-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBNeC+V63k0r0MJanJsjsJNgdB8nZbHWo0CgTieA2jWZaRvcaMCO+N6zDuWtO3Mj ScypoWnhwTrhg163ciJWyQ== 0000743653-95-000026.txt : 19951103 0000743653-95-000026.hdr.sgml : 19951103 ACCESSION NUMBER: 0000743653-95-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951102 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVEX COMPUTER CORP CENTRAL INDEX KEY: 0000743653 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 751838006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10386 FILM NUMBER: 95586724 BUSINESS ADDRESS: STREET 1: 3000 WATERVIEW PKWY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 2144974000 MAIL ADDRESS: STREET 1: 3000 WATERVIEW PKWY STREET 2: P O BOX 833851 CITY: RICHARDSON STATE: TX ZIP: 75083-3851 10-Q 1 ============================================================================== 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: September 30, 1995, 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 number : 1-10386 CONVEX COMPUTER CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 75-1838006 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3000 Waterview Parkway Richardson, Texas 75080 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (214) 497-4000 ------------------------ 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 30 days. Yes X No ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 30, 1995 Common Stock - $0.01 Par value 26,795,314 ============================================================================== PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONVEX COMPUTER CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) Sept. 30, Dec. 31, Assets 1995 1994 ------------- -------- Current assets: (Unaudited) Cash and cash equivalents $ 16,929 $ 34,422 Short-term investments 6,855 5,194 Receivables, net 33,446 44,922 Inventory 19,282 23,655 Current portion of long-term receivables 9,163 13,122 Prepaid expenses and other current assets 7,235 7,998 -------- --------- Total current assets 92,910 129,313 -------- --------- Fixed assets, net 27,326 29,433 Long-term receivables 9,734 16,594 Long-term investments 5,973 6,373 Other assets, net 5,130 4,477 -------- --------- Total assets $141,073 $186,190 ======== ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 7,168 $ 10,547 Accrued payroll and related taxes 4,612 4,327 Current portion of notes payable 7,944 9,884 Deferred revenue 11,156 14,207 Other current liabilities 20,308 25,912 -------- -------- Total current liabilities 51,188 64,877 -------- --------- Long-term liabilities: Notes payable 5,369 9,678 6% convertible subordinated debentures 53,500 53,500 -------- -------- Total long-term liabilities 58,869 63,178 -------- -------- Contingencies and commitments -- -- Shareholders' equity: Preferred stock ($.01 par value); 5,000,000 shares authorized, and none outstanding -- -- Common stock ($.01 par value); 80,000,000 and 40,000,000 shares authorized in 1995 and 1994, respectively; 26,790,465 shares and 26,533,485 shares outstanding in 1995 and 1994, respectively 267 265 Additional capital 154,780 153,574 Accumulated (deficit) (123,451) (94,305) Cumulative translation adjustment (580) (1,399) --------- -------- Total shareholders' equity 31,016 58,135 --------- -------- Total liabilities and shareholders' equity $ 141,073 $ 186,190 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. CONVEX COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Revenue: Product and other revenue $ 12,937 $ 20,537 $ 55,873 $ 47,279 Service revenue 12,262 15,906 39,563 52,610 --------- --------- --------- --------- Total revenue 25,199 36,443 95,436 99,889 Costs and Expenses: Cost of product and other revenue 9,375 12,018 36,847 32,236 Cost of service revenue 7,511 9,565 23,257 34,283 Research and development 8,172 7,697 23,469 23,771 Selling, general and administrative 13,142 14,970 39,117 45,847 Restructuring and other charges 0 0 0 18,345 --------- --------- --------- --------- Total costs and expenses 38,200 44,250 122,690 154,482 --------- --------- --------- --------- Operating (loss) (13,001) (7,807) (27,254) (54,593) Other (expense), net (860) (552) (1,618) (1,327) ---------- --------- --------- --------- (Loss) before provision for income taxes (13,861) (8,359) (28,872) (55,920) ---------- --------- --------- --------- Provision for income taxes 1 427 274 541 --------- --------- --------- -------- Net (loss) $ (13,862) $ (8,786) $ (29,146) $ (56,461) ========== ========= ========== ========== Net (loss) per common share $ (.52) $ (.33) $ (1.09) $ (2.18) ========== ========= ========== ========== Weighted average number of common shares outstanding 26,770 26,321 26,715 25,846 The accompanying notes are an integral part of these consolidated financial statements. CONVEX COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, ------------------------ 1995 1994 ----------- ----------- Operating activities: Net income (loss) $ (29,147) $ (56,461) Adjustments to reconcile net (loss) to net cash (used for) provided by operating activities: Depreciation and amortization 12,732 13,483 Foreign currency losses (103) (629) Deferred income taxes 388 256 Changes in assets and liabilities: Decrease in receivables 12,614 21,628 Decrease in inventory 4,800 2,502 Decrease in prepaid expenses and other current assets 1,418 8,164 Decrease in long-term receivables 10,974 7,428 (Decrease) in accounts payable (3,511) (2,185) Increase (decrease) in income taxes payable 152 (1,136) (Decrease) in deferred revenue (3,549) (8) (Decrease) in other current liabilities (7,938) (3,710) ----------- ----------- Total adjustments 27,977 45,793 ----------- ----------- Net cash (used for) operating activities (1,170) (10,668) ----------- ----------- Investing activities: (Additions) to fixed assets, net (7,280) (5,400) (Increase) decrease in short-term investments (1,661) 7,846 Decrease