6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313
Telephone: (305) 587-2900
Fax: (305) 797-5793
Employees: 1,330 (1988)
Sales: $4.7 million (1998)
Stock Exchanges: NASDAQ
NAIC: 334111 Electronic Computer Manufacturing
Encore Computer Corporation was one of the leading American manufacturers of open, scalable computer and storage systems for data centers and mission-critical applications. The company's highly innovative Memory Channel technology, coupled with its sophisticated Infinity 90 Series commercial parallel processing systems for mainframe computers, placed it at the forefront of the ever-changing computer systems industry. Yet from the very beginning of its existence, Encore struggled with financial problems. It ceased operations in 1999.
Encore Computer Corporation began its life under the most auspicious of circumstances. Kenneth G. Fisher, who had built the Prime Computer Company from a fledgling $7 million operation into a $350 million giant in just six short years, joinedC. Gordon Bell and Henry Burkhardt III to form Encore in 1983. Bell had previously worked as an engineering vice-president at Digital Equipment Corporation, and Burkhardt had co-founded Data General Corporation. These three luminaries from the computer industry joined together to raise nearly $50 million to fund the startup of the new company. The trio intended to develop and market an extremely broad range of products, including desktop computers and large mainframes. With the market for computers worth over $31 billion at the time, Fisher and his colleagues felt certain they could secure a healthy portion of it for Encore.
At first, everything went according to plan. A technical staff was hired from the research laboratories at Carnegie-Mellon University in Pittsburgh, and a headquarters was established in Wellesley Hills, Massachusetts. Bell undertook the supervision of the engineering and design department, while Fisher and Burkhardt concentrated on finance, sales, and marketing. Encore acquired Hydra Computer Systems, Inc. to develop processors, Foundation Computer Systems, Inc. to write software, and Resolution Systems, Inc. to produce the terminals. The number of employees shot up to 110, and management projected early 1985 as the date for the initial models to roll out of the company's plant.
By January 1984, however, the company had lost $1.2 million. Undeterred by the costs incurred during the initial setup of Encore, Fisher, Bell, and Burkhardt forged ahead. During 1984 and 1985, the company concentrated on designing and marketing UNIX-based computers and terminal servers. During the same time, Encore developed a reputation as a leader in early symmetric and parallel multiprocessing designs for computers. Both the Defense Advanced Research Projects Agency, an office of the United States government, and the academic community became interested in the company's innovative software and architectural hardware. Members of these communities agreed to fund additional multiprocessing research conducted by Encore engineers. Armed with this ready financial backing, by 1988 Encore was able to build and deploy its own revolutionary design for a 32-way UNIX symmetrical multiprocessor with unprecedented computational abilities.
In order to build upon this technology, in 1989 Encore purchased the assets of the Computer Systems Division (CDS) of Gould Electronics. The Computer Systems Division of Gould dated back to 1961, a period when the competition between the United States and the Soviet Union for space technology encouraged numerous American firms to pursue contracts with the National Aeronautics and Space Administration (NASA). One of those companies, Systems Engineering Labs (SEL), targeted the field of data acquisition. SEL manufactured the industry's first 32-bit minicomputer, a development that spurred the explosion of the telemetry, energy, and vehicle simulation markets. SEL grew accordingly as it designed high technology products for its customers in power utilities and aerospace.
In 1981, Gould recognized the leadership role Systems Engineering was playing in the superminicomputer industry. It purchased SEL and reorganized it under the name Computer Systems Division (CDS). As part of Gould, the new Computer Systems Division continued to design and manufacture computer systems for the simulation, energy, and telemetry markets. In 1985, CDS created a distributed shared memory system that became known as the Reflective Memory System. This system not only provided a simple memory model but also solved failure obstacles. The reflective memory system passively "reflected" memory updates to the memory boards on every one of the computers on the participating system. Each individual computer in a system possessed a reflective memory adapter and functioned as a repository for shared data. Armed with its own adapter, each computer was therefore protected from the failure of any other computer.
The strategy behind Encore's acquisition of Gould's Computer Systems Division was simple. Encore combined its own high technology symmetrical multiprocessing research and design advances with CSD's microprocessor-based systems and high-speed reflective memory system. The combination of high technology laid the groundwork for the development of Encore's Infinity 90 Series.
Infinity 90 was an open systems mainframe that provided I/O bandwidth and massive storage capacity. The topology of the system was designed to solve any single failure within a network without disrupting the entire system. Encore felt that the mainframe was a significant advance over traditional mainframe solutions to systems failures and storage capacity. Encore management believed the development of the Infinity 90 Series was the answer to their financial difficulties.
