 23,568 22,206
Series D assumed converted 36,243 34,232 36,021 33,979
Series E assumed converted 37,046 34,991 36,819 34,732
Series F assumed converted 17,335 16,373 17,229 16,252
Series G assumed converted 18,601 17,569 18,487 17,439
Series H assumed converted 11,376 8,994 11,306 4,497
Series I assumed converted 1,736 0 1,698 0
Exercise of options reduced by
the number of shares purchased
with proceeds 248 4,353 282 4,292
191,106 183,003 190,121 177,313
Net loss per share -0.10 -0.07 -0.21 -0.17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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Exhibit No. 27
ENCORE COMPUTER CORPORATION
Financial Data Schedule
(Unaudited)
(in thousands)
For the six months ended June 29, 1997
Cash and cash items 3,155
Marketable securities 0
Notes and accounts receivable-trade 8,956
Allowances for doubtful accounts -947
Inventory 9,475
Total current assets 21,990
Property, plant and equipment 80,062
Accumulated depreciation -49,653
Total assets 53,826
Total current liabilities 85,669
Bonds, mortgages and similar debt 566
Preferred stock mandatory redemption 0
Preferred stock no mandatory redemption 49
Common stock 376
Other stockholders' equity -33,246
Total liabilities & equity 53,826
Sales of tangible products 7,594
Total revenues 15,687
Cost of tangible goods sold 13,298
Total costs applicable to revenues 21,852
Other costs and expenses 1,163
Provision for doubtful accounts and notes 408
Interest and amortization of debt discount 2,754
Income before taxes and other items -39,660
Income tax expense 167
Income/loss from continuing operations -39,827
Discontinued operations 0
Extraordinary items 0
Cumulative effect of accounting changes 0
Net income or loss -39,827
Earnings per share-primary -1.21
Earnings per share-fully diluted -0.21
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