in long-term investments 400 3,360 (Increase) in other assets (2,738) (2,871) Foreign currency hedging activity (179) (1,195) ----------- ----------- Net cash (used for) provided by investing activities (11,458) 1,740 ----------- ----------- Financing activities: Issuance of common stock under stock option and purchase plans, net 1,209 2,693 Proceeds from long-term debt 3,424 310 Principal payments on long-term debt (9,670) (8,947) ----------- ----------- Net cash (used for) financing activities (5,037) (5,944) ----------- ----------- Effect of exchange rate fluctuations on cash and cash equivalents 172 1,832 ----------- ----------- (Decrease) in cash and cash equivalents (17,493) (13,040) Cash and cash equivalents, beginning of period 34,422 43,094 ----------- ----------- Cash and cash equivalents, end of period $ 16,929 $ 30,054 ========== =========== Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 3,763 $ 3,833 Income taxes, net of refunds $ (936) $ (5,824) The accompanying notes are an integral part of these consolidated financial statements. CONVEX COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation of Interim Financial Statements The accompanying unaudited consolidated financial statements of Convex Computer Corporation and subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information in footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to those rules and regulations. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. It is suggested that these financial statements be read in connection with the financial statements and notes thereto included in the Company's most recent annual report to shareholders. While the financial information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting of normal, recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the interim balance sheet dates. Revenue Recognition Product revenue is recognized at the time of shipment except in those cases where (a) specified functional or performance criteria cannot be factory tested or otherwise verified prior to shipment, or (b) contract terms or funding contingencies would render the earnings process not substantially complete. In cases where revenue is deferred at the time of shipment, revenue will be recognized when the product functionality or performance can be verified or when contract terms or funding contingencies are resolved. Service revenue is recognized ratably over the term of each maintenance contract or, for other services, as those services are provided. For maintenance contracts, customers are given the option to prepay for service, in which case the prepayment is accounted for as deferred revenue and recognized ratably over the service period. Inventory Inventory is recorded at the lower of cost (on a first-in, first-out basis) or market. Inventory consists of the following (in thousands): Sept. 30, Dec. 31, 1995 1994 ----------- ---------- Raw material $ 7,137 $ 10,119 Work-in-process 2,671 2,957 Finished goods 9,474 10,579 ------- -------- $ 19,282 $ 23,655 ======== ======== Income Taxes The operating loss for the Company in the third quarter of 1995 is anticipated to result in no tax benefit in the current year. The Company believes it may incur tax expenses in various foreign subsidiaries which could result in a net tax expense for the year. At September 30, 1995, the Company had foreign and domestic operating loss carryforwards which are available to offset future taxable income. The realization of the tax benefits related to the loss carryforwards is dependent on the future profitability of the Company and its foreign subsidiaries. Earnings per Common and Common Equivalent Share The computation of primary earnings per share is based on the weighted average number of common and common equivalent (stock options) shares assumed to be outstanding during the period. Because of net losses in the periods presented, common stock equivalents have been excluded from the computation since the effect of their inclusion would be anti-dilutive. Legal Proceedings On September 22, 1995, an action titled Joanne Hoffman v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe, Convex and Hewlett-Packard (the "Hoffman Action") was filed in the State of Delaware against Convex, Hewlett-Packard and the Convex Board. The Hoffman Action alleges, among other things, that the proposed price per share for the Convex Common Stock is unfairly low and does not accurately reflect the intrinsic value of the Convex Common Stock. The Hoffman Action further alleges that the members of the Convex Board breached their fiduciary duties to Convex by failing to conduct an auction of Convex before signing the Merger Agreement and that the Convex Board failed to exercise independent judgment in agreeing to the Merger. The Hoffman Action alleges that HP owes a fiduciary duty to the stockholders of Convex. The Hoffman Action requests, among other things, that the court enjoin the consummation of the Merger, as well as unspecified damages, and certification as a class action. On October 2, 1995, a second action titled Gail Gomberg v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe, Convex and Hewlett-Packard (the "Gomberg Action") was filed in the State of Delaware against Convex, Hewlett-Packard and the Convex Board. The Gomberg Action alleges, among other things, that the Merger is unfair to Convex and its stockholders for the following reasons: (i) the Convex Board did not conduct an auction before entering into the Merger Agreement, (ii) the price offered for shares of Convex Common Stock in the Merger was below the market price on the date that the Merger Agreement was signed, (iii) the Merger will deny the Convex stockholders the right to maximize the value of their securities through the loss of a premium that could be available from other suitors, and (iv) by conducting the foregoing acts, the Convex Board