During the late 1980s and early 1990s, there was a detectable trend within the computer industry away from traditional proprietary computer technologies toward a "open systems" technology, that is, software and hardware manufactured to nonproprietary international standards and capable of running on machines regardless of their manufacturer. Nonetheless, the market for such technology remained very small. Encore committed over $76 million to develop a new generation of computer systems (the Infinity 90 Series and the Encore 90 Families) based on the open systems architecture, but demand for its products remained weak. Encore's new open systems technology did not generate the level of demand and income that management initially anticipated. At the same time, the company's older technology reached the final stages of its marketability and began to experience declining sales. The increasingly precarious financial position of the company began to affect the working relations of the founders, and Bell and Burkhardt decided to resign. Fisher remained chief executive officer and chairman of the board but was confronted with what seemed to be intractable financial problems. Sales of $215 million in 1990 dropped to $153 million by 1991.
Faced with declining revenues and a smaller customer base than originally projected, Fisher responded aggressively by implementing a complete restructuring of the company. He reduced Encore's number of employees, consolidated manufacturing and warehousing facilities, and devoted even more money to research and development. Pinched to generate a sufficient cash flow to pay for operating expenses, Fisher looked for help from the outside.
In 1991, Encore entered into an agreement with Japan Energy Corporation and a number of its subsidiaries to provide working capital for the financially strapped high-tech firm. The agreement included a revolving loan program amounting to $50 million and a refinanced loan amounting to $80 million. Fisher also agreed to a large exchange of stock for help in paying off Encore's growing debts.
With the assistance of Japan Energy, Fisher was able to obtain Encore additional time to prepare the Infinity 90 Series for market. When the Infinity 90 product line was introduced, however, the overall market conditions and the demand for open systems products did not increase significantly. Sales for 1992 dropped to $130 million. That year, the company was delisted by NASDAQ because it was unable to meet NASDAQ's $2 million minimum equity requirements for trading.
Anticipating future developments in the marketplace, Fisher reduced the level of sales to U.S. government agencies. With the end of the cold war in Europe, Fisher correctly perceived that the U.S. government, and especially the Department of Defense, would reduce its expenditures for computers and computer-related services. In 1992 and 1993, sales to various departments of the U.S. government amounted to 29 percent and 37 percent of the company's total net sales, respectively. To offset the potential damage that could be inflicted on Encore if the source of these revenues was reduced, he concentrated on expanding the Infinity 90 Series product line, still convinced of the application and high growth potentiality of non-traditional computer markets.
Encore, however, endured another disappointing year in 1993. The declining demand for open systems technology exceeded the projections of company management and, as a result, revenues continued to spiral downward. Estimates for international sales and growth of non-traditional computer markets were also significantly higher than actual sales and growth rates. At the end of fiscal 1993, the company reported sales of $93 million, a $35 million decrease from the previous year, and an operating loss of over $69 million. In light of these problems, Fisher was forced to reduce Encore's work force by 10 percent in June and an additional 8 percent in December of the same year. The company's European work force was reduced by approximately 20 percent. It marked the third straight year that the company had cut the number of workers it employed. Other cost-cutting measures included the elimination of excess sales and service offices.
With Fisher in firm control of Encore and a comprehensive restructuring program completed, the company's fortunes suddenly turned around. In late 1993 and early 1994, Encore management negotiated a major contract with Digital Equipment Corporation to license the company's connectivity technology for use in DEC's product line. This move, expected to produce a large amount of revenue through royalties, started to show results in early 1995. Encore also won a contract with the U.S. Department of Defense to replace and upgrade already employed IBM mainframes with its Infinity 90 Series at certain centers operated around the world. The first system was installed in January 1994. The Department of Defense was so pleased with the performance of this equipment that it concluded an agreement to install $20 million worth of Encore systems during the remainder of 1994.
Throughout 1994, Encore succeeded in winning additional contracts. The company reached an agreement with Amdahl Corporation to distribute an IBM-compatible storage system using a modified Infinity 90 mainframe computer. This was the first product designed and manufactured by Encore to be compatible with IBM's product environment, and the introduction of this system marked Encore's first foray into a $13 billion market. Encore noted that the product was the first in the industry with the ability to connect to an IBM system and provide storage functions, while at the same time perform as an open systems mainframe computer. The result was a five-year distribution partnership that amounted to over $1 billion. Finally, in early 1994, the company was recapitalized and began to sell its stock once again on the NASDAQ. By the end of fiscal 1994, Encore sales had rebounded to $130 million on the strength of Fisher's reconfiguration of Encore into an alternative mainframe and storage systems company.
