Encore Computer Corporation - Company Profile, Information, Business Description, History, Background Information on Encore Computer Corporation

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History of Encore Computer Corporation

Encore Computer Corporation is 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, place it at the forefront of the ever-changing computer systems industry. Yet from the very beginning of its existence, Encore has struggled with financial problems, and its survival as an independent company is not yet assured.

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, combined with C. 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 dates 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 Aeronautical 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 is an open systems mainframe that provides I/O bandwidth and massive storage capacity. The topology of the system is 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 more open systems technology. 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 suspended from participation in the NASDAQ Stock Exchange because it was unable to meet minimum trading requirements.

To guard against anticipated 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 ten percent in June and an additional eight 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 Exchange. 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.

Additional Details

Further Reference

Baatz, E.B., "How To Win The Hearts (And Cash) Of Fickle Venture Capitalists," Electronic Business, June 1992, p. 96."Can Three Hotshots Make Encore Take Off?" Business Week, August 27, 1984, p. 93.

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