breached their fiduciary duties to Convex and its stockholders. The Gomberg Action also alleges that HP aided and abetted the members of the Convex Board in breaching their fiduciary duties. The Gomberg Action seeks an injunction against the Merger, as well as unspecified damages, certification as a class and other forms of relief. On October 3, 1995, a third action titled Glenn Faegenburg v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe and Convex (the "Faegenburg Action") was filed in the State of Delaware against Convex and the individual members of the Convex Board. The Faegenburg Action alleges, among other things, that the proposed price per share is unfairly low and that the members of the Convex Board breached their fiduciary duties to the Convex stockholders. The Faegenburg Action seeks an injunction against the Merger, as well as unspecified damages, certification as a class action and other forms of relief. While no assurance can be given as to the results of the above described actions, HP and Convex believe that each of the above actions lacks merit and intend to defend these actions vigorously. Restructuring and Other Charges A summary of the Company's restructuring and other charges is as follows (in millions): 1994 Quarters -------------------------- Item 4th 3rd 2nd 1st - ---- ---- ---- ---- ---- Severance and related employee costs $0.0 $0.0 $2.1 $0.0 Fixed asset write-downs/write-offs 0.0 0.0 2.9 0.0 Demo equipment write-downs 0.0 0.0 1.6 0.0 ---- ---- ---- ---- Restructuring charges 0.0 0.0 6.6 0.0 C3 inventory write-downs/write-offs 0.0 0.0 11.7 0.0 ---- ---- ----- ---- Other charges 0.0 0.0 11.7 0.0 ---- ---- ----- ---- Restructuring and Other charges $0.0 $0.0 $18.3 $0.0 ==== ==== ===== ==== The Company implemented restructuring actions in 1994 primarily as a result of the substantial decline in order rates and revenues of the Company's C3 product line. These actions were designed to reduce operating costs and to increase the efficiency of the Company's operations. These actions included reductions of the Company's workforce and resulted in payments to terminated employees for salaries and severance, benefits during the severance period and outplacement services. Additionally, the restructuring actions resulted in write-downs of certain of the Company's assets which were either obsolete or lacked future utility to the Company. The fixed asset write-downs included costs related to the retirement of fixed assets, principally assets used in the assembly and test of both hardware and software products for the C3 product lines. In addition, the Company wrote-down the carrying value of its C3 sales demonstration and marketing equipment. The Company recorded $11.7 million of other charges in 1994. The majority of these charges related to the write-downs of the carrying values of the Company's inventories. These write-downs were the result of the continued decline in demand for C3 products below levels estimated in the second quarter of 1993 and the resulting reductions in sales prices for the entire C3 family of products. Merger with Hewlett-Packard On September 21, 1995, Convex Computer Corporation, Hewlett-Packard Company ("Hewlett-Packard"), and Gemini Project Corporation, a wholly-owned subsidiary of Hewlett-Packard ("Subsidiary") entered into an Agreement and Plan of Merger (the "Merger Agreement"), which contemplates that Hewlett-Packard will acquire Convex by means of a merger of Subsidiary with and into Convex. Subject to the approval of the holders of a majority of the outstanding shares of common stock, $.01 par value, of Convex ("Convex Common Stock") and certain other conditions set forth in the Merger Agreement, (i) each outstanding share of Convex Common Stock will be converted into the right to receive that fraction of a share (the "Conversion Fraction") of common stock, $1.00 par value, of Hewlett-Packard ("HP Common Stock") as is determined by dividing $4.83 by the average closing price of HP Common Stock for the ten trading day period ending two trading days prior to the effectiveness of the Merger (the "Effective Time"), and (ii) each outstanding option to purchase Convex Common Stock will thereafter constitute an option to acquire that number of whole shares of HP Common Stock equal to the number of shares of Convex Common Stock issuable with respect to such option multiplied by the Conversion Fraction, at a price equal to the exercise price per share of Convex Common Stock divided by the Conversion Fraction. Subject to the consummation of the Merger, Convex will apply the funds credited as of the last payday on or prior to the Effective Time in each participant's payroll withholdings account under the Convex 1995 Employee Stock Purchase Plan to the purchase of whole shares of Convex Common Stock. No fractional shares of HP Common Stock will be issued in the Merger. Cash will be paid in lieu of issuing fractional shares. After the Effective Time, the 6% Convertible Subordinated Debentures due March 1, 2012 (the "Debentures") issued by Convex will be convertible, at the option of the holders, into whole shares of HP Common Stock at a conversion price determined by dividing $21.75, the current price at which the Debentures are convertible into Convex Common Stock, by the Conversion Fraction. Hewlett-Packard will not succeed to the rights and obligations of Convex under the Indenture dated as of March 1, 1987 relating to the Debentures (the "Indenture") at the Effective Time. Upon completion of the transaction, which is anticipated by early 1996, Convex will become a wholly- owned subsidiary of Hewlett-Packard. Nothing in the Merger Agreement prevents the Board of Directors of Convex (the "Convex Board") from soliciting or encouraging, or from considering or negotiating, another proposal for a merger or similar transaction (an "Acquisition Proposal"). Convex, through its financial