The flicker of success proved to be a brief pause in Encore's decline. Nearly ten years after the deal, Encore still had not recovered from its 1988 purchase of Gould's real-time computing business. The real-time enterprise developed and marketed data systems for such applications as military and civil aircraft simulators, utility power stations, and rapid transit systems that required computer processors capable of analyzing and responding to input at high speeds. A "business in decline," according to David Poppe of the Miami Herald (March 24, 1998), the real-time operation struggled despite having contracts with most major air carriers, including Boeing, Northrup Grumman, Electrabel, Lockheed, Raytheon, and Consolidated Edison.
Encore drew heavily on Gould and its then parent company Nippon Mining Co's resources, completing a $150 million recapitalization with Nippon Mining in 1992 and a $100 million debt-to-equity refinancing deal with Gould in 1994. In 1995, a recapitalization of undisclosed amount with Japan Energy Corp. allowed Encore to resume trading on NASDAQ, but the company continued to suffer steep losses. Between 1989 and 1998, the company lost over $228 million. In 1993, after its recapitalization with Nippon Mining, Encore's losses averaged nearly $6 million per month on revenues of about $7.79 million per month. In 1994, after the recapitalization through Gould, Encore's losses averaged about $3.4 million per month on revenues of about $6.48 million per month. David Poppe wrote, "Encore's continual need for financial aid caused Japan Energy Corp., the parent of Gould, to publicly describe Encore as a bone in its throat." Gould refinanced Encore again in 1997, converting $40 million of debt into preferred stock convertible to non-voting common stock at $3.25 per share, but the cash infusion was not enough to keep Encore from being removed to NASDAQ's Small Cap Market in early February of that year because the company failed to meet trading regulations for net tangible assets.
July 1997 marked the sale of Encore's storage products business to Sun Microsystems Inc., a Santa Clara, California-based technology firm known for such innovations as the universal software platform Java and other technologies important to the Internet and networking systems. The $185 million cash deal provided Sun with Encore's Datashare software and associated intellectual properties and technologies, which Sun intended to use to bolster its enterprise-level computing business. Led by Robert Collings and Paul Rosenblum, six Encore shareholders, who controlled over 5 percent of the company's stock, objected to the deal, which called for Encore to pay $154 million of the purchase price to Gould to retire debt and $17 million to management and employees in the form of severance payments and incentives. Shareholders would receive the remaining $7 million, or about 2.5 cents per share, only $4.3 million of which would come in the form of cash. Gould owned 49 percent of Encore's shares, however, so the opposition came to naught.
It was a deal that Sun came to regret. Sun hoped that the Encore software would aid in the development of a high-end intelligent storage system, but delays in packaging and delivery so diminished revenues from the software that Sun declared in its September 20, 2001, SEC filing that "future cash flow from the use of Encore's technology was determined to be negligible in fiscal 2000." Sun scrapped Encore's technology at a cost of $9 million and signed a deal to sell Hitachi Data Systems instead.
Its primary business gone, Encore posted a loss of more than $20 million on revenues of over $8.33 million in 1997. By the end of the first quarter of 1998 in March, the company recorded a net loss of $766,000 on revenues of more than $4.7 million. That month, Encore announced the sale of its real-time computing business to Gores Technology Group, a technology acquisition company that purchased and managed high-tech organizations, for $3 million in cash. Under the terms of the sale, Gores operated Encore's real-time business between June 1, 1998 and January 8, 1999 for a fee of $100,000 per month, refundable to Encore on closure of the deal. During that time, Gores contracted with Compro to provide hardware service and refurbished products, reorganized Encore's European branches, and signed a new agreement with Encore's Japanese distributor. The management company also met with major customers and tailored the business, accelerating software releases and planning software and hardware upgrades to suit. Under Gores' management, sales increased 20 percent over the six months ending June 1998, and the real-time business began generating a net profit. The sale closed on January 8, 1999, and Encore ceased operations.
Dell Inc.; EMC Corporation; Hitachi Data Systems Corporation; International Business Machines Corporation.
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——, "Encore Shares Up as Firm Again Retools Financing," South Florida Business Journal , March 24, 1995, p. 5A.
—update: Jennifer Gariepy