advisors, PaineWebber Incorporated, has commenced efforts to solicit alternative proposals from potential acquirors. In addition, nothing in the Merger Agreement prevents the Convex Board from approving or recommending an Acquisition Proposal if the Convex Board determines that such Acquisition Proposal would result in a transaction more favorable to Convex's stockholders from a financial point of view that the transaction contemplated by the Merger Agreement (a "Superior Proposal"). If Convex accepts or recommends to its stockholders a Superior Proposal, Convex will be required to pay Hewlett-Packard the sum of $3,750,000, plus Hewlett-Packard's expenses. Hewlett-Packard has filed with the Securities and Exchange Commission ("Commission") a Registration Statement on Form S-4 under the Securities and Exchange Act of 1933, as amended, with respect to the HP Common Stock to be issued in the Merger. The Proxy Statement/Prospectus forming part of that Registration Statement will be mailed to the record holders of Convex Common Stock after the Registration Statement is declared effective by the Commission, which is expected to occur before the end of 1995. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview On September 21, 1995, Convex Computer Corporation ("Convex"), Hewlett-Packard Company ("Hewlett-Packard") and Gemini Project Corporation, a wholly-owned subsidiary of Hewlett-Packard ("Subsidiary") entered into an Agreement and Plan of Merger (the "Merger Agreement"), which contemplates that Hewlett-Packard will acquire Convex by means of a merger (the "Merger") of Subsidiary with and into Convex. Upon completion of the Merger, which is expected to occur by early 1996, Convex will become a wholly-owned subsidiary of Hewlett-Packard. Certain terms of the Merger are summarized below under the heading "Merger with Hewlett-Packard." During the third quarter of 1995, revenue declined sharply due in substantial part to customers' continued concern over Convex's financial viability. Continued intense competition in the technical markets and component shortages for Convex's C4 systems also played a role in the decline, which was significantly sharper than expected. Revenue for the third quarter was $25 million versus $35 million in the previous quarter and $36 million in the third quarter of 1994. Expenses for the third quarter increased by $.7 million versus the previous quarter, but declined by $1 million from the third quarter of 1994. As a result, Convex incurred a loss of $14 million, or $.52 per share, for the third quarter, versus a loss of $7 million, or $.27 per share, in the previous quarter and $9 million, or $.33 per share, in the third quarter of 1994. Cash and short-term investments decreased by $10 million in the third quarter of 1995 to $24 million as of September 30, 1995. The Company believes that its financial results will continue to be adversely affected by intense competition in the technical markets, component availability issues and, unless the Merger is consummated or Convex can obtain additional capital, customers' concern over Convex's financial viability. The Company has no established borrowing facility or other source of additional capital. After a thorough investigation of financing alternatives, the Company has been unable to locate a source of additional capital willing to provide an amount of capital sufficient to satisfy the Company's near-term requirements. While some sources have expressed interest in attempting to raise or provide additional capital for the Company, none of these sources has been able to express a high level of confidence in their ability to satisfy the Company's capital requirements given the Company's recent history of losses and near-term prospects and general market factors, including the fact that virtually all of the supercomputer companies still in business in 1994, including Kendall Square Research, Thinking Machines Corporation and Cray Computer Corporation, either are experiencing financial difficulties or have filed bankruptcy. The Company expects financial performance to be below break-even for at least the next two quarters and potentially beyond. As a result, the Company expects cash, cash equivalents and short-term investment balances to decline to or be below minimum requirements in early 1996 unless it (a) can obtain additional capital from currently unidentified sources or by consummating the Merger or (b) curtails or eliminates some of its technology and product development activities which are important to its success in the long term. Revenue Total revenue of $25 million for the third quarter of 1995 was 31% below the Company'sttotal revenue for the third quarter of 1994 and 28% below the second quarter of 1995. Quarter ended --------------------------- Revenue ($000,000) 9/30/95 9/30/94 6/30/95 ------------------ ------- ------- ------- Product and Other $ 13 $ 21 $ 22 Service 12 16 13 Total 25 36 35 9/30/95 Quarter Revenue - Percent change from quarter ended --------------------------------- Product and Other Revenue 0% -37% -40% Service Revenue 0% -23% -9% Total Revenue 0% -31% -28% System Shipments ---------------- Exemplar SPP 14 17 18 Meta Series 0 2 1 C4600 1 5 4 C3800 0 0 0 C3200/3400 0 5 5 Third quarter product revenue decreased 37% from the third quarter of 1994, primarily as a result of a decrease in C Series system shipments, and decreased 40% from the second quarter of 1995, as a result of decreases in both C4 system and Exemplar SPP system shipments. Critical sole-source component shortages coupled with late order placement allowed shipment of only one C4 system during the third quarter of 1995, and resulted in an increase of two systems in the C4 system order backlog. The Company believes that the availability of these critical sole-source components will continue to limit C4 system shipments in the near term. The Company also believes that the high average selling price and the low unit volume of its C4 system will continue to lead to highly variable results for this product line, sales of which have ranged from one to eight system sales per quarter. During the third quarter of 1995, shipments of higher-end Exemplar system XA models were below the levels of the previous quarter and the same quarter of 1994. The effects of this decline were partially offset by an increase in shipments of lower-end Exemplar system CD models and an increase in Exemplar SPP upgrade shipments. Service revenue in the third quarter of 1995 decreased 23% from the third quarter of 1994 and 9% from the second quarter of 1995. Service revenue includes revenue from maintenance contracts and systems integration. Systems integration includes the integration components for the data management business and the Meta Series product line. Service revenue from maintenance contracts, which was approximately $11 million in the third quarter of 1995, has been declining gradually because the decrease in service revenue from older systems has not been fully offset by an increase in service revenue from newer systems. The decline in service revenue also reflects a decline in systems integration revenue, which Convex believes will fluctuate from quarter to quarter. The Company manufactures and ships its products as soon as practicable after receiving a purchase order, and generally does not maintain a significant backlog. The Company's future financial performance will depend on its ability to generate new orders for shipment in the same quarter in which the orders are received. The Company currently has an order backlog for three C4 systems, shipment of which are constrained by critical sole-source component shortages and, for one system, export licensing and funding approval. In addition, shipment of three Exemplar SPP systems that are in backlog require export licensing and funding approval. Finally, because a significant portion of the Company's shipments occur in the last month of a quarter, minor timing differences in the receipt of customer purchase orders and in the Company's shipments can have a significant impact on quarterly financial results. Due to the high average selling price and low unit volume of the Company's sales, failure to complete a small number of sales transactions before the end of a quarter can have a significant negative impact on financial results. Gross Margin Total gross margin for the third quarter of 1995 decreased to 33% from 40% in the second quarter of 1995 and 41% in the third quarter of 1994 . Quarter ended --------------------------- Gross Margin % Revenue 9/30/95 9/30/94 6/30/95 - ---------------------- ------- ------- ------- Product and Other Margin 28 41 38 Service Margin 39 40 42 Total Margin 33 41 40 Product margin decreased to 28% in the third quarter of 1995 versus the 41% achieved in the third quarter of 1994 and 38% in the second quarter of 1995. The primary reason for the decrease was the impact of fixed factory overhead on the reduced volume. Third quarter margins for Exemplar SPP systems remained relatively constant versus both prior periods, while third quarter margins for C Series systems declined versus both prior periods. The Company expects continued pressure on C Series system margins due to continued intense pricing competition and increased costs associated with shortages of critical sole-source components. Gross margin on the service business was 39% for the third quarter of 1995 compared to 40% a year ago and 42% for the second quarter of 1995. Both service and integration volumes declined in third quarter of 1995, compared to the prior period. While service costs have been reduced significantly versus the third quarter of 1994 the revenue decline in the near term is against a relatively fixed cost base, resulting in the lower margin compared to the second quarter of 1995. Expenses Expenses for the third quarter of 1995 increased slightly from the second quarter of 1995 in both research and development and in selling, general and administrative expenses. Expenses declined from the same quarter in 1994, with reductions in selling, general and administrative expenses. Quarter ended --------------------------- Expenses ($000,000) 9/30/95 9/30/94 6/30/95 ------------------- ------- ------- ------- Research and Development 8 8 8 Selling, General and Administrative 13 15 13 Expenses % Revenue ------------------ Research and Development 32% 21% 22% Selling, General and Administrative 52% 41% 37% The Company continues to focus on expense management. New Product Development - ----------------------- The market for the Company's products is characterized by rapid technological change, frequent new product introductions, changes in customer needs and evolving industry standards and is therefore highly dependent upon timely product innovation. The Company's success is dependent in part on its ability to enhance and improve its existing products while developing and introducing new products on a timely basis to replace declining revenues from older products. The timing and success of product development is unpredictable due to the technological complexity of the Company's products, the inherent uncertainty in anticipating technological developments, the need for coordinated efforts of numerous technical personnel, the Company's reliance on third party vendors for critical technology and the difficulties in identifying and eliminating errors prior to production release. The timely introduction and market acceptance of the third generation Exemplar products planned for 1996 are critical to the Company's future financial performance. The introduction, acceptance and cost of these products is substantially dependent upon the delivery of acceptable components manufactured by third parties. The integration of components developed by the Company with third party components and the performance tuning of the integrated product are also critical to the overall success of these future products. Integration and performance tuning efforts typically require significant development effort and expense. The Company believes that it will be forced to curtail or eliminate its development efforts unless the Merger is consummated or another source of additional capital can be obtained by early 1996. Components Availability - ----------------------- Certain components of the Company's products are currently available only from a single or limited number of sources. In the third quarter of 1995 the Company experienced a shortage of gallium arsenide gate arrays for the C4 product line, which are only available from Vitesse Semiconductor Corporation. The Company believes availability of these devices will improve in the fourth quarter of 1995, but there can be no assurance that the Company will receive an adequate supply of these components. Sole-source components also include the PA-RISC microprocessor modules used in the Exemplar family, which are only available from Hewlett-Packard, and custom gallium arsenide gate arrays designed by Convex that are manufactured for the Exemplar family by Fujitsu Microelectronics Incorporated. The Company's ability to manufacture and ship its products to meet customer demands requires that the Company receive sufficient quantities of all these semiconductor devices and other sole-source components. The Company's reliance on these vendors involves several risks, including the possibility of an interruption or shortage of components and reduced control over delivery schedules. The Company's products also use several components such as DRAMs and SRAMs which, although manufactured by multiple suppliers, have recently been in short supply. The Company has experienced component shortages in the past, and there can be no assurance that the Company will receive adequate component supplies in the future. Delay in the receipt of sole-source or other components could have a material adverse effect on the Company's results of operations. Restructuring and Other Expenses - -------------------------------- The Company implemented restructuring actions in 1993 and again in 1994 to reduce operating costs, to increase the efficiency of the Company's operations, and to align operating expenses with anticipated future business levels. These charges totaled $54 million and required approximately $20 million in cash expenditures. At September 30, 1995, the accruals to provide for expenses not yet incurred declined to below $1 million. The Company ended the third quarter of 1995 with 815 full time employees. The Company's future success is substantially dependent upon its ability to attract and retain highly skilled technical and sales personnel. Industry competition for highly skilled personnel is intense, and the Company's recent financial performance has challenged its ability to compete for these personnel. The Company believes that the Merger will improve the Company's ability to attract and retain key personnel, however, the loss of key personnel could have a material adverse effect on the Company's business. Other Income and Expense Other income and expense consists of interest earned less interest expenses incurred and certain costs associated with implementing the Company's foreign currency hedging program. While the net amounts were immaterial in the periods presented, the Company expects the interest income component to decline due to lower average cash balances. Income Taxes The operating loss for the Company in the third quarter of 1995 is anticipated to result in no tax benefit in the current year. The Company believes it may incur tax expenses in various foreign subsidiaries which could result in a net tax expense for the year. At September 30, 1995, the Company had foreign and domestic operating loss carryforwards which are available to offset future taxable income. The realization of the tax benefits related to the loss carryforwards is dependent on the future profitability of the Company and its foreign subsidiaries. Continuing Losses from Operations The Company has reported losses from operations for each of the last ten quarters. The Company is experiencing intense competition in its historical markets as well as in new markets targeted by the Company. The Company believes that it is experiencing order delays due to customer anticipation of the introduction of new products in the second half of 1996 and customer concerns regarding the Company's viability. The result of these factors has been reduced current demand for the Company's products, slower than expected acceptance of the Company's products in new markets and reduced gross margins as compared to the supercomputer industry performance. In response to these factors, the Company has taken a number of actions to reduce expenses, including reductions in the size of the Company's workforce. However, the Company has continued to spend aggressively on research and development. The Company expects financial performance to be below break-even for at least the next two quarters and potentially beyond. As a result, the Company expects to experience liquidity problems in early 1996 unless it (a) can obtain additional capital from currently unidentified sources or by consummating the Merger or (b) curtails or eliminates some of its technology and product development activities which are important to its success in the long term. Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investment balances declined by $10 million in the third quarter of 1995, primarily as a result of the Company's operating loss in that quarter. This decline compares to a decline of $7 million in the third quarter of 1994 and a decline of $3 million in the second quarter of 1995. At September 30, 1995, the Company's cash, cash equivalents and short-term investment balances were a total of $24 million. The Company continues to focus on cash conservation. Receivables decreased by $4 million in the third quarter of 1995 and inventory remained at the same level as the second quarter of 1995. There were essentially no capital expenditures in the third quarter of 1995, compared to $3 million in the third quarter of 1994 and the previous quarter. The Company has no established borrowing facility or other source of additional capital and no agreement or commitment to provide the Company with additional capital presently exists. In addition, after a thorough investigation of financing alternatives, the Company has been unable to locate a source of additional capital willing to provide an amount of capital sufficient to satisfy the Company's near-term requirements. While some sources have expressed interest in attempting to raise or provide additional capital for the Company, none of these sources has been able to express a high level of confidence in their ability to satisfy the Company's capital requirements given the Company's recent history of losses and near-term prospects and general market factors, including the fact that virtually all of the supercomputer companies still in business in 1994, including Kendall Square Research, Thinking Machines Corporation and Cray Computer Corporation, either are experiencing financial difficulties or have filed bankruptcy. With financial performance expected to be below break-even for at least the next two quarters and potentially beyond, the Company expects cash, cash equivalents and short-term investment balances to decline to or be below minimum requirements in early 1996 unless it (a) can obtain additional capital from currently unidentified sources or by consummating the Merger or (b) curtails or eliminates some of its technology and product development activities which are important to its success in the long term. The Company believes it will experience severe liquidity problems if the Merger is not completed by January 31, 1996. Dependence on Relationship with Hewlett-Packard The Company's future success and growth depends significantly on its relationship with Hewlett-Packard. The Company has licensed certain core technology from and to, and has an ongoing joint marketing arrangement with, Hewlett-Packard. The Company's strategy of developing products based on Hewlett-Packard's microprocessors and operating environment makes it substantially dependent on the competitiveness of those processors and the Company's ability to obtain access to, and to develop expertise with, Hewlett-Packard's current and future product developments. Competition The high performance computer business is intensely competitive and characterized by rapid technological advances. The Company's future success is dependent upon its ability to develop new products and bring them to market in the near term. The Company's ability to bring new products to market is substantially dependent on Hewlett-Packard's timely development and introduction of new microprocessors. In addition, the availability of other technologies necessary for the Company's success are not under the Company's control. The Company's Exemplar products compete with International Business Machines Corporation's SP2 product, Silicon Graphics Inc.'s Challenge and Power Challenge products, and products offered by several vendors who offer high performance workstation and server products. The Company's entire product line also competes with that of Cray Research, Inc. Each of these competitors has significantly greater financial, technical, sales, marketing and other resources than the Company. The introduction of new products by any of these competitors could result in material adverse effects on the Company, including but not limited to delays in orders caused by customer evaluations of new product offerings. Merger with Hewlett-Packard On September 21, 1995, Hewlett-Packard, Subsidiary and Convex entered into the Merger Agreement, which contemplates that Hewlett-Packard will acquire Convex by means of a merger of Subsidiary with and into Convex. Subject to the approval of the holders of a majority of the outstanding shares of common stock, $.01 par value, of Convex ("Convex Common Stock") and certain other conditions set forth in the Merger Agreement, (i) each outstanding share of Convex Common Stock will be converted into the right to receive that fraction of a share (the "Conversion Fraction") of common stock, $1.00 par value, of Hewlett-Packard ("HP Common Stock") as is determined by dividing $4.83 by the average closing price of HP Common Stock for the ten trading day period ending two trading days prior to the effectiveness of the Merger (the "Effective Time"), and (ii) each outstanding option to purchase Convex Common Stock will thereafter constitute an option to acquire that number of whole shares of HP Common Stock equal to the number of shares of Convex Common Stock issuable with respect to such option multiplied by the Conversion Fraction, at a price equal to the exercise price per share of Convex Common Stock divided by the Conversion Fraction. Subject to the consummation of the Merger, Convex will apply the funds credited as of the last payday on or prior to the Effective Time in each participant's payroll withholdings account under the Convex 1995 Employee Stock Purchase Plan to the purchase of whole shares of Convex Common Stock. No fractional shares of HP Common Stock will be issued in the Merger. Cash will be paid in lieu of issuing fractional shares. After the Effective Time, the 6% Convertible Subordinated Debentures due March 1, 2012 (the "Debentures") issued by Convex will be convertible, at the option of the holders, into whole shares of HP Common Stock at a conversion price determined by dividing $21.75, the current price at which the Debentures are convertible into Convex Common Stock, by the Conversion Fraction. Hewlett-Packard will not succeed to the rights and obligations of Convex under the Indenture dated as of March 1, 1987 relating to the Debentures (the "Indenture") at the Effective Time. Upon completion of the transaction, which is anticipated by early 1996, Convex will become a wholly-owned subsidiary of Hewlett-Packard. Nothing in the Merger Agreement prevents the Board of Directors of Convex (the "Convex Board") from soliciting or encouraging, or from considering or negotiating, another proposal for a merger or similar transaction (an "Acquisition Proposal"). Convex, through its financial advisors, PaineWebber Incorporated, has commenced efforts to solicit alternative proposals from potential acquirors. In addition, nothing in the Merger Agreement prevents the Convex Board from approving or recommending an Acquisition Proposal if the Convex Board determines that such Acquisition Proposal would result in a transaction more favorable to Convex's stockholders from a financial point of view that the transaction contemplated by the Merger Agreement (a "Superior Proposal"). If Convex accepts or recommends to its stockholders a Superior Proposal, Convex will be required to pay Hewlett-Packard the sum of $3,750,000, plus Hewlett-Packard's expenses. Hewlett-Packard has filed with the Securities and Exchange Commission ("Commission") a Registration Statement on Form S-4 under the Securities and Exchange Act of 1933, as amended, with respect to the HP Common Stock to be issued in the Merger. The Proxy Statement/Prospectus forming part of that Registration Statement will be mailed to the record holders of Convex Common Stock after the Registration Statement is declared effective by the Commission, which is expected to occur before the end of 1995. Legal Proceedings On September 22, 1995, an action titled Joanne Hoffman v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe, Convex and Hewlett-Packard (the "Hoffman Action") was filed in the State of Delaware against Convex, Hewlett-Packard and the Convex Board. The Hoffman Action alleges, among other things, that the proposed price per share for the Convex Common Stock is unfairly low and does not accurately reflect the intrinsic value of the Convex Common Stock. The Hoffman Action further alleges that the members of the Convex Board breached their fiduciary duties to Convex by failing to conduct an auction of Convex before signing the Merger Agreement and that the Convex Board failed to exercise independent judgment in agreeing to the Merger. The Hoffman Action alleges that HP owes a fiduciary duty to the stockholders of Convex. The Hoffman Action requests, among other things, that the court enjoin the consummation of the Merger, as well as unspecified damages, and certification as a class action. On October 2, 1995, a second action titled Gail Gomberg v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe, Convex and Hewlett-Packard (the "Gomberg Action") was filed in the State of Delaware against Convex, Hewlett-Packard and the Convex Board. The Gomberg Action alleges, among other things, that the Merger is unfair to Convex and its stockholders for the following reasons: (i) the Convex Board did not conduct an auction before entering into the Merger Agreement, (ii) the price offered for shares of Convex Common Stock in the Merger was below the market price on the date that the Merger Agreement was signed, (iii) the Merger will deny the Convex stockholders the right to maximize the value of their securities through the loss of a premium that could be available from other suitors, and (iv) by conducting the foregoing acts, the Convex Board breached their fiduciary duties to Convex and its stockholders. The Gomberg Action also alleges that HP aided and abetted the members of the Convex Board in breaching their fiduciary duties. The Gomberg Action seeks an injunction against the Merger, as well as unspecified damages, certification as a class and other forms of relief. On October 3, 1995, a third action titled Glenn Faegenburg v. Robert J. Paluck, Steven J. Wallach, Erich Bloch, H. Berry Cash, Max D. Hopper, Sam K. Smith, Howard D. Wolfe and Convex (the "Faegenburg Action") was filed in the State of Delaware against Convex and the individual members of the Convex Board. The Faegenburg Action alleges, among other things, that the proposed price per share is unfairly low and that the members of the Convex Board breached their fiduciary duties to the Convex stockholders. The Faegenburg Action seeks an injunction against the Merger, as well as unspecified damages, certification as a class action as well as other forms of relief. While no assurance can be given as to the results of the above described actions, HP and Convex believe that each of the above actions lacks merit and intend to defend these actions vigorously. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger dated as of September 21, 1995, among Hewlett-Packard Company, Convex Computer Corporation and Gemini Project Corporation. Incorporated by reference from Exhibit 2.1 to Hewlett-Packard Company's Registration Statement on Form S-4 (No. 33-63643). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fiscal quarter ended September 30, 1995. SIGNATURE 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 thereunto duly authorized. CONVEX COMPUTER CORPORATION Registrant BY: DAVID W. CRAIG ---------------------- David W. Craig Chief Financial Officer and Vice President, Finance (Principal Finance and Accounting Officer) Dated: November 2, 1995 EX-27 2
5 3-MOS DEC-31-1995 SEP-30-1995 16,929 6,855 40,046 6,600 19,282 92,910 125,532 98,207 141,073 51,188 58,869 267 0 0 30,749 141,073 12,937 25,199 9,375 16,886 21,314 0 860 (13,861) 0 (13,862) 0 0 0 (13,862) (.52) (.52)
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